China adds a fifth bad-debt manager to prepare for decade-high dud loans as Covid-19 weighs on banks and borrowers

China has given the green light for the first national asset management company (AMC) to be established in more than 20 years, as the country’s banking system braces for a record spate of corporate defaults and bad loans from the coronavirus pandemic.

Galaxy would become the fifth AMC to be established in China’s banking industry to process and dispose of dud assets from the books of the nation’s state-owned banks. The task has taken on added urgency as China’s financial system must brace for a record wave of bond defaults and slumping corporate earnings, as the coronavirus pandemic weighs on consumption and crimps economic growth.

While China’s economy has returned to growth – the only major economy to expand this year – it has come at the expense of banks, which have been instructed to cut their borrowers some slack to help them weather the pandemic. Outstanding non-performing loans at China’s commercial banks rose to 2.8 trillion yuan by the end of the third quarter, the highest level since at least March 2009, according to data released by the regulator.

“The impact of the pandemic on the structure of the economy will be long-lasting and noteworthy,” said Yang Rong, an analyst at CSC Financial. “The sectors that used to have very low bad loan ratios, such as airlines, entertainment and catering, have now apparently seen increases in bad loans.

“The ongoing economic transformation will also increase bad loans in industries such as retailing.”

China’s bond market, the world’s second largest, is also reeling from a turbulent year. Debt defaults had topped 104 billion yuan in 2020 as of November, set for a record in annual missed payments, according to Bloomberg data.