In the news: China investigates Crown for alleged gambling crimes, Sinochem and ChemChina deny M&A rumors and the State Council releases rules for debt-for-equity swaps

Sinochem and ChemChina deny merger rumors

Sinochem Group and China National Chemical Corp. (ChemChina)—and their subsidiaries—have denied rumors that the two will merge. The purported deal was first reported as a move to create an oil-to-chemicals giant as part of the PRC government overhaul of state-owned enterprises (SOEs). A marriage would combine more than $100 billion of assets and result in a conglomerate that could refine about 1 million barrels of crude a day, making it the third-largest refiner in the country after China Petroleum & Chemical Corp. and PetroChina Co., according to research firm Wood Mackenzie. The speculation follows State Council guidelines issued on October 10 encouraging business reorganization in key industries, advising companies struggling with overcapacity to accelerate M&A in order to streamline so that there are a smaller number of higher quality companies. They also allowed eligible firms to issue preference shares and convertible bonds to raise funds for these activities. And while China's moves to shake up and reform the debt-laden state sectors (as already evident in the shipping, railway and steel industries) are aimed at improving capacity, megamergers may not really be the answer to enhancing productivity and competition. As an OECD chief economist pointed out: “China is overhauling sectors, not companies. You need to overhaul companies to enhance productivity. The combination of growth and exchange rates is what will really change things for China.”

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A look at China's debt-for-equity swaps

An October 10 circular detailing rules for the debt-for-equity swap scheme released by the State Council has drawn the attention of investors. It permits lenders and institutions offering loans to corporates, insurers, state-owned investment companies and asset management companies to accept equity corresponding to their credit, and invites private investors to participate. The circular forbids “zombie” enterprises, including loss-ridden firms beyond repair or with opaque debt, from the scheme, and encourages “high-quality” companies with plausible reform plans and no record of defaults to play a leading role in key sectors, particularly in high-growth, high-tech or strategic industries. Although the scheme needs more clarity as to the exact criteria for eligibility, fund managers said the swap plan sends a strong signal that it will be market-oriented, as opposed to being forced on lenders to bear all the risks. China's corporate debt surged 465% over the past decade, increasing risks to the financial system and prompting even Premier Li Keqiang to warn of the dangers of runaway borrowing. The People's Bank of China has taken several steps to curb leverage, the most recent being in the nation's money markets. The monetary authority has restarted offering 14- and 28-day reverse-repurchase agreements, rather than just the one-week lending tool, in an effort to ensure that the longer-term, more expensive funds make it less profitable to speculate using borrowed money.

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