Chinese banks' deteriorating asset quality mitigated by debt to equity swaps

8% special-mention loans is already offloaded.

According to Natixis, the latest development shows that banks have won the tug-of-war with regulators, i.e. banks are no longer allowed to hold equities from D/E swaps, which would weigh heavily on capital requirement as time goes on.

"Since the first D/E swap, an equivalent of 8% special-mention loans is already offloaded. Although offloading of stressed assets through D/E swaps could help improving asset quality, we expect deterioration in asset quality to continue due to slower GDP growth and the still weak global demand. A huge pick-up in corporate performance to service debts remains unlikely."