China Bad-Loan Managers Face Risks Amid Slowdown, Huarong Says

  • Huarong chairman says industry needs access to cheaper funds
  • Firm is China's largest manager of nonperforming loans

China’s bad-loan managers are facing rising risks as the nation’s economic slowdown helps drive soured loans in the banking system to the highest in a decade, according to the head of China Huarong Asset Management Co.

More capital at bad-loan managers is being tied up for longer periods of time in soured debt as pricing conditions worsen amid the rising supply of such assets, Huarong Chairman Lai Xiaomin wrote in a six-point proposal to the National People’s Congress. The firms need access to more and cheaper funding channels, said Lai, whose firm is China’s largest bad-loan manager.

Data from the banking regulator show that Chinese commercial banks’ nonperforming loans had risen to 1.27 trillion yuan ($195 billion) by December, the highest level since June 2006, as economic growth slowed to the weakest pace in a quarter century. Including “special-mention” loans, where future repayment is at risk but yet to become nonperforming, troubled loans had swelled to 4.2 trillion yuan, or about 5.5 percent of total advances, the data show.

Huarong is one of four state-owned asset-management companies set up during the banking crisis of the late 1990s to dispose of nonperforming loans. The firm raised $2.5 billion in a Hong Kong initial public offering last year.

Below is a summary of Lai’s six suggestions to the NPC:

  • The government should provide support to troubled companies by arranging as much as 3 trillion yuan of funding for bad-loan managers’ debt-to-equity swap transactions.
  • The government should support bad-loan managers’ IPOs on domestic stock exchanges so that they will have access to a cheaper and more sustainable source of financing for their purchases of soured assets and other acquisitions.
  • The central bank and the finance ministry should allow bad-loan managers to issue so-called special bonds, simplify the approval process and relax requirements on bad-loan managers’ bond sales. He also suggests that the central bank extend its refinancing policy to bad-loan managers and provide low interest loans.
  • Regulators should lower capital requirements on bad-loan managers as the current 12.5 percent ratio is higher than the requirement on banks.
  • Managers of soured debt should be allowed to participate in securitizing nonperforming loans.
  • A merit-based long-term incentive mechanism should be established for bad-loan managers.

— With assistance by Aipeng Soo

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