Bad Banks

In 2014, the China Banking Regulatory Commission started approving a new batch of asset management corporations (AMCs)—also known as bad banks—to complement the four AMCs that have been in operation since 1999. AMCs help lessen the burden of bad debts on banks and other financial institutions by acquiring their non-performing loans (NPLs). The new AMCs differ from the original four in a number of ways, most notably in that they are limited to buying bad loans only from financial institutions in their province. As banks accelerate their NPL disposals, the role of these new, local AMCs will likely increase.

China’s original four AMCs have in recent years focused less on bank NPLs and increasingly on acquiring bad loans between non-financial companies. Such delinquencies arise when companies that acquire goods and services on credit later find they’re unable to pay. While Cinda and Huarong—the only two of the four that publish regular data—continue to increase their acquisitions of bank NPLs, that business is nonetheless dwarfed by the bad debts of non-financial companies. Meanwhile, Cinda and Huarong’s purchase of bank NPLs leans heavily towards major state-owned commercial banks and joint stock banks, even as city and rural commercial bank NPLs account for a rising share of total outstanding NPLs.

City and Rural Banks Account for an Increasing Share of Commercial Bank NPLs ...
Note: For more details about this dataset, please click here.
Source: CBRC.

The Source of NPLs Acquired By Cinda & Huarong Has Altered Radically In Recent Years
Source: Cinda and Huarong.
... But Cinda & Huarong’s Acquisitions of New NPLs are Moving in the Other Direction
Note: For more details about this dataset, please click here.
Source: Cinda and Huarong.
China’s Local AMCs Are Controlled By A Wide Range of Different Shareholders
Note: Some of the English names are MacroPolo’s translations of the Chinese. For more details about this dataset, please click here.
Source: SAIC, local government websites, state media.

That has created a space for new, locally oriented AMCs. At the end of February 2018, there were 47 local AMCs. Some provinces had three, others only one, and a couple none at all—although more are likely to be approved. Unlike the original four AMCs, the new batch of bad banks are allowed to purchase bad loans only from financial institutions in their province. Moreover, the new AMCs don’t conform to one simple model. In fact, in many ways, they don’t resemble traditional AMCs (read more here).

The decision to approve local AMCs was initially met with some skepticism. These new bad banks were set up with relatively thin capital levels, which threatened to circumscribe their ability to make a meaningful contribution to the financial system cleanup efforts. Nonetheless, a handful of local AMCs have disclosed data that suggest that they have managed to have a significant impact on the disposal of NPLs in their respective provinces. However, the actual value of that contribution is more complex than the numbers suggest (read more here).

Some Local AMCs Have Managed to Make a Big Impact In A Short Period
Note: Only a handful of AMCs disclose data on their NPL purchases.
Source: The AMCs and their parent companies; CBRC.