Both commercial banks and enterprises participating in China's debt-to-equity swap program must fully reform their operations to avoid incurring new losses and to attain profitability.

"We must guard against some enterprises' using the swap as a way to avoid collecting legitimate debts," Jiang Jianqing, vice-president of the Industrial and Commercial Bank of China (ICBC), was quoted by today's China Daily Business Weekly as saying.

Jiang's bank is expected to transfer non-performing assets worth 350 billion yuan (42.2 billion US dollars) to the China Huarong Asset Management Corporation, though no timetable has been announced.

"We should bear in mind that only loss-making enterprises should rely on the debt-equity swap solution to deal with their debt," he added.

Banks should carefully evaluate the quality of their assets, properly manage valid loans and try to improve their assets before considering referring them to asset management corporations.

State-owned enterprises' high debt ratios have various origins, with a lack of adequate capitalization one of them, according to Jiang.

Many of these enterprises have relied on commercial bank loans to sustain production or operations, which has led to some of their high debt ratios, Jiang said.

"We will focus on enterprises that have State priority whose problem loans emerged during the enterprises' technical upgrading or expansion," Jiang added.

The ICBC will take a leading role in arranging debt-to-equity swaps for 42 firms suggested by the State Economic and Trade Commission.

After the swaps, the assets-liability ratios of these enterprises are expected to decrease by an average of 9.5 percent from more than 60 percent in the beginning, and the quantity and proportion of non-performing assets held by the ICBC will also decrease substantially. (Business Weekly - China Daily)