(Yicai Global) Aug. 24 -- Chinese Premier Li Keqiang hosted an executive meeting of the State Council, the country's cabinet, to map out policies aimed at pushing reforms and deleveraging companies supervised directly by the central government to improve the quality and efficiency of business growth.

The meeting outlined five high-priority tasks: introducing an industry-specific financial 'red alert' system; setting up multi-channel deleveraging systems; proactively supporting market-based debt-for-equity swaps and urging central government-owned firms, or centrally-owned firms, to ramp up their use of existing agreements; taking disciplinary action against companies that are failing to curb mounting debts and cause material losses or harm and upgrading industry through new growth drivers.

Debts at state-owned enterprises totaled CNY94.1 billion (USD14.1 billion) as of the end of June, up 11.4 percent on the year, data from the Ministry of Finance shows. The total liabilities of companies directly owned by the central government rose 9.2 percent to CNY49.8 billion while the overall debt ratio of all SOEs was around 65.6 percent, the ministry said.

A corporate debt ratio above 40 percent is considered to be relatively high, said Li Jin, chief researcher at China Enterprise Research Institute. The excessive ratio among Chinese SOEs could lead to systemic financial risks if it is not controlled.

Officials at the meeting decided that financial leveraging should be carried out on a case-by-case basis, with greater weighting given to asset-liability ratio assessment in the annual performance appraisals of SOEs whose debt ratios are significantly above the threshold. Business investment will be rigorously controlled and a ban will be imposed on projects that could increase the debt level.

Fast-growing companies will need to offset debts with profits without affecting their normal business operations. Those with a debt ratio below the threshold, or high profitability, are encouraged to tackle historical issues and absorb the costs of destocking and other reform initiatives through accounting adjustments to profit and gains.

Market-based debt-for-equity swaps have become an important tool to deleverage state-owned enterprises. In October last year, the State Council set up seven measures to facilitate steady deleveraging: push corporate mergers and acquisitions; develop a modern enterprise system and reinforce self-discipline; revive idle assets; optimize corporate debt structures; push a market-based transformation of bank lending into equity; declare insolvent enterprises bankrupt and proactively develop equity financing.

Lending institutions negotiated debt-for-equity swaps with worth CNY1 trillion (USD150 billion), the National Development and Reform Commission said earlier this month. The deals were struck with 70 heavily-indebted steel, coal, chemical and manufacturing firms, all of which have excellent development prospects. The swaps will effectively reduce the companies' financial leverage and expedite SOE mixed-ownership reforms to facilitate the creation of a long-term mechanism to self-control leverage.

An effective tool to reduce asset-liability ratios, debt-for-equity swaps play an important role in terms of corporate deleveraging, cost reduction, stimulating restructuring and optimizing financing structures, Li Jin said.

The State Council also called for efforts to drive an industry upgrade and financial deleveraging amid a continuous transition of growth drivers. It suggested taking such measures as reducing overcapacity in the coal and steel sectors; getting rid of zombie companies and destitute enterprise management; slashing overall production of thermal power, electrolytic aluminum and building materials and strictly controlling new production projects.

The cabinet also suggested developing emerging industries and new business models, enhancing the functions of traditional industries and building momentum for sustainable economic development by promoting a shift toward digital, networked and intelligent industries.

Through the first seven months, the total profit of centrally-owned enterprises grew as much as 16.4 percent, compared with the 3.7 percent decline in growth recorded over the same period last year. The average asset-liability ratio also slipped 0.2 percentage point, showing the campaign to improve quality and efficiency is starting to take effect.

Government departments should give priority to SOE deleveraging, the cabinet said, and central government-owned enterprises should keep debt ratios in check and take advantage of growing profitability. The State Council ordered responsible departments to draw up guidance opinions to steadily reduce financial leverage among the companies, stipulating that the overall debt level should be gradually lowered and debt-ratios of heavily-indebted firms must return to a normal level.