Turning bad debts into equity stakes does not always make for healthier companies, richer investors, or stronger economies. This is especially true in oversupplied industries. On Wednesday, regulators in China — the overcapacity capital of the world — confirmed that the country is considering new rules to make these exchanges easier.

The plan makes superficial sense: conversion of sour loans into shares could lighten China’s debt burden. While non-performing loans at China’s leading banks are reported at less than 2 per cent, most analysts are sceptical of the numbers. JPMorgan believes the real figure could be more than 5 per cent, or closer to 8 per cent if shadow lending is included. Some may decry the increased risk attached to holding equity, but given virtually non-existent bankruptcy procedures in China, creditors are little better off.

For an example of an unproductive debt-equity exchange, consider Sharp. Last year, Mitsubishi UFJ and Mizuho took equity for debt owed by the struggling electronics maker. The move followed several rounds of operational and debt restructuring, none of which delivered substantial progress. This despite the fact that Sharp’s display technology is advanced enough to be used in iPhones. Overcapacity in most of Sharp’s industries, particularly displays, has prevented a recovery. Hon Hai, which once considered buying Sharp’s equity, now wants new equity instead, and negotiations over the deal seem to be foundering.