Accessing Asia

The Chinese government is mulling the launch of a new trading platform to allow investors to buy into the country’s substantial pool of state bank-held non-performing loans, according to Reuters. If so, it would be welcome news.  

Research by Standard Chartered shows corporate debt levels in China has risen significantly over the last five years. Indeed, on an Asia-wide basis, it now exceeds 2008 levels. The report argued China’s corporate sector is the “most leveraged and challenged” in Asia.

The findings of that report appear to reinforce a lengthy New York Times article released Friday, which reported that a “painful credit crisis” is spreading across certain Chinese cities — Shenmu, Ordos and Fugu are cited specifically. The crisis in those cities may be a harbinger of future difficulties across China’s broader economy. Slow growth in the region has led to a spike in defaults in non-traditional loans, and pricing has fallen for assets that had previously been pumped up with debt.

With that in mind, any new means for investors to access distressed credits and help reduce NPL portfolios is an encouraging development, but as is often the case, there are plenty of caveats.

Details are sketchy, and China’s track record when it comes to facilitating foreign investment is patchy at best. Similar platforms already exist in other markets and they have struggled to grapple with providing sufficient data to allow potential bidders to get comfortable with the process. China’s also tried this before, and after much groundwork by foreign groups, most of the loans stayed within state-created asset managers set up to house them and prepare for sale.

China’s attitude towards foreign private equity investment in the country is also instructive: welcoming in principle, but in practice, there are plenty of hurdles. The legal pitfalls are significant, not least due to competing regulators and tension between provincial and national bodies.

Even so, there are plenty of asset managers already looking to target the Asian market however, both on the equity and debt sides, but most are wisely looking at China as part of a pan-Asian play. It’s important to remember the region is a vast and diverse one, encompassing some other very attractive countries.

KKR has been making inroads into the Indian market  for example – its non-bank financing company, KKR India Financial Services, launched four years ago and has already provided debt financing to almost 30 companies. Its private equity unit in the country has been active for even longer, and put more than $1.1 billion to work.

Asia as a region is one which Private Debt Investor will strive to cover in more detail. Starting next month, we’ll be seeing a regular column from a China-based market participant, for example, and we’ll be looking to track developments in this rich and varied market as closely as possible.