Sellers of China’s bad debt prove to be picky shoppers
More attractive real estate debts are being bought while harder to process debt in the manufacturing sector is left on the shelf
China’s asset management companies are starting to make greater progress when it comes to dealing with companies’ non-performing loans (NPLs), but observers say it is the easier bad debts that have been processed so far, with the more difficult ones yet to come.
There are four large asset management companies, Cinda, Huarong, Orient and Great Wall, which were set up in 1999 to process soured loans in China’s last round of dealing with bad debt, as well as multiple regional players who were set up more recently, primarily to buy and process debts from local governments and local banks.
According to estimates from Japanese bank Nomura, the total outstanding balance of bad loans bought by asset management companies reached about 190 billion yuan at the end of 2015, and 246 billion yuan by the end of June this year. While this is rapid growth, it suggests that net purchases of non-performing loans by asset management companies was only about 20 per cent of the net bad-loan increase each year at banks.
Local officials are sometimes concerned about being seen to sell loans of distressed companies too cheaply to overseas entities who may then make a large amount of money from them
Furthermore, those loans are in industries that are easier to sell.
“The large asset management companies are trying to do the easier deals, which are often in the real estate sector,” said Mac Liang, a manager at distressed financing specialist Alvarez and Marsal in Shanghai, speaking on the phone from a project in Heilongjiang.
“While about half of the outstanding NPLs are in the manufacturing sector, the proportion of manufacturing NPLs purchased by the asset management companies is much lower.”
The reason, Liang says, is that property companies generally provide land as security which can be handed over if the loan is unpaid, whereas the situation for a manufacturing company is more difficult to process.
Liang also says a further challenge for asset management companies when dealing with distressed manufacturing companies is that “[asset management companies], particularly local [ones] can face pressure from local government if they try to foreclose a factory”.
