Chinese regulators encouraging Asset Investment Companies to boost equity financing and debt to equity assets

In order to reduce leverage in the economy, Chinese regulators have allowed asset investment companies (AIC) to conduct asset management business to invest in debt-to-equity assets and boost equity financing in the country.

Major state-owned banks including China Construction Bank and Industrial and Commercial Bank of China have set up AICs to conduct debt-to-equity swaps in the past two years with the aim of slashing leverage especially in state-owned entities and shift risks from banks.

In a notice on Tuesday, the China Banking and Insurance Regulatory Commission (CBIRC) said, such AICs can now set up investment plans in market-oriented debt-to-equity assets including debt-to-equity special bonds, convertible bonds, ordinary shares, preferred shares and debt-to-preferred shares.

“AICs can raise fund through private fundraising from qualified investors include families with at least 5 million yuan ($705,000) in net asset or individuals with annual income no less than 600,000 yuan in the past three years”, said CBIRC while adding, pension funds and insurance funds can also invest in such debt-to-equity investment plans through AICs.

The move comes as China has been taking a series of measures to expand direct financing via capital markets.

China’s policymakers are keen to balance the need for more liquidity, a key metric in reviving the economy that has been hobbled by the coronavirus pandemic, with risks of higher inflation and improving leverage.

Last Thursday, China also announced plans to create a public market for real estate investment trusts (REITs), which is aiming at pooling in personal savings with private capital into infrastructure projects without overstretching already debt-laden local government.

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