Turning Toxic Debt to Gold in China

In 1999, China set up four companies to help dispose of $229 billion of soured loans that banks had accumulated after years of lending to unprofitable state-owned companies. The strategy worked better than anyone expected. By trading debt for equity and using other restructuring tactics, the asset managers have delivered profits and evolved into diversified financial companies that do investment banking, manage funds, make real estate deals, and sell insurance. Now the four—Huarong Asset Management, Cinda Asset Management, Orient Asset Management, and Great Wall Asset Management—are poised to benefit from a new batch of nonperforming loans (NPLs) generated in China’s latest lending spree. “You can make a ton of money off of NPL workouts if you do them right,” says Charlene Chu, the Beijing-based head of China financial institutions at Fitch Ratings.

The asset management companies’ reported combined assets of 560 billion yuan ($91 billion) and profits of 16 billion yuan in 2011, according to a bond offering prospectus Cinda issued last year. At Cinda, the second-largest of the companies, profit rose 6 percent, to 7.2 billion yuan, in 2012. Huarong, the largest, posted a 68 percent jump in profit last year, to 5.9 billion yuan.