Laws counter foreign role in asset sales
China may have to overhaul its legal and regulatory framework to let foreign investors tap into its proposed 1.3 trillion yuan (about HK$1.22 trillion) sales of non-performing assets, warns a United States law firm, O'Melveny & Myers.
On Friday, China Huarong Asset Management said it hoped to tap international and domestic investment funds when it put 14.9 billion yuan of non-performing assets up for sale in October.
It would enable companies to effectively acquire controlling stakes in state firms and enter the protected financial industry.
The non-performing assets of four state-owned banks have been taken over by four asset management companies (AMCs). Most of these assets are unpaid debts and collateral which had been pledged by state-owned enterprises before 1996.
Legal and regulatory obstacles may, however, hinder the smooth disposal of the assets to foreigners, according to an O'Melveny & Myers report.
One problem was the assets were transferred to the AMCs at existing book value - not adjusted according to their real market value.
'The inevitably unrealistic valuations mean that, in most if not all cases, large losses will be incurred when the bank AMCs eventually divest the assets,' the report said.
Another major problem involved exchange controls.
Those who bought yuan assets could find it difficult to convert them into other currencies, or export them from China.
'There is currently no law or policy that would permit a foreign buyer of Chinese debt to convert the proceeds of a domestic currency loan into foreign exchange and remit the funds out of the country,' the report said.
'This is clearly a major obstacle by the foreign financial investors.'
In addition, foreign investors who set up an investment firm to buy into these bank loans may have to acquire a financial institution licence under China's legal framework.
The existing laws also impose a number of restrictions on foreign investors buying property in China - making it difficult for them to buy any property assets from the AMCs.
The report, however, suggested some of these obstacles could be addressed if China made some policy changes to facilitate the sale of AMC assets.
'Moreover, officials within the bank AMCs now speak openly of new laws they hope will be promulgated during the next year to address the problems faced by foreign investors wishing to acquire assets from the bank AMCs,' the report said.
'Whether new policies and legislation will appear and provide an adequate framework for near-term dispositions of bank AMC assets to foreign investors remains to be seen.'
A partner at the law firm, Howard Chao, who runs the China practice in Shanghai, said moves were afoot for changes.
'The Chinese Government is studying some changes which would facilitate the sales.
'This is a very hopeful sign that China is going to issue a new regulation.'