May 30, 2013 02:35 PM

In a First, Jiangsu Tests the AMC Waters

(Beijing) -- The quiet launch of Jiangsu Asset Management Co. marks the start of the first local government-backed asset management company (AMC) to dispose of local banks' non-performing loans.

Headquartered in Wuxi, Jiangsu Province, Jiangsu AMC has registered capital of 5 billion yuan. Its controlling shareholder is the city government's investment vehicle, Wuxi Guolian Development (Group) Co.

A source close to Wuxi Guolian said Jiangsu AMC is under the joint supervision of the provincial banking regulatory commission, the state-owned asset supervisor and the government financial office.

Jiangsu AMC is the first step forward after the Ministry of Finance and the China Banking Regulatory Commission (CBRC) last year allowed local governments to set up local AMCs amid concerns about rising bad loans.

Bad loans in Jiangsu are mainly related to photovoltaic and steel trading companies, many based in Wuxi, local bank officials say.

Wuxi-based Suntech Power Holdings Co., once a top global solar panel maker, is among the major debtors in the eastern province, with 7.9 billion yuan in unpaid loans by the end of January.

An analyst at an investment bank said that more local governments are monitoring Jiangsu AMC and mulling setting up their own. He predicted that Zhejiang, Shanghai and Guangdong, where governments are keen to solve the bad loan issue, will soon follow suit.

A president of a state-owned bank's Wuxi branch said that local banks will welcome the new local AMCs because they can provide new channels to help banks digest non-performing loans. But whether the Jiangsu AMC can successfully operate depends on the pricing capacity when acquiring bad loans, the bank president said.

Industry insiders were also concerned about potential competition between local AMCs and the four central government-backed AMCs.

Local Efforts

A source close to Wuxi Guolian said that Jiangsu AMC has received a license to operate. In addition to Wuxi Guolian, other shareholders in the company are Jiangsu government-owned enterprises.

Established in 1999 as a government investment arm, Wuxi Guolian controls 75 enterprises, including local commercial banks, financial firms, hotels and power companies.

The company is also playing a major role in the reorganization of Suntech Power, which filed for bankruptcy protection in March.

Investment bank analysts said the photovoltaic industry has become one of the most risky industries in Jiangsu. And Suntech has become the largest debtor.

Bank data showed that by the end of January, Suntech owed banks at least 7.9 billion yuan. It also provided 2 billion yuan in external guarantees to commercial banks for affiliated companies.

As of March 15, nearly 1 billion yuan of Suntech's debts had matured.

An investment bank source said that Wuxi Guolian is seeking to save Suntech because the government is unwilling to see the company, which has more than 10,000 employees and 400 suppliers, go into liquidation.

An employee of a central government-backed AMC said his company had been in contact with Suntech, but "it is so huge and (the loans) can't be digested by a single company. There is big risk."

Some expected that with local government support, Jiangsu AMC can bail out Suntech. An investment bank analyst said with its registered capital, Jiangsu AMC is unable to save Suntech by itself, but it can take over some of its debts and give the company some relief.

A Small Player

The 2012 policy issued by the finance ministry and the CBRC gave the green light to local governments to set up AMCs to dispose of bad loans. The document stipulates that each provincial government can only set up one AMC, and local AMC can only dispose bad loans for local financial institutions through debt restructuring.

In 1999, China set up four state-backed AMCs to deal with the mounting non-performing assets in state banks following the financial crisis in Asia. The four were China Oriental Asset Management Corp., Cinda Asset Management Co., Huarong Asset Management Co. and Greatwall Asset Management Corp.

After more than ten years operation, the four have opened various local branches and developed to offer more diversified financial services.

Yet some believe the market is providing opportunities for more such companies. A report by Cinda's financial risk research center said as Chinese companies' profitability and banks' asset quality have remained weak, there are lots of business opportunities in asset management business.

The Cinda report also suggested that AMCs should further diversify their business and find their own niche as competition increases due to business overlap.

But the investment bank analyst predicted that compared with the Big Four AMCs, local companies will face greater business pressures due to their limits in capital and operation. 

The source from one of the state AMCs said the Big Four have enjoyed great policy support in the early stages. However, the local versions do not have access to such preferential policies and are restricted to operating within provinces, meaning it would be difficult for them to compete with the Big Four.

Bad Loan Concerns

CBRC Chairman Shang Fulin recently warned about a rebound of bad loans in the country's financial institutions. The banking regulator said banks are facing higher risks due to increases in non-performing loans, especially in coastal regions.

The photovoltaic industry, which has reported a combined loss in 2012, and the suffering shipping industry are the most risky areas for banks. Bad loan risks have also emerged in chemical, wind power, construction materials and other industries, Shang said.

By the end of March, the outstanding value of non-performing loans in commercial banks totaled 524 billion yuan, up 20.7 percent from the same month last year. Banks' bad-loan ratio was 0.99 percent, 0.22 percentage points higher than January.

Jiangsu is one of the provinces suffering the most. A CBRC report showed that by the end of 2012, non-performing loans in the province's financial institutions totaled 52.9 billion yuan, mainly related to photovoltaic and steel trading companies. The average ratio of non-performing loans in Jiangsu was 1.04 percent.

Lian Rui, an analyst at photovoltaic industry research institution Solarbuzz, said the industry has suffered the most over the past two years. But he predicted that a wave of consolidation would mean improvement for the industry.

For large companies like Suntech, if debt restructuring with an AMC can prevent it from falling into bankruptcy, the local economy would benefit, Lian said.

A source close to Suntech said that if Jiangsu AMC can play an active role in its restructuring, the province's steel industry could be the next to benefit.

Chen Yongde, a financial analyst at CLSA Asia-Pacific Markets, predicted a rise in bad loans in steel-trading companies this year, especially in Shanghai, Jiangsu and Fujian.

"Banks are struggling," Chen said. "If they stop lending, there will be big problems; if they continue, many loans will become non-performing assets."

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