China is considering a plan that would allow banks to swap bad debts for equity in the borrowing firm, according to reports, as the banking sector faces mounting bad loans and slowing growth in the world's second-largest economy.
Under the proposed scheme, banks would write down debts of companies in return for equity stakes, business magazine Caixin said Monday.
The government could allow swaps for as much as 1.0 trillion yuan ($155 billion), it said, quoting an executive at the China Development Bank.
Authorities could approve the move as early as this month, Bloomberg News reported Tuesday, quoting a person with knowledge of the matter.
The move could lead to the ownership of some struggling Chinese companies changing -- in developed economies, such debt-for-equity swaps frequently dilute existing shareholders on a huge scale, effectively handing over the company to its creditors.
But enabling inefficient companies to shed debt could prop them up instead of pressuring them to go bankrupt, analysts said, reducing the impetus for market-oriented reforms.
"Bank ownership stakes in clients would result in moral hazard issues, amplifying long-term financial risks," Nomura said in a note.
The speculation follows flat growth in net profits and rising bad loans at the nation's biggest banks last year.
The Industrial and Commercial Bank of China (ICBC) -- the nation's biggest bank -- eked out a 0.48 percent rise in net profit to 277.13 billion yuan as its non-performing loan (NPL) ratio rose to 1.50 percent in 2015 from 1.13 percent the year before.
China Construction Bank, the country's second-largest lender, reported flat growth in net profit last year, as bad loans reached 1.58 percent, up from 1.19 percent in 2014.
Nomura said the move could lower risk in the banking system in the short term, "but we do not view this as the ultimate solution to the NPL problem".