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China Great Wall Asset Management is one of four companies that were established to buy nonperforming debt. (AP/Reuters)
Datawatch

China's bad debt disposal re-emerges -- in charts

Beijing prods asset management companies to buy more nonperforming loans

LONDON -- Chinese banks have come under increasing pressure from President Xi Jinping to clear bad debt from their balance sheets, but data from one of the country's four largest state-owned asset management companies suggests a re-emergence of nonperforming loan disposals.

With companies required to publish records of auctions of nonperforming loan debt, Brandon Emmerich, principal at Granite Peak Advisory, collected data released by Great Wall Asset Management.

His analysis found an increase of more than 100% in the number of nonperforming loans acquired between 2016 and 2017, and a nearly 300% increase since 2014 -- a year that recorded the lowest count in over a decade.

Three other government-led financial institutions purchase nonperforming loans -- China Cinda Asset Management, China Huarong Asset Management and China Orient Asset Management. However, the most detailed figures were available for Great Wall.

The amounts they bought peaked in 2011, when all four were being recapitalized. The figure then dropped, but has been rising again since 2014.

According to S&P Global Ratings analyst Harry Hu, regulators have encouraged the big four asset management companies to buy more of this debt to foster financial stability.

With capital rationing and restrictions in place on international expansion and investment, Hu explained, the government has prodded AMCs to concentrate on the business they were designed for, namely buying nonperforming loans.

In addition, regulators have lowered the risk weight for the classification of the business of acquiring such debt, meaning that asset management companies now benefit from a discount on the nonperforming loans they buy.

Lastly, the reserve ratio on nonperforming loans has been lowered to 120% from 150%, subject to asset pre-risk management, encouraging banks to sell them before breaching the limit.

Another driver has been the emergence of smaller provincial asset management companies, which began to appear around three years ago. The increase in the number of buyers pushed prices in the banks' favor, further encouraging them to dispose of this kind of debt, said Hu.

Hu foresees the two remaining unlisted asset management companies acquiring more bad debt in the near term. Once listed and backed by an infusion of capital, they are likely to continue spending.

Amounts are likely to be particularly large in sectors that contribute most to banks' current nonperforming loan portfolios, such as manufacturing, wholesale and retail.

Emmerich's research suggests that the banks that are most at risk from unrecognized nonperforming loans are those with the largest exposure to China's weakest regional economies.

According to data from the annual reports of China's Banking Regulatory Commission, the average increase of outstanding balances on nonperforming loans at commercial banks from 2015 to 2016 was considerably higher in China's Rust Belt than in other parts of the country.

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