Local Bad Banks Become Major Players in China’s Bad Loan Market
Since 2013, when China’s banking regulator first started approving the establishment of local asset management companies (AMCs) to help clean up the bad loans in China’s financial system, it has been difficult to gauge the extent to which these “bad banks” have contributed toward clean-up efforts. That’s because the local AMCs, numbered 47 at the end of February—seldom disclose data about how many nonperforming loans (NPL) they’re buying up. We at Macro Polo have trawled through as many sources as we could get our hands on in search of such data but only managed to find numbers on the NPL purchases of five local AMCs, most of which were figures no more recent than 2016.
However, a recent report called “A White Paper on China’s Local AMCs Industry” offers an unprecedented degree of insight into the activities of local AMCs. Jointly published in late April 2018 by the Southwestern University of Finance and Economics in Chengdu and the Sichuan Development of Asset Management Co.—the sole provincial AMC in Sichuan—the report presents previously unavailable data on NPL acquisitions by 30 local AMCs in 2017.
The paper has its limitations, however. It only provides data on NPL acquisitions in 2017, giving no indication as to how the local AMCs’ operations may have changed over the last few years. Nonetheless, it does yield important new insights.
First, local AMCs have, as a group, become a major force in the disposal of NPLs, acquiring significantly more NPLs in 2017 than Huarong and Cinda—the two largest of the “Big Four” AMCs—combined. According to the white paper, the 30 local AMCs for which it has data acquired 290 billion yuan worth of NPLs in 2017. In contrast, Huarong acquired just 114 billion yuan worth of NPLs from banks and other financial institutions and Cinda 93.3 billion yuan over the same period.
The white paper also provides insight into the degree to which local AMCs are helping the various provinces manage outstanding NPL levels. Based on the paper’s data, among large provincial AMCs, Anhui Goho Asset Management made the biggest impact on local NPL levels, acquiring 30.6 billion yuan in 2017, equivalent to 85.6% of outstanding NPLs at commercial banks in Anhui province at the end of 2016 (not all of China’s provinces have as yet disclosed 2017 NPL data). Meanwhile, Shanghai’s two AMCs acquired a combined 24.5 billion yuan worth of NPLs in 2017, equivalent to 79.7% of the municipality’s outstanding commercial bank NPLs at the end of the previous year. Zhejiang’s AMCs acquired new NPLs more aggressively than any other province. Two of Zhejiang’s AMCs acquired 59.5 billion yuan worth of NPLs last year, almost twice the amount of Goho in Anhui, which came in second. Nonetheless, that represented only 37.9% of outstanding NPLs at Zhejiang’s commercial banks at the end of 2016.
The white paper omits an explanation on what the local AMCs do with the NPLs once they’ve acquired them. With prices rising aggressively throughout 2017 (the paper says the portfolios of bank NPLs typically sold at about 30% of their face value at the end of 2016, rising to about 60% in some places a year later), and with most local AMCs holding relatively thin capital levels, that means that they typically don’t have the resources to buy NPLs and hold them for a long period. Hence, local AMCs may have primarily emerged as a conduit through which NPLs pass from banks to investors in the secondary market. But regardless of how the local AMCs are disposing of their NPLs, they’re unquestionably making it easier for banks to clean up their balance sheets.
For a full copy of the report, please see below.