Five provinces have been authorized by the banking regulator to set up local asset-management companies, according to a report by Anhui Daily, a newspaper of the Anhui provincial government, citing a statement from the China Banking Regulatory Commission.
The five AMCs in Jiangsu, Zhejiang, Anhui, Guangdong and Shanghai were approved to carry out bulk transfers of non-performing assets. Banks, trusts, finance companies, financial leasing companies and other financial institutions can sell their bad assets to these AMCs. Experts said the move will ease the pressure of an increasing bad loan rate.
In the past, China only had four national asset management companies, including China Cinda Asset Management Co, which were established in 1999 for the purpose of handling the bad loans of commercial banks.
Registered in Wuhu, Anhui province, Anhui Guohou Asset Management Co was jointly founded by a Shanghai-based AMC and several local enterprises with a registered capital of 1 billion yuan ($160 million) and will gradually receive increased investment as business develops.
Four other local AMCs - Jiangsu Asset Management Co, Zhejiang Capital Management Co, GDF Asset Management Co and Shanghai State-owned Assets Operation Co - are ready to launch, according to online business news provider Caixin.
The four provincial AMCs have already completed preparations and are all wholly controlled by State-owned enterprises. The registered capital of Shanghai State-owned Assets Operation is 5 billion yuan; 5 billion yuan for Jiangsu Asset Management; 1.2 billion yuan for GDF Asset Management; and 1 billion yuan for Zhejiang Capital Management.
Anhui Guohou was recently established by one of the four national AMCs, Orient Asset Management Corp, and is the only one to bring in private capital.
However, compared to the four national AMCs, non-performing assets acquired by local AMCs can only be disposed of via debt restructuring and are not transferable outside their region.
The China Banking Regulatory Commission did not reply to a request for comment. Bloomberg had earlier confirmed the news with unnamed sources.
As bad assets in China's local banks are expected to increase in the wake of larger downward pressure on the economy, there is an urgent need for many provinces to have an agency specializing in the disposal and acquisition of non-performing financial assets to resolve and reduce local financial risks.
Analysts said the AMCs specializing in the disposal of non-performing financial assets will help improve regional financial environments.
Lu Yiwen, an analyst with Shanghai-based Shenyin & Wanguo Securities Co, said she believed that the role of local AMCs is subject to their ability in disposing of non-performing assets. The scale of their disposal will be limited in the short term, and their business will not be a primary way to dispose of non-performing bank loans for lenders seeking IPOs, which is a usual role of AMCs.
"But it is in favor of accelerating the disposal of non-performing assets in higher-risk areas such as the Yangtze River Delta region," she said.
The latest data from the CBRC show that up to the end of June, the balance of non-performing loans of commercial banks reached 694.4 billion yuan, up 17 percent from the beginning of the year. The non-performing loan ratio was 1.08 percent, the highest in the last six quarters.
The bad loan ratio in Shandong province reached 1.57 percent, an increase of more than 25 percent in the past six months.
Local govts to start asset management companies
China has started a pilot program for five local governments to approve and set up financial asset management companies (AMCs) to buy soured loans, as part of the nation's banking regulator's efforts to prevent the escalating local bad debts from crippling the economy.
The trial program covers Shanghai, South China's Guangdong Province, East China's Zhejiang, Jiangsu and Anhui provinces, Reuters reported on Tuesday citing unnamed sources.
China Banking Regulatory Commission (CBRC) did not immediately reply to a faxed inquiry by the Global Times seeking comment on the trial program.
However, a statement posted on a local government website affirms the regulator's initiatives.
Anhui-based Guohou Asset Management Co has been given a green light to buy bad debts from banks, trust firms, financial corporations and financial leasing companies under the trial program, according to a statement posted on Anhui provincial government's website on Monday.
Currently, the nonperforming loans (NPLs) of financial institutions are dealt with by four national AMCs, which were launched by the Ministry of Finance in the late 1990s and early 2000s.
The centrally controlled AMCs are China Huarong Asset Management Co, China Cinda Asset Management Co, Orient Asset Management Co, and China Great Wall Asset Management Corporation.
Since 2012, China has been introducing new methods, such as a trading platform to help banks off-load loans to investors, to cope with its soured loans, which were created by a massive credit splurge in 2009.
"Local government-endorsed AMCs will be a new channel for handling the distressed debts of the banks and prevent the regional financial risks from further building up," Feng Zishan, a financial analyst at Beijing Unbank Investment Consultant Ltd, told the Global Times on Tuesday.
The regulator picked the five local governments as they have been witnessing a significant surge of NPLs or have experience in asset management practices, in the cases of Shanghai, Guangdong and Zhejiang, Feng said.
Banks' NPLs jumped by 102.4 billion yuan ($16.65 billion) in the January to June period, and bad loans accounted for 1.08 percent of total lending, the banking regulator's data showed Friday.
Hampered by underperforming industries including steel, textile, shipbuilding, and solar panel manufacturing that suffer from overcapacity, Guangdong and Zhejiang are the regions that had the fastest growing NPL ratios in the first quarter, up 0.08 percentage points from the end of 2013, according to data from the CBRC's local offices.
The banking sectors of Zhejiang, Guangdong and Jiangsu recorded NPL ratios at 1.91, 1.29 and 1.28 percent respectively in the three months through March, higher than the nation's average of 1.04 percent, the data showed.
Local AMCs will offer banks more options to negotiate for a better price for their bad debts than selling them to the Big Four national AMCs, Feng said.
As some regional and city-level banks are preparing to get listed, the local AMCs will help them get rid of soured loans and make their financial reports more appealing to investors, he noted.
The program enables local government endorsed asset management firms to take a chunk of the profitable bad debts business currently dominated by the four State-owned AMCs, Zhang Taowei, a finance professor at Tsinghua University, told the Global Times on Tuesday.
The strong financial performances of the Big Four AMCs in the first half of the year showed that bad debts disposal could be a lucrative business in China.
China Orient Asset Management Co, one of the Big Four AMCs, posted a 39 percent rise in profit growth, yet modest compared with the 57 percent year-on-year surge from China Huarong and 45 percent hike in profit from China Great Wall Asset Management Corp.
It also gives greater flexibility for local authorities to deal with rising local government debts, and more provinces and regions are expected to be covered by the program, Zhang said.
