Foreign banks scramble to get piece of China's bad-debt AMCs

Lai Xiaomin, chairman of China Huarong Asset Management, found his schedule packed one morning in January with back-to-back meetings in Beijing with visitors from Goldman Sachs and Morgan Stanley.

Since the mainland's largest bad-loan manager was restructured into a commercial company last October, Wall Street banks have been clamouring to get in the door. Executives including Goldman Sachs vice-chairman Michael Evans and Morgan Stanley's co-head of investment banking in the Asia-Pacific region, Shane Zhang, lauded Huarong's success and expressed interest in buying stakes.

The reason: the mainland's four state-owned asset-management companies (AMCs), set up during the banking crisis of the late 1990s to oversee 1.4 trillion yuan of non-performing loans (NPLs), have been delivering profits. They did it by selling some loans and converting others into equity stakes. Now they have expanded into licensed financial firms doing everything from investment banking to trusts and real estate.

"The AMC balance sheets are relatively clean at this point," said Charlene Chu, Beijing-based head of China financial institutions at Fitch Ratings. "You can make a tonne of money on NPL workouts if you do them right."

Foreign investors led by UBS and Standard Chartered already have bought stakes in China Cinda Asset Management, which is preparing for a US$3 billion initial public offering as early as the end of the year. Buying shares in the mainland's bad-loan managers could help the global firms profit from a new round of non-performing loans following a US$6.5 trillion lending spree since the end of 2008.

"At some point, China will embark on sales of NPLs resulting from the 2009-2012 credit binge," said Ted Osborn, a Hong Kong-based partner at PricewaterhouseCoopers and a specialist in bad debt. "International investors are keen to invest in the AMCs."