China's initiative to help companies with heavy debt repay parts of their loans with shares got a boost this month as the total value of so-called debt-for-equity swaps reached 1-point-7 trillion yuan so far this year. The swaps have benefited more than one hundred financially troubled companies that have great potential. Chen Tong has the story.

At the beginning of July, the People's Bank of China announced a cut of 0.5 percentage points in the reserve requirement ratio for commercial banks. The 500 billion yuan of liquidity released by the reduction is to be used to finance debt-for-equity swaps. The swap deals help struggling companies stay afloat, by giving commercial banks equity positions in the troubled firms in exchange for the cancellation of non-performing loans. 80 percent of the deals signed so far have been signed by commercial banks, and the rest by asset management companies. Once the liquidity released by the targeted RRR cuts actually lands on balance sheets, more commercial banks are expected to participate in the swap plans.

CHEN JI, SENIOR ANALYST BANK OF COMMUNICATIONS "The central bank's target in releasing liquidity is to boost the real economy. The funds released by the targeted cuts in the reserve requirement ratio is to help companies instead of going to off-balance sheet loans, the capital market or the fictitious economy. So what is good about the debt-for-equity swap plans is that the funds go directly to companies with heavy debts and commercial banks can then participate in the operations and the management of those companies."

The People's Bank of China has reduced the reserve requirement ratio three times this year. The three rounds of cuts all aim to help China's small and medium sized companies to underpin the country's real economy. Using debt-for-equity swap plans also marketizes this effort, and that should help the stock market as well.

YANG ZHONGNING, INV'T CONSULTANT INDUSTRIAL SECURITIES "Social capital doesn't like risks. Once it enters the market, the whole process of debt-for-equity swaps will become more marketized. And then investors will be more at ease with questionable companies that are supported by the commercial banks. The valuations of the bank shares have seen an obvious decline from their high point at the beginning of this year. So the market is worried. The debt-for-equity swap will ease those worries."

No specific explanation has yet been given of just how the funds released by the targeted reserve cuts will be applied to the debt-for-equity swaps. But the National Development and Reform Commission has made it clear that the swaps won't go to any zombie companies.