Debt-to-equity swap programs to lower China’s corporate debt will not offer a free lunch to profit-losing companies, according to guidelines issued by the State Council on Oct 10.

Unlike the previous government-led equity-for-debt program launched at the end of the 1990s, the new guidelines require that the program will be launched under market principles.

The government will play a complementary role only, the guidelines said. It will not be responsible for choosing which companies are qualified for the program and won’t bear the losses during the swap process.

“The program is open only to promising companies with short-term difficulties,” said Lian Weiliang, deputy head of the National Development and Reform Commission. “Loss-making zombie companies will be strictly banned.”

In the meantime, fiscal policies and preferential policies will be provided to support debt-to-equity swap programs in the future, according to Dai Bohua, assistant finance minister.

Fan Yifei, a vice-governor of the People’s Bank of China, said the central bank will create a favorable monetary policy environment and ensure that credit growth remains at a proper level to implement the deleveraging process.

The top level guidelines come at a time when rising corporate debt in China is posing increasing risks to the financial sector, according to Lian.

Corporate debt relative to GDP reached 156 percent, according to the National Institute for Finance and Development, and a large proportion comes from profit-losing State-owned enterprises.

“Although the banking sector does face a certain level of pressure brought by bankruptcy and restructuring, debt-to-equity swaps will not lead to a systemic crisis,” said Wang Zhaoxing, assistant chairman of the China Banking Regulatory Commission.

“Responsive measures to prevent losses are needed,” said Wang. “Debt-to-equity swap programs will be conducted step by step, and will be conducted first in some pilot regions.”

Zhang Minghe, deputy head of the credit division with China Construction Bank, said that despite market principles helping to prevent simply shifting risks by converting bad debt into bad equity, more detailed plans must guide the debt-to-equity swap process.