1. Chinese regulators have ordered distressed-debt managers to stop acting as conduits for outside investors, escalating enforcement of a decade-old ban that threatens regional asset management companies (AMCs). Regulators started informal instructions in late June. On July 24, Chongqing's local financial regulator suspended Chongqing Fucheng Asset Management Co. for essentially lending or renting out its financial business license. [para. 1][para. 2]
2. This crackdown could reshape the distressed-debt market, forcing licensed asset managers to take actual responsibility for investment decisions and recoveries as falling property values expose weaknesses in previously low-risk deals. Fucheng is the first regional AMC suspended for such conduit work and license rental. A national AMC subsequently issued an internal prohibition, while several regional firms received restrictions on these transactions. [para. 3][para. 4]
3. In China, only licensed AMCs can make bulk purchases of financial bad debts; outside investors cannot buy directly from banks. Conduit arrangements bridge this divide: investors select portfolios, supply part of the purchase price—often 20% to 30% as first-loss capital—and direct recovery, while AMCs provide licenses and finance roughly 70% of the price. AMCs charge annual financing interest of 8% to 10% plus transaction fees. [para. 5][para. 6][para. 7][para. 8]
4. Investors largely conduct due diligence and pricing, leaving AMCs with a formal review. This structure offered predictable income without lengthy, uncertain recovery work, making younger, cash-strapped regional firms dependent on it. However, investor guarantees and initial capital contributions no longer protect AMCs from losses. [para. 9][para. 10]
5. Feng Cantong, a senior partner at Guangdong F&H Law Firm, says that money flooding into distressed debt in 2020-2021 drove up prices; good collateral portfolios sold for 60-70% of principal, with collateral valuations at 120-130%. However, much collateral was commercial property. Sharp price declines over the past two years (approaching 50% in some cases) eroded this cushion. Taxes, fees, and bankruptcy risks complicate recoveries. Greater risk arises when investors stop repayments, leaving AMCs with substantial unpaid principal in hard-to-sell portfolios. [para. 11][para. 12][para. 13]
6. More harmful conduit uses include helping banks conceal bad loans and borrowers evade repayment. Banks may lend to a borrower's affiliate, which uses an AMC to buy its bad debt, removing it from books and lowering bad-loan ratios while the bank retains credit risk. Borrowers may repurchase their own debt at a steep discount through affiliates and then settle, eliminating remaining repayment obligations and releasing collateral. [para. 14][para. 15]
7. In consumer-debt deals, regional AMCs contribute only 5% to 20% of the price before selling rights to 80-95% of recoveries to law firms, collectors, or other investors. Persistent complaints about abusive collection, harassment of third parties, and personal-data leaks led to especially tough enforcement in this segment. [para. 16]
8. Regulators first banned the conduit business in 2016, tightened rules in 2024 requiring genuine transfers of assets and risk, and specified prohibitions in July 2025 regulations. China had 58 recognized regional AMCs at the end of 2025, with 46 controlled by state-owned shareholders. Feng expects privately controlled firms to be hit hardest, as national AMCs have cheaper funding and stronger debt-recovery teams. [para. 17][para. 18]
9. A lasting transition demands developing independent valuation, recovery, and restructuring capabilities. Feng says regional AMCs should shift performance targets from revenue and acquisition speed to recovery rates and asset turnover. New rules expanding their scope (e.g., acquiring more impaired corporate debt, acting as bankruptcy administrators) open up new opportunities. But capabilities take time to build; Feng expects severe pressure, exits, and consolidation in the sector. Near-term, bidders will be more cautious, with downward pressure on distressed-debt prices as AMCs work through high-price portfolios and underlying assets remain hard to sell. [para. 19][para. 20]
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