Financial Asset Exchanges - MacroPolo

Financial Asset Exchanges

Financial asset exchanges are a uniquely Chinese type of financial institution. They primarily operate as electronic auction houses for selling everything from equity in non-listed firms to physical assets like buildings and cars, and as fundraising platforms for small financial entities, such as leasing firms, to issue debt. But they’re also used by banks and asset management companies (AMCs) to sell bad loans directly to the public via auction. There are dozens of financial asset exchanges are the country, and they’ve become an important tool in China’s efforts to clean-up its financial system. (Unlike The Cleanup’s other dashboards, the data presented here represents a snapshot of this market in the fourth quarter of 2017 and will not be updated.)

There is no official data on the volume of NPLs sold via asset exchanges, so last year we decided to take our own snapshot of the market, to the extent possible. We monitored 20 exchanges that had a track record of selling NPLs and collected data on NPLs that were due to be auctioned between October 1 and December 31, 2017. (While we may have missed some exchanges that sell NPLs, we are confident that our sample includes the most active platforms for auctioning bad loans. For more information on how we collected the data, see here.) During the last three months of 2017, we collected data on 3,071NPLs that were put up for auction on exchanges by both banks and AMCs, with a combined face value—that is, outstanding principal plus interest and unpaid fines—of about 90.4 billion yuan.

Four Exchanges Were Responsible for Almost Two Thirds of NPL Auctions (By NPL Face Value)
Source: Financial Asset Exchanges.

Financial Asset Exchanges Were Used by Both Bank and AMCs to Sell NPLs
Source: Financial Asset Exchanges.

Traditionally, China’s banks could only sell NPLs to financial institutions. But that rule was scrapped in 2009 when the Chinese public was also cleared to invest in distressed debt. In recent years, a vibrant secondary market for NPLs has emerged, with specialty distressed debt funds popping up in great numbers to take advantage of the nascent market. The exchanges allow banks to bypass the AMCs and sell direct to the public. Given that the exchanges generally auction NPLs individually or in small groups, they create opportunities for small scale investors who are less suited to dealing directly with the AMCs that typically sell NPLs in bulk. Our sample captured financial institutions ranging from rural commercial banks to China’s biggest state banks using the exchanges. The biggest sellers were ICBC and three of the four big AMCs—Cinda, China Orient, and Great Wall.

There is little consistency in the information various exchanges disclose on the NPLs posted for auction. Consequently, standardizing information for every loan collected was virtually impossible. In many cases, the names of the debtor companies were withheld, which meant that for those loans we couldn’t determine where in China the debtor was based, or whether it was a state-owned or private firm. Hence, the sample size for both of those data points are smaller than the total. For the pie charts to the left below, the data is based on 66.5 billion yuan worth of NPLs, accounting for 73.6% of our sample’s total, and 2,057 individual loans, accounting for 67.6% of the sample’s total. The map to the right below is based on 72.8 billion yuan worth of NPLs, representing 80.5% of the total sample size.

The Debtors of NPLs Sold over Exchanges were Mainly Private Companies
Source: Financial Asset Exchanges.
Concentration of Exchange-Auctioned NPLs by City (By NPL Face Value)
Source: Financial Asset Exchanges.

The asset exchanges don’t publicly reveal whether the loans they auction actually sell and at what price. While the price at which the loans are sold is not available, in many cases the exchanges disclose a listing price—that is, the minimum or starting price for the auction. To the right, we attempted to determine whether a loan’s listing price was affected by its degree of distress. We measure distress by dividing outstanding interest by outstanding principal. Higher ratios indicate a relatively large amount of interest outstanding, and hence a greater level of distress. A close correlation would result in the dots starting in the top left and moving diagonally toward the bottom right. The lack of a clear correlation is likely in large part due to loan valuations being heavily influenced by the value of the collateral backing the loans, as well as the quality of any third-party guarantors. (We excluded loans for which the listing price was higher than the outstanding face value of the loan.)

There was Little Correlation Between NPLs’ Degree of Distress and Their Listing Price
Source: Financial Asset Exchanges.