The non-performing asset ratio in China is rising this year, according to an S&P Ratings report. But while commercial banks in the country receive beneficial treatment for their non-performing loan recognition – as corporate defaults rise during the pandemic – foreign investors are not seeing an increase in dealflow.
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The latest analysis by S&P Ratings, published on 8 April, showed that the ratio, taking into account tighter loan classifications under regulatory guidance in China, will rise to 7.25 percent in 2020.
The total stock of NPLs in China was already significant prior to the pandemic.
The officially reported outstanding balance of NPLs in commercial banks was 2.41 trillion yuan ($341.5 billion; €312.8 billion), or 1.86 percent in ratio terms, as of 31 December 2019, according to industry statistics released on 17 February.
The latest NPL ratio climbed in the first quarter of this year to 2.04 percent, and will continue to rise at a moderate pace in the second quarter, per a Reuters report on 22 April, citing Xiao Yuanqi, chief risk officer at the China Banking and Insurance Regulatory Commission.
However, for foreign NPL investors, it is premature to draw the conclusion that the surge in the NPL ratio will translate into feasible investment opportunities.
Benjamin Fanger, ShoreVest Partners’ managing partner and founder, told Private Debt Investor that official recognition of bank NPLs has been pushed out to a degree despite the corporate defaults seen since the start of the pandemic.
He added: “The economic impact of the pandemic on the NPL side will be delayed most likely to 2021 and 2022. As many governments around the world have, the Chinese government told the banks to provide temporary forbearance for companies affected by covid-19.”
Loan forbearance measures include payment holidays, reduced interest charges and lengthened maturities, according to the S&P report.
PDI understands ShoreVest began investing its most recent fund, ShoreVest Distressed Credit, in 2018 and is still deploying it. Its main investment strategies are distressed debt and special situations: NPL acquisitions, bridge loans, balance sheet restructuring and rescue financing.
Data provided by PwC show there were at least 14 secondary bank NPL transactions finalised in 2019, with ShoreVest Partners, Lone Star Funds and Argyle Street Asset Management acquiring bank NPLs that originated in Hebei province.
Requests to comment on the reporting to Argyle Street and Lone Star Funds were not returned.
Additionally, China is reinforcing its national asset management company sector, which has been led by the ‘Big Four’ since 1999: China Cinda, China Great Wall, China Huarong, and China Orient.
According to a research by Savills, a real estate service provider, the four AMCs were set up to purchase bad loans from financial institutions that had seen NPL ratios rise to more than 20 percent after the 1997 Asian financial crisis.
However, in 2018, Huarong, the largest AMC by asset size, saw a sharp decline in its loan acquisition cost in the primary NPL market, referring to banks’ sales of NPL packages to AMCs, as PDI reported.
On 16 March this year, the CBIRC announced its approval for the establishment of the fifth national AMC, on 5 March.
Jiantou Citic Asset Management, a Beijing-based firm, is to be converted into a national AMC and renamed as China Galaxy AMC, according to a statement from King & Wood Mallesons, a legal advisor to the new firm.
China Galaxy AMC must complete the process of converting into a national firm within six months of the CBIRC’s approval. The new entity will be approximately 70 percent owned by a state-owned investment company Central Huijin Investment and about 30 percent owned by joint stock limited company CITIC Securities.
The story has been updated per additional comments provided by a ShoreVest source on 4 May.