How large was the scale of the three rounds of debt-for-equity swaps in history?

Major positive news: The most supportive measure for debt-to-equity swap in recent years is about to be introduced!

Minister of Finance Lan Fo'an stated at a press conference of the State Council Information Office on the 12th that it is planned to increase the debt ceiling significantly at one time, replace the hidden debts of local governments, and increase support for local debt risk resolution. This policy is the most significant measure to support debt-to-equity swap in recent years.

Lan Fo'an mentioned that the policy "timely rain" will greatly alleviate the pressure of local debt, free up more resources for economic development, boost confidence of operating entities, and consolidate the "three guarantees" at the grassroots level.

The size of the debt-to-equity swap is the biggest focus of this press conference. Although the Ministry of Finance did not mention specific numbers, clues can be found from the three historical debt-to-equity swap actions.

According to the analysis by the CITIC Fixed Income Team, the Ministry of Finance has led three large-scale debt-to-equity swap actions in history, with the main situations as follows:

The first round (2015-2018) involved issuing approximately 12.2 trillion yuan of debt-to-equity swap to replace existing government debts;

The second round (2019) involved issuing 157.9 billion yuan of debt-to-equity swap to replace hidden debts;

The third round (December 2020-June 2022) involved a cumulative issuance of 1.13 trillion yuan of special refinancing bonds.

First Round of Debt-to-Equity Swap (2015-2018): Standardizing Debt Financing Mechanisms

This round of debt-to-equity swap was mainly carried out against the backdrop of rapid expansion of debt by local financing platforms and increasing risks of potential defaults. In terms of the process, the debt financing mechanisms of local governments were standardized first, and after cleaning up and identifying local government debts, approximately 12.2 trillion yuan of debt-to-equity swap was issued from 2015 to 2018 to replace existing government debts.

Formal debt-to-equity swap started in 2015, with the Ministry of Finance issuing the debt replacement quotas, and local governments issuing according to the quotas. According to 21st Century Business Herald, local governments first reported to the Ministry of Finance the debt maturity situation for 2016 and subsequent years, and then the Ministry of Finance coordinated and allocated the debt replacement quotas to provinces based on the national situation. From 2016 to 2018, the scale of local government debt-to-equity swap issuances were 4.9 trillion yuan, 2.8 trillion yuan, and 1.3 trillion yuan respectively.

Second Round of Debt-to-Equity Swap (2019): Reduction of Hidden Debts

This round of debt-to-equity swap mainly involved provinces and cities with high debt pressure choosing counties as pilot projects for resolving hidden debts, issuing 157.9 billion yuan of debt-to-equity swap to replace hidden debts.

On June 26, 2019, Guizhou Province took the lead in issuing 11.5 billion yuan of debt-to-equity swap, marking the beginning of the second round of debt replacement bond issuances. By the end of 2019, the cumulative scale was only 157.9 billion yuan. Among them, Guizhou and Hunan issued over 30 billion each, accounting for 24% and 23% respectively, while Gansu Province issued the least at only 6 billion, accounting for about 4%. In terms of bond types, special bonds accounted for 95.6 billion yuan, approximately 61%, while general bonds accounted for 62.3 billion yuan, approximately 39% In addition to the 6 pilot provinces and cities, Jiangsu has also issued 15 billion special bonds to replace hidden debts.

The third round of debt-to-bond conversion from 2020 to 2022: Clearing hidden debts

From December 2020 to June 2022, the Ministry of Finance carried out the third round of debt-to-bond conversion. By expanding the pilot scope of resolving hidden debts and piloting "no hidden debts in the whole area" in Beijing, Shanghai, and Guangzhou, a total of 1.13 trillion special refinancing bonds were issued in this round of debt-to-bond conversion.

Local debt-to-bond conversion mainly went through the process of "standardizing debt financing mechanisms → reducing hidden debts → clearing hidden debts":

Phase One (2020/12-2021/9) expanded the pilot scope of resolving hidden debts in counties. In 2020, the pilot scope of resolving hidden debts in counties was expanded to 26 provinces and cities, and special refinancing bonds were issued in December to repay outstanding debts. During this phase, a total of 627.8 billion special refinancing bonds were issued. Among them, general bonds accounted for about 54%, totaling 338.7 billion, and special bonds accounted for about 46%, totaling 289.1 billion.

Phase Two (2021/10-2022/6) piloted no hidden debts in Beijing, Shanghai, and Guangzhou. Starting from October 2021, with the approval of the State Council, Guangdong, Shanghai, and Beijing successively launched the "no hidden debts in the whole area" pilot work. During this phase, Beijing, Shanghai, and Guangdong (including Shenzhen) issued approximately 325.23 billion, 65.48 billion, and 113.48 billion special refinancing bonds respectively, with a total issuance of special refinancing bonds in the three regions reaching about 504.18 billion.

Finally, multiple districts in Guangdong Province, Beijing, and Shanghai announced the completion of the pilot work of no hidden debts in the whole area.

Compared to the second round, the scope and scale of this round of debt-to-bond conversion have been expanded, and in Guangdong, Shanghai, and Beijing where debt control is relatively good, the pilot of no hidden debts in the whole area has been initiated, marking the early stage of "clearing hidden debts". The type of bonds issued has also changed from replacement bonds to special refinancing bonds.

From the perspective of issuance scale, 2021 is a peak year for special refinancing bond issuance. The annual issuance scale of special refinancing bonds from 2020 to 2022 was 94.9 billion, 817.1 billion, and 220 billion respectively.

The fourth round of debt-to-equity swaps is currently underway, with a total of 34 trillion local government bonds allocated to support debt-to-equity swaps from 2023 to 2024.

The fourth round of debt-to-equity swaps started in 2023 and is currently ongoing. The CITIC fixed income team believes that the current stage is characterized by the simultaneous reduction of "hidden debts" in regions with high debt pressure and the clearance of "hidden debts" in regions with low debt pressure.

According to the Ministry of Finance on the 12th, in addition to allocating over 2.2 trillion yuan of local government debt limits in 2023, the central government has also allocated 1.2 trillion yuan in 2024 to support local governments, especially in high-risk areas, in resolving existing debt risks and clearing overdue corporate accounts. Overall, the risks of local government debt have been alleviated, and progress has been made in debt-to-equity swaps.

Lan Fo'an also mentioned that in terms of special bonds, with the unutilized funds from the allocated quota, a total of 2.3 trillion yuan of special bond funds can be arranged and used in various regions in the next three months. We will urge local governments to effectively utilize various bond funds, accelerate project implementation progress, allocate funds in a timely manner according to actual needs, and quickly generate tangible work output to stimulate investment