China makes headway in denting distressed debt

Foreign investors are rushing into the country to purchase its NPLs.

China is making considerable progress in halting the growth of its bad debt, according to accountancy firm Deloitte, as a growing number of high profile and foreign investors are showing greater interest in the acquisition of Chinese NPLs in recent years.

“The growth in the use of debt for equity swaps, non-performing loan (NPL) securitisation and distressed debt management foreign buyers have been increasingly participating in a market that has seen lower levels of activity since the onset of the financial crisis in 2008,” Deloitte noted as nominal and relative NPL levels within the banking sector are at $254.2b and 1.74% in Q4.

Also read: Chinese banks poised for profit as combined net income to rise 8% in 2018

The report noted that China’s depth of its expertise in managing large levels of distressed debt appears to be paying off especially with the creation of what is now the Big 4 in asset management corporations - China Huarong, China Great Wall, China Orient, and China Cinda asset management corporations.

Moreover, a national NPL securitisation pilot programme was launched by the Chinese Banking Regulatory Commission (CBRC) in 2016 to explore new options in providing assistance to banks with regards to the management and reduction of their accumulated bad debt.

In February 2016, the People’s Bank of China (PBoC) with other Commissions co-issued the policy to restart the NPL securitisation trial programme and set aside some $7.7b (RMB50b) to underwrite an initial test securitisation programme by China’s six largest banks

Also read: China eases banks' bad-loan coverage ratio to 120%

“Given the progressive move to a “new normal” for the Chinese economy, the number or NPLs available for sale arising from the measures that have been introduced to drive toward active management of the NPL position of the industry and the outright capital position of the AMC’s the prospects for increased foreign investor participation are high.”