On 11th April, in a symposium organized by the State Council to discuss the current situation, Premier Li Keqiang has once again, made it clear that the government will use measures such as debt-to-equity swaps to gradually reduce the leverage ratio of the enterprises. There is absolutely no doubt that this policy will be implemented but the parties remain sharply divided on this measure.

ANBOUND's research team is of the view that the debt-to-equity swaps will not help the enterprises to achieve transformations and more importantly, it exposes the banks to significant risk.

The real problem with the debt-to-equity swaps is the unreasonable allocation of resources which might further inflate the asset bubble, resulting in more financial problems.

The reforms are stuck in neutral and this is the most pressing problem in China, as such, immediate actions should be taken to clean up the zombie enterprises and to promote the reform of the state-owned enterprises.

The risk will continue to pile if we allow the too-big-to-fail enterprises to swap their debt into equity.