China Said to Allow Five Regions to Create Bad-Loan Firms

China’s banking regulator is allowing governments in five places including Shanghai to set up asset-management companies to buy bad loans from financial institutions, three people with knowledge of the matter said.

The trial program also covers the provinces of Guangdong, Zhejiang, Jiangsu and Anhui, said the people, who declined to be identified as they aren’t authorized to speak to the media. The firms can buy local soured loans from banks, trust and finance companies and leasing firms, the people said.

Premier Li Keqiang is grappling with reining in credit risks following an unprecedented surge in lending since the global financial crisis. The local companies would be in addition to four national bad-loan managers, including China Cinda Asset Management Co., set up in 1999 to help clean up the banking industry.

“Just four AMCs are not enough to absorb all the nonperforming loans in the system,” Edmond Law, a Hong Kong-based analyst at UOB-Kay Hian Ltd., said by phone. He said bad credit is still yet to peak.

China’s economic slowdown is adding to pressure on the nation’s lenders. A 7.4 percent expansion this year, forecast in a Bloomberg News survey of analysts, would be the slowest pace since 1990.

Banks’ nonperforming loans jumped by 54 billion yuan ($8.7 billion) in the three months through March, the biggest quarterly increase since 2005, according to China Banking Regulatory Commission data. Bad loans accounted for 1.04 percent of total lending, up from 1 percent three months earlier.

The CBRC didn’t immediately reply to a faxed query seeking comment on the trial program. Anhui Daily, controlled by the Anhui provincial government, reported the news yesterday.