Caixin
Dec 18, 2020 05:56 AM
FINANCE

China Clears First New National Bad-Loan Manager in Two Decades

Commercial banks had outstanding nonperforming loans of 2.84 trillion yuan ($435 billion) as of the end of September
Commercial banks had outstanding nonperforming loans of 2.84 trillion yuan ($435 billion) as of the end of September

Top financial regulators in China granted final approval to a new asset management company (AMC) to deal with bad loans and toxic assets nationwide, adding a new player to a sector controlled by four state giants for more than two decades.

The China Banking and Insurance Regulatory Commission (CBIRC) Thursday approved the opening of state-owned China Galaxy Asset Management Co. Ltd., making it the first national bad-asset manager to be launched since 1999.

According to the CBIRC, China Galaxy will receive its financial business license within 10 days and proceed with relevant procedures before it opens for business early next year.

The new bad loan manager will open as Chinese banks face greater bad loan concerns with fallout from the Covid-19 pandemic pounding their bottom lines. China’s $45 trillion banking industry suffered the worst profit slump in more than a decade in the first half after being put on the front line to help millions of struggling businesses amid the pandemic.

According to the CBIRC, commercial banks had outstanding nonperforming loans of 2.84 trillion yuan ($435 billion) as of the end of September with an additional 3.8 trillion yuan of special-mention loans, meaning they are at higher risk to turn bad.

With registered capital of 10 billion yuan, China Galaxy is 65% owned by China Galaxy Financial Holdings and 12.2% by Central Huijin Investment Co., an investment arm of China’s sovereign fund China Investment Corp., according to the CBIRC statement. The rest of the company is held by Nanjing Zijin Investment Group Co. Ltd., Beijing Financial Street Capital Operation Center and Citic Securities Co. Ltd.

China Galaxy’s business will include buying and investing in nonperforming assets of financial institutions, taking part in debt-to-equity swaps, offering loans to financial institutions, investing in fixed-income securities and issuing bonds, as well as carrying out bankruptcy restructuring and management, according to the CBIRC.

Li Mei, chairman of China Galaxy Financial Holdings and a securities industry veteran, was named chairman of the newly formed asset manager.

China Galaxy was restructured from Beijing-based Jiantou Citic Asset Management Co. Ltd., according to a CBIRC statement in March. Jiantou Citic was ordered to complete the transformation work within six months and was suspended from doing financial business during the transition, the regulator said at that time.

Jiantou Citic was founded in 2005 to take over some of the assets of Huaxia Securities Co. Ltd. Huaxia, set up in 1992, was one of the country’s earliest and biggest brokerages. It collapsed in November 2008 after years of reckless expansion combined with illegal financial management that led to massive financial losses. Jiantou Citic was jointly owned by Central Huijin and Citic Securities.

China set up the four national asset management companies in 1999 to buy, manage and sell off a total of 1.4 trillion yuan of nonperforming loans from the big four state-owned commercial banks. The four — China Great Wall, China Orient, China Huarong and China Cinda — account for a combined 90% of the country’s bad-asset management market.

No new national AMCs have been established since then, although regulators since 2014 have approved 56 regional asset managers to deal with bad assets locally. Since 2017, five major state lenders were approved to set up their own asset management subsidiaries to address bad loans.

Regulators have tightened oversight of AMCs since the 2018 graft probe of Lai Xiaomin, then chairman of China Huarong. Lai was found to have channeled Huarong funds into privately owned companies with risky investments. He was prosecuted last year for taking huge bribes. Lai’s trial on charges of corruption, bribery and bigamy is still going on.

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In Depth: Bad Business at a ‘Bad Bank’

Following the Lai scandal, regulators launched management reshuffles in the national AMCs and ordered the companies to focus on their core business of bad debt management.

Timmy Shen contributed to this story.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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