Worst to come for China's bad debt, says DAC

Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management.

The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world's biggest distressed debt traders.

Non-performing loans at Chinese banks jumped by the most since 2005 in the third quarter to 766.9 billion yuan (HK$968 billion), official statistics released earlier this month showed. The People's Bank of China has injected 769.5 billion yuan into its banking system over the past two months to support an economy growing at the slowest pace in more than a decade.

"They keep reporting such a low number for so many years, there's only one way it can go - up," DAC founder Philip Groves said. "We've yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can't cover every single one."

DAC manages about US$400 million of its own and clients' money onshore in China. It first bought Chinese bad loans in December 2001 from China Orient Asset Management Corp, one of four asset management companies created by the government to buy, repackage and onsell soured debt, Groves said.

While China's bad loan ratio is relatively small versus other countries in Asia - soured loans are equivalent to 1.16 per cent of total advances compared with 3.88 per cent in Vietnam and 0.86 per cent in South Korea - their total is still in an order of magnitude greater than the funds raised by distressed investors.