Jan 08, 2014 05:44 PM

China's Toxic Debt Doctors Prepare for Surgery

(Beijing) -- Regulators eager to resolve China's local government debt conundrum are setting standards for an emerging class of asset management companies (AMCs) responsible for settling bad loans without Beijing's help.

One standard, issued in early-December by the China Banking Regulatory Commission (CBRC), set the floor for each local AMC's registered capital at 1 billion yuan. It was the first financial parameter of its kind since CBRC and the Ministry of Finance started promoting these debt restructuring vehicles in May 2012.

Also in December, CBRC spelled out management staff requirements and corporate governance rules for AMCs.

Every province, autonomous region and municipality in the country is being encouraged to form a single AMC to take over and restructure non-performing assets held by local banks and local government financing vehicles.

Last year, Jiangsu and Zhejiang provinces, both in the east, became the first to heed the call. The Guangdong and Shanghai governments are close to launching AMCs of their own.

And Caixin has learned that an unnamed provincial government in central China is likewise gearing up with 1 billion yuan in registered capital from the province's largest state-owned investment group.

Beijing authorities could be expecting each of the 22 provinces, five autonomous regions and four municipalities to form an AMC without central government prodding, said a CBRC branch director in a central province where, so far, local officials have not submitted a plan.

Once in place, a local AMC is expected to complement existing debt-cleanup operations carried out by the central government's four AMCs – China Oriental Asset Management Corp., Cinda Asset Management Co., Huarong Asset Management Co. and Greatwall Asset Management Corp.

National AMCs have been processing bad assets inherited from the biggest, state-owned banks since 1999. And their power runs deep: They have permission to arrange asset liquidations, debt-equity swaps and bankruptcy auctions.

Local AMCs, whose tasks are limited to debt incurred within the local government's boundaries, would have less clout and fewer responsibilities.

"Establishing a provincial-level AMC can achieve two benefits by maintaining the value of state-owned assets and promoting development at companies" burdened by toxic assets, said a source close to the provincial investment group that is putting together an AMC.

Mounting Debt

Exactly how much debt might fall into local AMC laps is subject to debate. The central government's National Audit Office said direct liabilities held by all local governments totaled 10.9 trillion yuan as of July 1. About 45 percent of that amount was supposed to come due before the end of this year, although it's likely much of this debt could be rolled over.

State-owned banks have shouldered the bulk of this bad debt. According to the CBRC, non-performing loans on the books and ratios of non-performing-to-total outstanding loans rose slightly in the third quarter 2013 from the second quarter. Other sources, however, call these recent increases substantial.

As of October 1, CBRC said, banks were saddled with 563 billion yuan in bad debts, up 24 billion yuan from the end of the second quarter. The country's Big Five banks – Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, Agricultural Bank of China and Bank of China – finished the third quarter with a combined toxic debt balance of 336.5 billion yuan, the banking regulator said.

The entire banking industry's ratio of non-performing loans to total outstanding loans was 0.97 percent as of October 1, up 0.01 percentage points from the previous quarter, CBRC said. The ratio for the Big Five was 0.98 percent.

A bank industry source who declined to be named said CBRC's decision to announce a new set of standards for local AMCs in December may have come in response to an increase in bad debts during the fourth quarter.

Indeed, according to a survey released December 24, many industry insiders believe the bad-debt ratio may be significantly higher than what Beijing authorities have been willing to reveal. A survey of 1,604 executives at 76 banks conducted jointly by the China Banking Association and the auditing firm PricewaterhouseCoopers found a whopping 40 percent of respondents estimated the nationwide, all-bank non-performing loan ratio rose in 2013 from 2012 to between 3 percent and 5 percent.

Most bankers responding to the survey think the biggest jumps in bad debt came from loans to metallurgical sector companies such as steel mills, shipbuilders and real estate developers.

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