PwC’s latest report, released on 5 February, illustrates the changing dynamics in China’s non-performing loan market. The Chinese NPL market in 2020 shows that activity involving large domestic asset managers – the major NPL portfolio buyers for banks – has been subdued, whereas foreign general partners have been steadily purchasing portfolios from these firms.

The advisory group estimates that about $1.5 trillion of NPLs and other stressed assets were held by Chinese banks and asset managers as of the end of June 2019, in terms of the face value of the loans and assets. This figure excludes defaulted or stressed situations in China’s shadow banking sector.

Official statistics released by the China Banking and Insurance Regulatory Commission on 12 November showed that the total outstanding balance of NPLs held by Chinese commercial banks was 2.37 trillion Chinese yuan ($338.4 billion; €306.7 billion) as of Q3 2019. This constituted an increase of 132 billion yuan on the previous quarter’s total.

PwC notes that international investors deployed at least $1.1 billion into Chinese NPL deals during 2019. It adds that there are large global distressed funds currently building up deal teams in China, evaluating portfolios and looking to enter the market in 2020.

Among the 2019 transactions that PwC tracked, 14 were backed by eight different international investors: Oaktree Capital Management, Lone Star Funds, Goldman Sachs, Bain Capital Credit, ShoreVest Partners, Clearwater Capital Partners, Argyle Street Management and Farallon Capital Management.

GPs purchasing the portfolios have been targeting more than 17 percent in leveraged IRR terms, according to the PwC report. It explains that foreign NPL investors are targeting annualised returns of 13 to 15 percent, or higher, on a portfolio level.