Bad Loans Part 3: Foreign Firms Find it Tough to Bid for Troubled Debt
(Beijing) — China's growing need to dispose of bad loans and other distressed assets is luring foreign investors into the market, but many say government restrictions and a reluctance in the country to deal with outsiders are preventing them from competing fairly with Chinese firms.
Several foreign fund management firms, including Oaktree Capital and KKR, have entered the market, setting up funds of their own or teaming up with Chinese asset management companies (AMCs) to buy and sell distressed assets, especially non-performing bank loans (NPLs).
Many other foreign investment companies have been "actively monitoring the market" for opportunities, said a fund manager of Singapore-based Baring Private Equity Asia. "We're assessing the possibility of setting up an alternative investment fund, too."
But foreigners may be the last buyers Chinese banks look to when selling their assets.
Some Chinese entities, such as AMCs, worry they may be stigmatized if they allow foreigners to reap profits from quality NPLs, most of which are debts incurred by state-owned enterprises, said Kingsley Ong, a partner of Hong Kong-based law firm Eversheds. The companies prefer to sell the distressed assets to government-related provincial AMCs.
The political risk of selling state-owned portfolios to foreign investors raised bureaucratic hurdles. In August, the National Development and Reform Commission (NDRC) laid out a regulation that requires an independent assessment of the transfer of NPLs from domestic AMCs to foreign invested-enterprises, a move that lengthened the approval processing time.
"China worries about the flight of state assets if foreign funds purchase packages of NPLs at lower prices," said Zhang Xiaolin, co-founder and managing partner of Shoreline Capital, a private firm that manages funds in dollars. "But only when the third-party assessment institution has hands-on experience in handling NPLs could it be possible to reach an acceptable price for the distressed assets."
Feng Jianyun, co-founder of Bosien Capital, an investment firm dealing with NPLs, said, "Opportunities can easily slip away because it takes more than a month to go through the entire approval procedures."
China's control over foreign exchange also plays a role in decreasing the efficiency of allocating capital. According to regulations by the State Administration of Foreign Exchange, foreign investors need to open a Non-Resident Account (NRA) — a special bank account opened with a mainland bank but treated as an offshore account — to buy NPLs. And currency conversion in the accounts typically takes a long time. Also due to regulatory restrictions, returns from one investment deposited into the account cannot be reinvested into another project.
"We sold an asset package for 600 million yuan, but can convert no more than 100 million yuan into dollars every year," said Zhang. "The rest of the money was just parked in the account, generating no returns at all."
For foreign investors, a trickier challenge is to build good relations with local governments, AMCs, debtors and creditors in a country that emphasizes exchanges of favors, or connections that may be beneficial for any parties involved.
A manager of Huarong Asset Management told Caixin that foreign investment firms do not have any competitive advantages when it comes to purchasing and handling NPLs in China because they lack experience of dealing with local entities such as asset auction companies and courts.
"The legal environment for NPL disposal has not changed much from the past," he said. "Many problems have remained the same."
Contact reporter Dong Tongjian (firstname.lastname@example.org)
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