In 2014, the China Banking Regulatory Commission (CBRC) started approving the establishment of local asset management corporations (AMCs)—otherwise known as bad banks—to compete alongside the Big Four AMCs (Cinda, Huarong, China Orient, and Great Wall) that had been operating at the national level since 1999. Although the new provincial AMCs were granted the right to buy batches of nonperforming loans (NPLs) directly from banks—a right hitherto limited to the Big Four—geographical limitations were placed on their operations. That is, they were allowed to buy NPLs only from banks in their own province. At the time, local AMCs were generally heralded as a welcome addition to the box of tools banks could deploy to reduce their bad loans. What was less clear was whether these new institutions would be able to muster the resources necessary to make a significant contribution toward managing China’s bad loan problem.
These institutions have now been around for almost four years. After initially licensing only five local AMCs, by MacroPolo’s count, at the end of February there were 47, with at last another half dozen awaiting approval from the CBRC. Some provinces have only one, while others have as many as three. And two provinces—Guizhou and Xinjiang—have designated companies as AMCs, but it appears as though the CBRC is yet to approve them as such. And yet much uncertainty shrouds their role and contribution. That’s in part because there’s an incredible amount of diversity among the 50 firms, making it difficult to draw hard and fast conclusions.
More Than One Model
The Local AMCs have a diverse range of controlling shareholders.
Source: Local AMCs, SAIC.
Some are wholly owned by local government authorities, others are majority owned by private interests, and some are controlled by national financial institutions. Examples include China Merchants PingAn Asset Management Co., one of Fujian province’s three AMC, which is controlled by China Merchants Groups, and Everbright Jin’ou Asset Management Co., one of Zhejiang’s three AMCs, which is controlled by China Everbright Group. While most were set up for the express purpose of acquiring NPLs, in some cases the right to operate as an AMC was granted to financial holding companies like Tianjin Financial Investment and Services Group which already operates diversified business lines, including a leasing operation, venture capital funds, a credit guarantee business, a small loan company, and a futures brokerage. And while, as a group, they have very little experience in dealing with NPLs, some have been working with NPLs for years, having been involved in cleaning up China’s last wave of NPLs.
Not Their First Rodeo
Some local AMCs have experience dealing with NPLs starting well before they were formally annointed AMCs.
Source: Companies, bond filings.
Secondly, there is very little publicly available data about the local AMCs’ operations. That has gradually changed, however. This report is based on disclosures from nine local AMCs, pieced together from bond prospectuses, credit rating reports, and earnings reports—from the AMCs themselves and their parent companies—statements on the AMCs’ websites, and from speeches and interviews given by AMC officials and carried by the Chinese media. All nine were granted AMC status prior to 2017. Given that 16 local AMCs were only granted that status in 2017 and 2018, our sample represents about 30% of the most mature and active AMCs. Still, the sole criteria determining which local AMCs we used for this report was the availability of data. Even then, the that data was inconsistent across the group. Hence, this report isn’t a definitive accounting of the role of local AMCs, but rather a partial snapshot of how a little understood part of the financial system is contributing to the cleanup.
How Much is Enough?
Number of local AMCs in each province, at the end of February 2017. A number of provinces hope to have additional AMCs approved by the CBRC.
Source: Local AMCs, government websites.
Not Your Mother’s Bad Bank
Over the decades, AMCs have been used to deal with financial and economic crises in countries as different as Japan, Sweden, Malaysia, Ghana, and the United States. They take many different forms, but they nonetheless share a number of characteristics. AMCs are typically deployed when banks and financial institutions have accumulated so much bad debt that they’re unable to continue lending. In some cases, the bank is split in two—a “good” bank with healthy assets, and a “bad” bank with delinquent assets. In others—the model used in China—the bad banks are newly created companies that step in to buy a big chunk of bad loans from the banks—usually at a steep discount to the loans’ face value—thereby freeing up the banks to resume lending. The advantage that AMCs have over banks is that AMCs can spend years extracting value from bad loans—by going through the courts to seize assets, or securitizing the debt, or renegotiating terms with the borrowers, or just waiting for the market to recover so that once bad assets turn good—whereas the banks’ predicament means they need to get rid of their bad loans in a hurry. Lastly, it’s worth noting that AMCs usually have a monopoly over acquiring NPLs—if not an explicit regulatory monopoly, then a monopoly by default because no other institution is interested in competing with them over the right to buy large volumes of NPLs in the midst of a slump.
China’s local AMCs bear very little resemblance to what is described above. First, they’ve been mobilized at a very different stage in the credit cycle. Rather than needing to get banks lending again, their role is to ensure that the banks remain healthy so that they can continue to lend without interruption. To the extent that banks need the AMCs, it’s not in order to make massive, one-off divestments of bad assets, but rather so they have somewhere to transfers low- to moderate-volumes of NPLs on an ongoing basis. And rather than the AMCs having a monopoly over the supply of NPLs, they’re expected to compete against each other in order to buy them. In fact, China’s local AMCs perhaps have more in common with distressed debt investment funds than they do with traditional bad banks.
That Beijing deems it necessary at this point in the credit cycle to mobilize such institutions is very unusual. In other countries, in ordinary times banks typically resolve bad loans themselves in order to maximize the value they recover from them. Traditionally, China’s banks have lacked the skills to be able to do that, but that’s changing. According to the 2017 credit rating report for Zhejiang-based Zheshang Asset Management: “Over the course of many years, the ability of commercial banks to resolve nonperforming assets themselves has increased, quite a few banks have set up their own bad asset collection teams, and the need to entrust NPL resolution to outside institutions has declined.” Most notably, Ping An Bank has set up a “special-assets management” unit which has allowed the bank to massively reduce the volume of NPLs it sells to AMCs—which MacroPolo wrote about here.
Still, local AMCs are positioned to make two significant contributions to the health of the financial system. First, even though the banking sector’s NPL ratio is currently low, banks will likely need to dispose of elevated volumes of bad loans in order to keep it that way. While some banks will be up to the task, others—particularly smaller, regional banks that have less sophisticated management—might not be. In theory the Big Four AMCs could fulfill this role. However, the Big Four AMCs aren’t as engaged with the business of buying bank NPLs as they once were. While they still buy a huge—and increasing—volume of distressed debt each year, most of that is the result of companies extending credit to each other. Companies regularly sell each other goods and services on credit, but sometimes the buyer is ultimately unable to pay. Cinda and Huarong (the only two of the Big Four AMCs that publicly disclose financial details) have increasingly acquired these unpaid accounts receivable such that they, rather than bank NPLs, now constitute the major part of Cinda’s and Huarong’s business. Meanwhile, Cinda and Huarong have become increasingly selective in the bank NPLs they acquire, with bad loans from regional banks accounting for a declining share of their NPL purchases—even as regional banks account for a rising share of total bad loans in the economy.
Local AMCs can potentially fill that gap by acquiring NPLs from the local financial institutions that might otherwise be overlooked. A number of local AMCs—namely Zheshang Asset Management, Anhui’s Goho Asset Management, and Hunan Asset Management—have set up subsidiaries and joint ventures in cities throughout their provinces. According to Meng Yu, the general manager of Sichuan Development Asset Management Co., his AMC has set up joint ventures with either local SOEs or government finance offices in more than 30 cities in Sichuan province. However, that may have less to do with the opportunities that come with niche markets, and more the political imperatives of the business. “If the local government hasn’t injected resources, it is very difficult to liquidate your NPLs, and you’ll have to deal with a lot of obstacles,” Meng said at a conference in December.
Certainly, it appears as though at least some local AMCs have taken on a social function that embraces ensuring social stability and supporting local economic interests. In that same speech, Meng outlined how his firm intervened in a distressed property developer, doling out back-pay to disgruntled workers in time for them to return home and celebrate Chinese New Year. And in an interview with Chinese media, the vice president of Anhui Goho outlined how his firm helped return to profit a major producer of copper-clad plate in Tongling city three months after it acquired the company’s NPLs, by providing it with short-term liquidity that banks weren’t willing to provide. Still, the disclosure of such cases is clearly self-serving, and there’s no way of telling whether they represent the norm or the exception for local AMCs.
Second, the presence of local AMCs increases the pool of potential NPL buyers, thereby stimulating competition and potentially lifting the price at which banks can dispose of their NPLs, helping to boost profits, reducing the need to raise additional capital, and lessening the financial strain of dealing with bad loans. Certainly, the prices banks were paid for their NPLs rose significantly in 2017. In comments made in December, Lai Xiaomin, the chairman of Huarong, said that the prices for NPL portfolios had gone from 30% of a portfolio’s face value to more than 40% (and in some case as high as 60%), with AMCs sometimes getting into bidding wars.
A number of factors likely contributed to the rise. For one, Great Wall—one of the Big Four AMCs—massively increased its NPL acquisitions in 2017, ahead of an expected IPO in 2018. The company doesn’t publish financial details, but according to local media reports, over the first nine months of 2017, the AMC purchased 73 billion yuan worth of NPLs from financial institutions, an increase of more than 120% from the year before. (Third quarter data for Cinda and Huarong aren’t available, but in the first half of 2017, loans acquired by Cinda from financial institutions rose by 14.7% from a year earlier, and Huarong by only 3.8%.) Moreover, there was huge demand from the secondary market as investors embraced NPLs as an asset class, giving AMCs space to pay banks more up front before selling them on to third parties.
Making a Far Bigger Contribution, Far Faster, Than Expected
That said, it appears likely that rising competition from local AMCs was also a contributing factor. On the face of it, a number of local AMCs have already made a huge impact on NPL disposals in their respective provinces. Anhui Goho Asset Management, one of Anhui province’s two AMCs, disclosed in January that it acquired 32 billion yuan worth of NPLs in 2017. That’s almost equal to the 35.8 billion yuan worth of commercial bank NPLs at the end of 2016. The province has yet to publish 2017 data. (Goho’s NPL acquisitions aren’t limited to commercial banks only. Unlike other local AMCs for which we have data, the company says that it also buys NPLs from companies, presumably in a manner similar to Cinda and Huarong.) In 2016, Goho acquired 14 billion yuan worth of bad assets, equivalent to about 39.1% of provincial bank NPLs that year.
Sadly, Goho is the only AMC yet to disclose figures for 2017. But based on data from earlier years, it’s clear that the local AMCs in other provinces have also been extremely active.
Making an Impact
Relative to the size of their provinces’ outstanding NPLs, some local AMCs have made significant acquisitions.
Source: Provincial PBOC, provincial AMC’s credit rating reports, bond prospectuses, and CBRC annual reports.
It’s important to note that the loans acquired by the local AMCs appear to be predominantly from banks, but also include other financial institutions. Sadly, we have no way of telling how those figures compare with the Big Four AMCs, which don’t provide a breakdown of newly acquired NPLs by province.
That the local AMCs could make such a significant contribution so quickly goes against conventional wisdom. The concern that has dogged local AMCs since their inception is that they have insufficient capital to be able to acquire meaningful volumes of NPLs. The reason is a regulatory one—there is a requirement that that they maintain capital equal to at least 12.5% of risk weighted assets. At the end of 2017, the median registered capital for the 50 AMCs was 1.5 billion yuan, with the best capitalized local AMCs holding slightly more than 10 billion yuan. With 4.5 billion yuan worth of capital, Zheshang Asset Management is one of the better capitalized AMCs. But even then, a credit rating report published in June 2017 cites the company’s capital position as a major impediment to its development. “Zheshang’s capital strength…is still fairly weak…Not only is it far, far below the capital…of the Big four AMCs, but it’s also not enough to satisfy the demand arising from Zhejiang province’s outstanding NPLs.”
The “Fast-In-Fast-Out” Approach
Relatively thin levels of capital constrain the local AMCs in their ability to hold large portfolios of NPLs. However, they can still buy large volumes of NPLs as long as they don’t hold them for too long. A 2017 credit rating report on Tianjin Financial Investment and Services Group put it this way: “Because the NPL resolution business is only at its first stage, the ability to resolve NPLs is still fairly weak, [and so] the company…uses the ‘fast-in-fast-out’ approach.” The strategy doesn’t appear to be unique to Tianjin Financial Services.
Very few local AMCs offer a detailed accounting of how they manage their NPLs, so we have little insight into exactly how they turnaround their NPLs. However, an unusually frank disclosure made in August 2017 by the parent company of Zheshang Asset Management sheds some light on how local AMCs have been able to do that. In its bond prospectus, it says that in order to ensure the “scale, speed, and quality” of loan disposals, in 2016 about a third of Zheshang’s NPLs were resolved through what it called “channel” business, which is described thusly: First, Zheshang borrows money from a financial institution, which it uses to buy the institution’s NPLs. “At the same time, Zheshang usually signs a repurchase agreement with the financial institution, promising that if within a certain period the loans are unresolved, the financial institution will repurchase the NPLs.”
In effect, the banks use Zheshang as a warehouse where they can temporarily place their bad loans, allowing them to reduce their NPL ratio while still bearing ultimate responsibility for the NPLs. However, the CBRC banned the practice in March 2016. Zheshang explains that the reason why its acquisition of NPLs fell so much in 2016 was because of the CBRC’s crackdown. What’s telling is that Zheshang’s parent made this disclosure almost 18 months after the CBRC issued a notice banning the practice, suggesting it remains an important part of its business. There’s no way of telling how widespread the practice is, but local Chinese media have reported on the increasingly complicated permutations in which banks and AMCs have engaged—including allowing banks to repurchase their NPLs as wealth management products—with the same effect. In a statement published in January 2018, the CBRC again reiterated that NPL repos are banned, although it did not explicitly mention AMCs.
The local AMCs’ willingness to engage in such activities is likely not solely the function of capital constraints, but also a lack of expertise. In addition to the repurchase agreements, Zheshang’s parent also disclosed that at the end of 2016, responsibility for recovering about half of its outstanding loans had been entrusted to third parties—that is, outsourced—down from 63% in 2015. Zheshang doesn’t say who it was outsourced to, but given its repurchase arrangements with banks, it seems likely that it may have entrusted the banks with responsibility for servicing the NPLs they bought from Zheshang. No other AMC has yet provided as much insight into its operations as Zheshang. However, according to the 2017 bond prospectus of Jiangsu Asset Management’s parent company, almost all of the Jiangsu AMC’s revenue from NPLs over the previous three years had come from outsourcing recoveries.
It’s important to note that the entrustment of NPL recoveries can be used to disguise repurchase arrangements between AMCs and banks. According to a report from the 21st Century Business Herald, that occurs when the party entrusted with recovery of the loans (i.e. the trustee, in this case the bank) promises to recover a certain amount, ensuring the AMC gets compensated more than what it paid for the loans. At the end of the trustee period, the ownership of the loans then transfers to the trustee.
To the extent that the central government’s crackdown on “channel” business has been successful, other options have opened up to the local AMCs to help them shift NPLs as quickly as possible. In October 2016, the CBRC allowed local AMCs to sell NPLs to third parties, which has been made easier by Taobao and the proliferation of electronic auction houses, otherwise known as financial asset exchanges. These platforms provide new channels for the sale of NPLs, a market we’ll explore in more detail at a later date.
Moreover, some AMCs are looking for ways to overcome their capital constraints. Chongqing Yu Kang Asset Management Co. says it plans to take onboard strategic investors in the first half of 2018 and subsequently launch an IPO before 2020. Both Jiangsu Asset Management and Goho Asset Management have also expressed their intentions to list. Meanwhile, other AMCs have set up investment funds, allowing them to use cash raised from third parties rather than their own capital or debt to acquire NPLs.
The problem with local AMCs is that until they are sufficiently capitalized, and build up additional expertise, their ability to make a significant contribution to NPL disposals will primarily be as a warehouse for banks and as a conduit through which NPLs pass to the secondary market. Their relevance will also be shaped by the degree to which the banks themselves are able to take responsibility for resolving their own NPLs.
Ultimately, their value might come from troubleshooting specific cases for local government, rather than as a platform for large scale disposals. That is, of course, unless some sort of shock requires China’s banks to significantly increase their NPLs disposals, which could well prompt local AMCs to assume a more traditional and prominent role in disposing bad loans.
**A special thanks to Mark Hallerberg from the Hertie School and Governance for his comments and insights on how AMCs are used elsewhere in the world.
 MacroPolo has identified 47 local AMCs. That figure is slightly lower than what has been reported by some Chinese media. Working from lists of AMCs published in the Chinese media, we then went looking for confirmation, either from Chinese government websites, or from official state media sources that each AMC had in fact received government approval. In a small number of cases we were unable to find confirmation and so have left them off the list. Anhui Goho Asset Management Co., Zheshang Asset Management Co., Guangdong Finance Asset Management Co., Shandong Financial Asset Co., Sichuan Development of Asset Management Co., Liaoning State-owned Assets Marketing Co., Shanghai State-owned Operations Co., Jiangsu Asset Management, and Tianjin Financial Investment and Services Group.
 Meng was speaking at the 15th Caijing Annual Conference in Beijing. ‘蒙宇：近几年不良资产特征与前些年有较大差异 (Meng Yu: There is a big difference in the characteristics of bad assets of recent years compared with earlier years),’November 20, 2017, Caijing, http://economy.caijing.com.cn/20171130/4369668.shtml
 ‘安徽国厚启动上市计划 (Anhui Goho has already launched a plan to list),’ June 30, 2017, Economic Information Daily, http://jjckb.xinhuanet.com/2017-06/30/c_136405628.htm
 ‘万亿不良资产市场引多机构竞相围猎 爆发或暗藏风险 (The trillion yuan NPL market is creating competitive hunting among institutions; is risk erupting or being concealed),’ December 1, 2017, Economic Information Daily, http://www.xinhuanet.com/fortune/2017-12/01/c_129754028.htm
 ‘中国经营网：长城资产副总裁孟晓东：市场风险潜伏四领域 (China Business Journal: Great Wall deputy president Meng Xiaodong: market risk is concealed in four areas),’ October 12, 2017, China Business Journal (the story was carried on Great Wall’s own website), http://www.gwamcc.com/NewsDetails.aspx?liName=12&ID=49098
 Please note that we have chosen to compare local AMC NPL acquisitions to year-end outstanding provincial commercial bank NPLs, rather than total banking system NPLs (which includes the NPLs of policy banks, trust companies, finance companies, and rural credit cooperatives.) We’ve done this because Anhui and Guangdong don’t disclose data on outstanding total banking system NPLs (they only disclose an NPL ratio).
 According to information disclosed by Goho on its website, the company had accumulatively acquired 56 billion yuan worth of nonperforming assets at the end of 2017 (Company profile page, http://gohoamc.com/info.asp?base_id=1), 24 billion at the end of 2016, and 10 billion yuan at the end of 2015 (‘国厚资产：“安徽版”地方AMC的发展样本(Goho Asset Management: the development example of Anhui’s local AMC),’ May 2016, 2017, Juece Magazine (the story was reproduced on Goho’s own website), http://www.gohoamc.com/display.asp?id=258).
 Dagong Global Credit Rating’s credit rating report on Zheshang Asset Management, June 16, 2017.
 Shanghai Brilliance Credit Rating and Investor Services Co.’s credit rating reports on Shanghai State-owned Asset Management Co., from August 1, 2017, and June 24, 2016.
 Data comes from the bond prospectus issued on September, 7, 2017, by Guangdong Yuecai Investment Holdings, the parent company of Guangdong Finance Asset Management.
 Both the Shanghai and Guangdong figures are for NPLs acquired from banks only, while the Zheshang figure could potentially include loans acquired from other AMCs.
 Data comes from the bond prospectus issued July 2017, by Wuxi Guolian Development (Group) Co., the parent company of Jiangsu Asset Management.
 China Lianhe Credit Rating’s credit rating report on Tianjin Financial Investment and Services Group, 22 June 2017.
 “银行不良资产处置模式及趋势（下）：不良处置的五大创新招式,” (Models and Trends in Banks’ Disposal of NPLs: Five Big Innovative Tricks in NPL Disposal), Yang Xiaoyan, 21st Century Business Herald, August 17, 2016. http://epaper.21jingji.com/html/2016-08/17/content_45250.htm
 ‘中国银监会关于进一步深化整治银行业市场乱象的通知（银监发〔2018〕4号）(China Banking Regulatory Commission notice on further repairing bank sector chaos),’ January 13, 2018, China Banking Regulatory Commission, http://www.cbrc.gov.cn/chinese/home/docDOC_ReadView/84BF855655F54ECDA63CBBD0048F6C15.html
 “银行不良资产处置模式及趋势（下）：不良处置的五大创新招式,” (Models and Trends in Banks’ Disposal of NPLs: Five Big Innovative Tricks in NPL Disposal), Yang Xiaoyan, 21st Century Business Herald, August 17, 2016. http://epaper.21jingji.com/html/2016-08/17/content_45250.htm
 ‘重庆渝康启动“引战增资”并力争2020年前上市 (Chongqing Yu Kang has launched a campaign to raise capital, and striving to list before 2020),’ November 8, 2017, Xinhua (the story was reproduced on Chongqing Yu Kang’s own website), http://www.amc023.com/news/mtsj/2017-11-08/338.html
 ‘国厚资产：“安徽版”地方AMC的发展样本 (Goho Asset Management: the development example of Anhui’s local AMC),’ May 2016, 2017, Juece Magazine (the story was reproduced on Goho’s own website), http://www.gohoamc.com/display.asp?id=258
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