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


China has given the green light to the creation of the first national asset management company (AMC) in more than 20 years, as the country’s banking system braces for a record series of corporate defaults and claims questionable due to the coronavirus pandemic.

Galaxy China Asset Management was allowed to start a business, according to a statement on the China Banking and Insurance Regulatory Commission website. The Beijing-based company is capitalized at 10 billion yuan ($1.5 billion), he said.

Galaxy would become the fifth AMC to be established in China’s banking industry to address and eliminate failed assets from the books of state-owned banks in the country. The task has become all the more urgent as China’s financial system must brace for a record wave of bond defaults and plummeting corporate profits as the coronavirus pandemic weighs on consumption and dampens economic growth.

Get the latest insights and analysis from our Global Impact Newsletter on the great stories originating in China.

While China’s economy has returned to growth – the only major economy to grow this year – it has come at the expense of banks, which have been tasked with giving slack to their borrowers to help them cope with the pandemic. Outstanding non-performing loans from China’s commercial banks hit 2.8 trillion yuan at 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 noticeable,” said Yang Rong, analyst at CSC Financial. “Sectors that previously had very low bad debt ratios, such as airlines, entertainment and restaurants, have apparently seen an increase in bad debts.

“The ongoing economic transformation will also increase bad debts in sectors such as retail.”

The Chinese bond market, the second largest in the world, is also reeling from a turbulent year. Defaults had topped 104 billion yuan in 2020 by November, setting a record for missed annual payments, according to Bloomberg data.

Defaults by two state-owned giants: Huachen Automotive Holding Group, the parent company of Hong Kong-listed Brilliance China Automotive Holdings, and Yongcheng Coal & Electricity Holding Group, have rattled investors’ nerves.

Commercial banks should increase provisions for bad debts and speed up the disposal of failed assets to protect asset quality, Sun Tianqi, head of the central bank’s financial stability office, said at a forum this month. this.

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

Galaxy, revamped and renamed from a regional asset management company, “will actively implement the state’s strategy of serving the real economy, guarding against financial risks and deepening financial reforms”, said its majority shareholder.

The new AMC joins a quartet of asset managers created two decades ago to clean the books of China’s four largest public 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 in bad debt from the four lenders, cleaning up banks’ books enough that they could tap into global financial markets, including Hong Kong, for new capital to bolster their balance sheets.

The addition of a fifth AMC will provide respite for listed Chinese banks, which have come under pressure from rising defaults and potential policy tightening. A gauge of 39 banking stocks traded on the Shanghai and Shenzhen stock exchanges is down 6.8% from its peak this month, according to data provider Shanghai DZH.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice on China and Asia for over a century. For more SCMP stories, please explore the SCMP app or visit the SCMP Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.


Comments are closed.