Moral hazard in debt-to-equity plan needs addressing

China is reportedly considering a plan for debt-to-equity swaps, which are designed to bail out debt-ridden firms amid the economic downturn and prevent the non-performing loans of banks from rapidly piling up.

It is a stopgap measure, but one that, if it works well, will improve the operational efficiency of both enterprises and banks. However, detailed, applicable implementation policies must be put in place to ensure the program does not go awry.

Policymakers must have been encouraged by the previous equity-for-debt program, initiated at the end of the 1990s, in which many insolvent State-owned enterprises were saved from going bankrupt.