As China’s economy slows and defaults rise, bad loan managers are quietly buying toxic debt so it does not poison the broader financial system. Yet questions remain about whether these bad banks are savvy investors in distressed assets or conduits for a backdoor bailout of state banks.
Investors widely suspect that the banks’ practice of “extend and pretend” explains why the country’s official non-performing loan ratio remains modest at 1.67 per cent. While this practice is probably part of the explanation, lenders have also kept non-performing loans under control by accelerating sell-offs of soured debt.
Total assets at the big four state-owned asset management companies, the main buyers of such debt, surged from Rmb345bn ($53bn) to Rmb1.73tn ($268bn) between 2011 and 2014. Most is concentrated in industries such as steel, coal and real estate that have borne the brunt of China’s economic slowdown.
However, in a statement to China’s parliament, Lai Xiaomin, chairman of Huarong Asset Management, has warned that due to the slowing economy “the speed of distressed asset disposal is declining and the difficulty is increasing”.
Mr Lai asked for low-interest loans from the central bank and fresh equity capital from the finance ministry to reduce the pressure on the AMCs to sell off their distressed assets at unfavourable prices.
Yet the plan raises questions about whether the AMCs are returning to their roots as a channel for injecting government money into state banks.
Huarong is the largest by assets of four state-owned AMCs that Beijing established in 1997 to recapitalise the big four state-owned commercial banks. The AMCs purchased Rmb3.5tn in bad loans on government orders through 2008. With much of that debt purchased at face value, these transactions cleansed the balance sheet of the banks but left the AMCs with guaranteed losses.
Nearly two decades later, Huarong and Cinda, Great Wall and China Orient, its cousins, have disposed of their legacy assets and insist they have transformed themselves into profit-driven entities that buy assets at market prices, using their experience to recover value.
They have also diversified their assets beyond bank loans. Of Huarong’s total bad-debt portfolio at the end of June, 60 per cent was purchased from non-financial companies, mainly corporate receivables. Overdue receivables have risen sharply in recent years as cash flows tighten and companies delay payments to suppliers. They are also buying from non-bank financiers such as trusts.
Huarong sells bonds and borrows mainly in the interbank money market to fund its bad-asset purchases. But deprived of the government funding on which they once relied, Mr Lai said it is difficult to meet his funding needs.
“Things have changed from [the government] giving rice to cook meals to [us] searching for rice to fill the pot,” he said.
“My capital sources are limited and regulatory requirements are high so there’s a lot of pressure.”
Huarong raised $2.3bn last October in a Hong Kong initial public offering that set a record for the proportion of shares bought by cornerstone investors. Analysts said the reliance on state-owned cornerstones was a sign that ordinary investors were nervous about the deal.
Lack of transparency has fuelled a lingering suspicion that the AMCs are instruments of a stealth bailout, with politicians pressing the four AMCs to buy assets at inflated prices. Mr Lai said such deals are a thing of the past.
“Now everything we do is market-driven. From funding costs to negotiations over [asset] prices — the government doesn’t interfere,” said Mr Lai. “One-shot business deals mandated from above — that’s from 17 years ago. We don’t do that any more.”
The FT reported in 2014 that Huarong was the mysterious white knight that bailed out Credit Equals Gold 1, a high-yield wealth management product that had been sold by Industrial and Commercial Bank of China, China’s largest lender. The deal, in which Huarong bought the underlying assets at a modest discount to face value, was struck just days before a potential default that could have spread contagion through China’s financial system.
The question is whether incidents such as this are anomalies or indicative of the way Huarong and the other AMCs typically operate. Analysts mostly believe the bad banks are profit-driven, but they acknowledge that the AMCs can be pressed into national service when circumstances demand.
Zhan Di, an analyst at Everbright Securities in Hong Kong, said: “Whether they’re are completely market-driven and transparent I can’t really say. But they’re definitely headed in that direction. It’s the inevitable trend.”
Additional reporting by Ma Nan in Shanghai
但是，华融资产管理公司(Huarong Asset Management)董事长赖小民在向今年中国“两会”建言时警告，由于经济增长放缓，“不良资产处置速度下降且处置难度加大。”
近20年后，华融、信达(Cinda)、长城(Great Wall)、东方(China Orient)已经处理掉了遗留资产，坚称自己已转型为以市场价格购买资产的盈利驱动型实体，利用自己的经验收回价值。
英国《金融时报》曾在2014年报道，华融就是为“诚至金开1号”(Credit Equals Gold No. 1)纾困的神秘白衣骑士。诚至金开1号是中国最大银行——中国工商银行(ICBC)发售的一个高收益理财产品。华融以相对于面值的小幅折扣买下了标的资产，这笔交易的达成时间距离预计违约日只差几天，而潜在违约的不良影响可能在中国金融体系蔓延。