Chinese Banks Seeking to Recover Their Bad Debts

Major Chinese banks want to manage their own bad debts, attracted by the outsize profits being earned by recovery firms, in a sign of confidence that investments in internal risk assessment teams are set to pay off.

If they are right, it may mark the end of a buyer’s market for a distressed debt pile that has topped $100 billion, benefiting bank shareholders at the expense of asset-management companies such as China Cinda Asset Management Co (1359.HK).

But the phenomenon also poses a challenge for regulators as they push banks to lend more to stimulate growth; in retaining non-performing loans (NPLs) on their books in search of profit, the banks effectively limit their ability to make fresh loans.

“There are so many NPLs in China, there’s a lot of room for information asymmetry, where assets get written off that actually have some value,” said Benjamin Fanger, founder of Shoreline Capital, a Guangdong-based firm specializing in distressed debt investment in China since 2004.

It is a lucrative business at the moment. State-owned Cinda reported a 26 percent rise in net profit to 9.1 billion yuan ($1.5 billion) last year and China Huarong Asset Management’s net profit jumped 44 percent to 10.1 billion yuan.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza