This proposal entails nothing short of a nationalization on a grand scale, one which gives China's impaired commercial banks - all of which are implicitly state controlled - the "equity keys" to the companies to which they have given secured loans, loans which are no longer performing because the underlying assets are clearly impaired, and where the cash flow generated can't even cover the interest payments.
In effect, the PBOC is proposing the biggest debt-for-equity swap ever seen. What it also means is that since the secured lender, which is at the top of the capital structure will drop all the way down, it wipes out the existing equity and unsecured debt, and make the banks the new equity owners, and as such China's commercial banks will no longer be entitled to interest payments or security collateral on their now-equity investment. Finally, while this move does free up loss reserves, it essentially strips banks of their security and asset protection which they enjoyed as secured lenders.
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