Dec 23, 2016 01:59 PM

Bad Loans Part 2: Big Four Asset Management Companies Get Pushed Aside

(Beijing) — China's big four national asset management companies (AMCs) played a crucial role in helping the country's state-owned banks shed bad loans and go public more than 10 years ago. But now they are being quietly pushed off center stage in what is shaping up to be the best opportunity yet for businesses like them that handle distressed assets.

They are facing increased competition from local-government-controlled AMCs, private investors and even banks that are now embarking on the business. A lack of expertise and slow adaptation to a fast-changing environment did not help.

A Big Pie

No one knows for sure the amount of bad loan Chinese banks actually have, but no one doubts the number has kept getting bigger. A central bank report indicated that lenders across the country may have understated the amount of non-performing loans by at least half. That means commercial banks alone need to handle some 4 trillion yuan ($576 billion) worth of distressed assets. Many analysts have put forward much higher estimates.

Beijing is counting on the big four AMCs — Cinda, Huarong, Orient, Great Wall, plus the local ones that are modeled after them — to help defuse the risk by taking over some non-performing loans from banks, just as they did before.

From 1999 to 2009, the big five state-owned banks offloaded more than 3 trillion yuan worth of bad loans to the four AMCs before they went public. But that age has gone. Private investors are now piling into the industry, teaming up with local distressed-loan managers and using the big AMCs sometimes only as a tool to help them buy assets.

"The pie seems big, but who can take a bite is not clear yet," said Feng Jianyun, co-founder of Bosien Capital, a private fund company specializing in distressed-asset disposal.

Shifting Focus

Disposing of bad loans from banks now contributes to only about 12% of the AMCs' profits, according to a recent report by the Orient. A much bigger share of their income — which analysts say ranges from 60% to 70% — is now tied to debts owed by non-financial enterprises to each other.

"For example, a company may have trouble paying its contractors because it is falling behind on its sales schedule," an employee from Huarong said. "That's when we step in, taking over its debt and giving it some breathing room." The company then pays the AMC back when its conditions improve.

This is essentially making loans to the enterprise — which is not what the AMCs were set up to do. But some said they had no other choice.

"If the AMCs were to rely entirely on dealing with non-performing bank loans, as they had done in the past, none would have survived," said the Huarong employee. "This is a market where the sellers name the price," he said. Banks now have more channels to dispose of bad loans, and they are not letting the AMCs have them easily.

"Banks won't sell us loans if they are easy to handle," a Cinda manager said. "Those they do want to get rid of are like hot potatoes and often extremely difficult to deal with."

That's probably true, but some analysts say the listed AMCs are shifting their focus from bank loans to corporate debts also because the latter pay off more quickly.

It often takes three to five years for the AMC to recover value from a bad loan it acquires from a bank, while short-term loans made to companies can be repaid within a year. For Cinda and Huarong, both of which are already listed on a stock exchange, it is important to have some investment returns show up on their books every year, analysts said.

Bosien's Feng said the big four AMCs have been drifting away from what they were supposed to do after 2008 when the big state-owned banks had almost finished removing toxic assets from their books. Since then, he said, they have relied primarily on operations that do not really qualify as bad-loan disposal.

More Competition

While the big AMCs pull back, private investors are moving in.

Some of the 31 small AMCs under local governments' purview have private companies as shareholders. The one in Tibet is entirely owned by a Shenzhen-listed real estate developer controlled by private investors.

Some are no strangers to the business. Several private bad loan handlers had switched to the real estate business after 2009 when the housing market boomed. "Now they're back," Feng said.

Others are new entrants. Du Chenghua, a lawyer specializing in the field, said he was enticed to try the business himself after providing legal advice on bad-loan deals for years. The private fund company he co-founded last year just launched a product concentrating on distressed assets investment, he said.

Private companies often cooperate with the big four and the local AMCs, capitalizing on the latter's prerogative of being able to purchase bad loans wholesale directly from banks, Feng said. Usually, it is the private firms rather than the AMCs that actually manage the purchased assets and try to recover value from them, he said.

Banks are growing reluctant to give up bad loans, too, partly because they think many are salvageable and also because they now have more options than offloading them to AMCs.

Over the past two years, banks have put less than 1 trillion yuan worth of bad loans up for sale, and not many of them were sold to AMCs, said a bank executive familiar with the transactions.

Banks are adopting "a different mindset" and increasingly dealing with bad loans themselves because most of the loans were well-collateralized, said Wu Rui, an executive at the Bank of China Group Investment Ltd. They now have more options to handle bad loans other than selling them to AMCs, including securitization and swapping them for equities in the borrower, he said.

Some banks have sold loans to AMCs only to repurchase them using funds from their wealth management products. The maneuver allowed the bank to remove the problem loan from its balance sheet, although it remained exposed to the risk. The banking regulator cracked down on those operations in March. Since then, some AMCs said their trade with banks has fallen further.

The Shandong branch of an AMC has seen no business at all with banks since the crackdown, said an employee. They have received offers from banks, but did not take them because the loans were too pricey, he said.

"With the poor quality of the loans, if we take them at a 30% discount, we may not even be able to recover the investment," he said.

Critics say the AMCs are just not good at consolidating and improving collateral assets for sale, which should have been able to help them recover more value from bad loans.

A loan backed by an incomplete shopping center for which there is no longer demand, for example, could be turned into an office complex or a residential building that sells better, Feng said. "But this requires deep understanding of the industry that only someone experienced in the field can have," he said.

"Despite having their own real estate subsidiary, none of the AMCs are quite capable of such maneuvers," an AMC employee said.

He Guowang, co-founder of, which provides data on non-performing assets, said a lack of talent is one of the biggest obstacles facing the industry.

Suppose the market will have an annual supply of 500 billion to 600 billion yuan worth of bad loans in the next 10 years, it will take 50,000 to 60,000 experts to handle them based on current estimates, he said. But there are at most several thousand people who can meet the standards for expertise, he said. "The supply and demand gap is huge."

Contact reporter Wang Yuqian (

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