China adds a fifth bad-debt manager to prepare for decade-high dud loans as Covid-19 weighs on banks and borrowers

Zhang Shidong
·4-min read

China has given the green light for the first national asset management company (AMC) to be established in more than 20 years, as the country’s banking system braces for a record spate of corporate defaults and bad loans from the coronavirus pandemic.

China Galaxy Asset Management has been approved to start business, according to a statement on the website of the China Banking and Insurance Regulatory Commission. The Beijing-based firm is capitalised at 10 billion yuan (US$1.5 billion), it said.

Galaxy would become the fifth AMC to be established in China’s banking industry to process and dispose of dud assets from the books of the nation’s state-owned banks. The task has taken on added urgency as China’s financial system must brace for a record wave of bond defaults and slumping corporate earnings, as the coronavirus pandemic weighs on consumption and crimps economic growth.

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While China’s economy has returned to growth – the only major economy to expand this year – it has come at the expense of banks, which have been instructed to cut their borrowers some slack to help them weather the pandemic. Outstanding non-performing loans at China’s commercial banks rose to 2.8 trillion yuan by the end of the third quarter, the highest level since at least March 2009, according to data released by the regulator.

“The impact of the pandemic on the structure of the economy will be long-lasting and noteworthy,” said Yang Rong, an analyst at CSC Financial. “The sectors that used to have very low bad loan ratios, such as airlines, entertainment and catering, have now apparently seen increases in bad loans.

“The ongoing economic transformation will also increase bad loans in industries such as retailing.”

China’s bond market, the world’s second largest, is also reeling from a turbulent year. Debt defaults had topped 104 billion yuan in 2020 as of November, set for a record in annual missed payments, according to Bloomberg data.

Rattling the nerves of investors were the defaults in two state-owned behemoths: Huachen Automotive Holding Group, the parent of Hong Kong-listed Brilliance China Automotive Holdings, and Yongcheng Coal & Electricity Holding Group.

Commercial banks should increase provisions for bad loans and speed up disposals of the dud assets to protect the asset quality, said Sun Tianqi, head of the financial stability bureau under the central bank, at a forum this month.

Galaxy has five shareholders, led by state-owned China Galaxy Financial Holdings with a 65 per cent stake. Central China Huijin Investment, a unit of China’s sovereign wealth fund, owns 13.3 per cent of Galaxy as the second-largest shareholder, while Citic Securities has a 5.7 per cent stake.

Galaxy, revamped and renamed from a regional asset management firm, “will actively enforce the state strategy of serving the real economy, guarding against financial risks and deepening financial reforms,” its controlling shareholder said.

The new AMC joins a quartet of asset managers established two decades ago to clean up the books of China’s four largest state-owned lenders: Huarong for the Industrial and Commercial Bank of China (ICBC), Great Wall for the Agricultural Bank of China, Orient for Bank of China and Cinda for China Construction Bank.

They took over trillions of yuan worth of bad loans from the four lenders, cleaning up the banks’ books sufficiently for them to tap the global financial markets including Hong Kong for fresh capital to reinforce their balance sheets.

The addition of a fifth AMC will provide a respite to China’s listed banks, which have been under pressure from rising defaults and potential policy tightening. A gauge of 39 banking stocks trading on the Shanghai and Shenzhen exchanges is down 6.8 per cent from a high this month, according to data provider Shanghai DZH.

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