Private Firm Teams With Government to Tackle Toxic Debt

(Beijing) — A private fund manager has joined hands with a subsidiary of state-owned investment firm China Chengtong Holdings Group Ltd. to help relieve banks and local governments of about 7 billion yuan ($1.02 billion) in toxic debt.

Chengtong Huan Investment Co. Ltd. — a tie-up between Shoreline Capital's Huan Investment Co. Ltd. and the China Chengtong subsidiary China Chengtong Asset Management Corp. (CCTA) — plans to raise 10 billion yuan from unspecified investors and use most of that amount to buy non-performing loans.

The toxic debt, including outstanding loans to state-owned companies and local government financing platforms, would then be re-sold to other investors.

Unlike a state-company debt relief campaign launched by the Chinese government more than a decade ago, Chengtong Huan's plan calls for deep involvement by private investors as part of a broader government effort to clear out trillions of yuan worth of unpaid loans.

The effort also complements limited private sector involvement to unburden state-owned enterprises and local governments of debt, much of it left over from an economic stimulus program that followed the 2008 global financial crisis.

Privately held Shoreline has been dealing with distressed debt since 2004 and now has more than $1.5 billion under management. So far, the firm has taken over more than 100 billion yuan worth of bad bank loans and achieved an average annual return of 20%, said Zhao Xiaolin, Shoreline's co-founder and managing partner.

Shoreline founded Huan Investment last year to manage a yuan-currency fund.

China Chengtong was founded in 1992 as a state capital investment firm that's wholly-owned by the State Council, China’s cabinet. It claims more than 80 billion yuan worth of assets, according to the State-owned Assets Supervision and Administration Commission.

At the end of 2016, according to the China Banking Regulatory Commission (CBRC), bad loans held by the nation's commercial banks totaled 1.5 trillion yuan, an amount equal to about 1.74% of the all outstanding bank loans. Two years ago, CBRC said, some 1.25% of commercial lenders’ outstanding loans were non-performing.

China’s largest state-owned banks offloaded more than 3 trillion yuan worth of bad loans a decade ago. Taking over the debt were the nation's big four asset managing firms — Cinda, Huarong, Orient and Great Wall.

Toxic debt is now weighing down China's future economic prospects, said Chengtong Huan Chairman Zhang Baowen, who also serves as CCTA's chief manager.

For that reason, Zhang said, bad assets should best be handled through a “fast in, fast out” strategy that involves private investors.

Chengtong Huan's plan calls for wrapping up the relevant debt relief and paying off investors within four years.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)