• Tue
  • Dec 23, 2014
  • Updated: 11:51am
BusinessBanking & Finance
BANKING

Shanghai allows city-owned firm to buy bad loans from local banks

PUBLISHED : Friday, 07 March, 2014, 2:40pm
UPDATED : Saturday, 08 March, 2014, 4:26am

The Shanghai government has given approval to a city-owned investment company to buy non-performing loans from local banks, state media reported yesterday.

It is the latest local government on the mainland bracing for an expected rise in bad debt.

Shanghai's launch of a dedicated "bad-loan bank" follows similar moves by Jiangsu and Zhejiang provinces.

Analysts expect a rise in bad loans in the coming years as the mainland's economic growth slows, with loans to local governments and industries suffering from overcapacity being a key source of concern.

Unlike the two provinces, Shanghai had authorised an existing state-owned firm, Shanghai State-owned Assets Operation, to buy non-performing loans and other assets from local financial institutions, rather than creating a new entity, China Business News reported, citing a source close to the firm's parent company.

Shanghai State-owned Assets already owns equity in local banks, including Bank of Shanghai and Shanghai Rural Commercial Bank, and Guotai Junan Securities.

The central government established four national asset management companies in 1999 to clear bad loans from the balance sheets of the biggest state-owned banks. They bought about 2.38 trillion yuan in bad loans between 1999 and 2008.

In 2012, the Ministry of Finance authorised local governments to establish local asset management firms to do the same for local banks.

The first bad-loan purchase by Shanghai State-owned Assets may be of bank loans to Shanghai Chaori Solar Energy Science & Technology, the loss-making solar equipment producer that partially defaulted on a bond interest payment yesterday, becoming the mainland's first domestic bond default.

Bank of Shanghai was involved in a dispute with Chaori over 75 million yuan (HK$95 million) in loans outstanding, the paper said.

The lender also has 600 million yuan outstanding to Suntech Power, another struggling solar firm that has defaulted on its offshore bonds.

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