Local Bad Banks Become Major Players in China’s Bad Loan Market

Since 2013, when China’s banking regulator first started approving the establishment of local asset management companies (AMCs) to help clean up the bad loans in China’s financial system, it has been difficult to gauge the extent to which these “bad banks” have contributed toward clean-up efforts. That’s because the local AMCs—which, by our count, numbered 47 at the end of February—seldom disclose data about how many nonperforming loans (NPL) they’re buying up. We at MacroPolo have trawled through as many sources as we could get our hands on in search of such data, but only managed to find numbers on the NPL purchases of five local AMCs, most of which were figures no more recent than 2016.

However, a recent report called “A White Paper on China’s Local AMCs Industry” offers an unprecedented degree of insight into the activities of local AMCs. Jointly published in late April 2018 by the Southwestern University of Finance and Economics in Chengdu and the Sichuan Development of Asset Management Co.—the sole provincial AMC in Sichuan—the report presents previously unavailable data on NPL acquisitions by 30 local AMCs in 2017 (see here for full list).

The white paper says that the data comes from the China Banking Regulatory Commission (CBRC), but it also claims to have had the cooperation of all 30 local AMC representatives. The paper has its limitations, however. It only provides data on NPL acquisitions in 2017, giving no indication as to how the local AMCs’ operations may have changed over the last few years. Nonetheless, it does yield important new insights.

First, local AMCs have, as a group, become a major force in the disposal of NPLs, acquiring significantly more NPLs in 2017 than Huarong and Cinda—the two largest of the “Big Four” AMCs—combined.[2] According to the white paper, the 30 local AMCs for which it has data acquired 290 billion yuan worth of NPLs in 2017. In contrast, Huarong acquired just 114 billion yuan worth of NPLs from banks and other financial institutions and Cinda 93.3 billion yuan over the same period (neither Great Wall nor China Orient has disclosed data on their 2017 NPL acquisitions) (see Figure 1).

Figure 1. A New Force
NPL acquisitions by local AMCs relative to Cinda and Huarong

Note: Huarong and Cinda’s NPLs are specifically from banks and non-bank financial institutions.
Source: Southwestern University of Finance and Economics, companies.

The white paper also provides insight into the degree to which local AMCs are helping the various provinces manage outstanding NPL levels. Based on the paper’s data, among large provincial AMCs, Anhui Goho Asset Management made the biggest impact[3] on local NPL levels, acquiring 30.6 billion yuan[4] in 2017, equivalent to 85.6% of outstanding NPLs at commercial banks in Anhui province at the end of 2016 (not all of China’s provinces have as yet disclosed 2017 NPL data). Meanwhile, Shanghai’s two AMCs acquired a combined 24.5 billion yuan worth of NPLs in 2017, equivalent to 79.7% of the municipality’s outstanding commercial bank NPLs at the end of the previous year (see Figure 2).

Zhejiang’s AMCs acquired new NPLs more aggressively than any other province. Two of Zhejiang’s AMCs acquired 59.5 billion yuan worth of NPLs last year, almost twice the amount of Goho in Anhui, which came in second.[5] Nonetheless, that represented only 37.9% of outstanding NPLs at Zhejiang’s commercial banks at the end of 2016.[6]

Figure 2. Concentration of Local AMCs’ NPL Acquisitions by Province

Note: The white paper’s data doesn’t cover all local AMCs or all provinces. Where a province is labelled “zero,” it reflects that the white paper didn’t provide data, not that the local AMCs didn’t acquire any NPLs.
Source: Southwestern University of Finance and Economics.

Even though the white paper doesn’t provide a comparison with previous years, the charts below compare the white paper’s 2017 numbers with the data we collected independently on the NPL purchases made by five local AMCs in previous years. Given that the numbers came from different sources, they’re not necessarily directly comparable. Still, they give some indication of how NPL acquisitions have varied over the years for some of the most long-standing local AMCs. (For further explanation of the data presented below, please see our report here.) (See Figure 3).

Figure 3. Uneven Progression
Change in NPL acquisitions by some of the longest standing local AMCs

Note 1: The data for Shanghai State-owned Assets Operation is for NPLs acquired from banks in batches only. The 2017 figure for all NPLs acquired by the Shanghai AMC—including those acquired in batches—is 5.04 Bln yuan.
Note 2: The 2017 data is from the white paper. All other data has been collected by MacroPolo from the websites, bond prospectuses, and credit rating reports of the companies the their parents.

Source: Southwestern University of Finance and Economics, company filings.

The white paper also omits an explanation on what the local AMCs do with the NPLs once they’ve acquired them. With prices rising aggressively throughout 2017 (the paper says the portfolios of bank NPLs typically sold at about 30% of their face value at the end of 2016, rising to about 60% in some places a year later), and with most local AMCs holding relatively thin capital levels, that means that they typically don’t have the resources to buy NPLs and hold them for a long period. Hence, local AMCs may have primarily emerged as a conduit through which NPLs pass from banks to investors in the secondary market. But regardless of how the local AMCs are disposing of their NPLs, they’re unquestionably making it easier for banks to clean up their balance sheets.

 

Endnotes

[1Playing a Bigger Role
NPL acquisitions by local AMCS as diclosed in white paper
Source: Southwestern University of Finance and Economics, SAIC.

[2] While the white paper doesn’t include data from all local AMCs, it’s fair to assume that its sample doesn’t significantly undercount the group’s overall NPL purchases. Based on MacroPolo’s own research, the white paper includes data from all local AMCs set up in 2013 and 2014—that is, those with the longest history and most mature businesses—four of the six established in 2015, and 12 of the 16 set up in 2016. It only includes 4 of the 12 that received CBRC approval in 2017, but many of those are likely to have done little business in their inaugural year.

[3] It should be noted that Ningxia’s AMCs acquired NPLs in excess of 800% of the province’s outstanding NPLs at the end of the previous year, and that Tibet’s local AMCs acquired more than 160%. While that should mean these AMCs have had a relatively outsized impact on their respective province’s NPL situation, it also raises questions about whether the provinces’ NPL data actually represent reality.

[4] In our March report, we reported that Anhui Goho acquired 32 billion yuan worth of NPLs in 2017. We believe the difference between our figure and the white paper’s number to be a result of Goho disclosing rounded figures on its website.

[5] Anhui province has two AMCs, but the second was approved by the CBRC only in 2018.

[6] It’s important to note that the AMCs’ NPLs weren’t acquired solely from commercial banks, as they also buy bad loans from non-bank financial institutions and policy banks. However, the only data we currently have for comparison is that of commercial bank NPLs.