(Beijing) – A controversial program that would allow struggling companies to give equity to banks instead of repaying their loans could be extended to other creditors like suppliers, under a new State Council proposal issued this week.

A new document released yesterday appears to show the State Council, China's cabinet, wants non-financial enterprises like suppliers to swap their accounts receivable for equity in firms that can't pay their bills.

Local governments were told to "support the conversion of debt to equity among enterprises in the real economy which have growth potential," according to the document published on the State Council's official website.

The language appears to encourage suppliers and other business partners to stop pressuring struggling state-owned firms for payments, and instead to become their shareholders, according a source close to the National Development and Reform Commission (NDRC), China's state planner, which co-drafted the document.

China's rapid build-up of certain industries like steel and coal has created oversupply that has left many companies in those sectors posting major losses and unable to repay their debts.

Beijing originally proposed a debt-for-equity program that would allow those companies to give equity to their creditor banks. That proposal has created controversy because such shares would be highly illiquid and could rapidly lose value if companies' financial situations continue to deteriorate.

The new State Council document says only that the government should be "supportive" of conversions between companies, but should refrain from telling companies how to execute any such swaps, the source said.

A company's unpaid accounts receivable typically grow when its clients are having liquidity trouble. The problem often spreads across entire supply chains as companies throughout the system face cash shortages that make it difficult to pay their bills.

As of December 31, industrial companies with annual sales of at least 20 million yuan (US$3 million) had 11.45 trillion yuan in unpaid accounts receivable, an increase of 7.9 percent compared with the same time in the previous year. Their overall revenue grew at just 0.8 percent, and they posted a combined net loss for the year, according to the Ministry of Finance.

State-controlled enterprises fared particularly poorly, with their revenue falling by 7.8 percent last year, while their unpaid accounts receivable increased by 8.4 percent to 2.54 trillion yuan, according to official data Caixin obtained from a government source. Companies in the machinery manufacturing, coal mining and electronics sectors saw their accounts receivable increase the fastest last year.

Contact reporter Wang Yuqian (yuqianwang@caixin.com); editor Doug Young (dougyoung@caixin.com)