Just six months ago, China’s bad debt managers were seen as possible saviors for the crumbling real estate market. But now, they have become part of the bad debt problem.
As the real estate crisis deepened this year, Bloomberg reported that problems at China’s four biggest managers of bad loans got worse. Unfortunately, they are not likely to save the sector until their finances are in order.
China’s big four debt managers are Huarong, Cinda, China Great Wall Asset Management Co., and China Orient Asset Management Co. The big four have lent money to most of the top 50 developers in trouble across the country.
Cinda and Huarong have more than 200 billion yuan or $29 billion in exposure. Their filings show that real estate makes up almost half of their acquisition and restructuring businesses.
According to people who know the situation, these managers lent too much money to troubled developers during the boom years of this sector. As a result, the firms suffered heavy credit losses of $730 billion, causing their bonds to fall, which forced Beijing to consider a preliminary plan to restructure the sector.
Asset management companies, also known as AMCs, were set up after the Asian financial crisis. Then, they were the saviors of Chinese banks, which were on the brink of collapse.
China Huarong Asset Management Co. is the biggest among them. It shows how bad things can get when it had to take a 42 billion yuan ($6.1 billion) bailout last year. Its chairman was sentenced to death for crimes, including bribery.
Victor Shih is a political economics professor specializing in China at Northwestern University. He is the author of the book titled “Factions and Finance in China: Elite Conflict and Inflation.”
Professor Shih said that these funds [quote] “can’t go on rescuing China’s property market this time. Their own balance sheets are already so full of bad debt that they just can’t handle any more.” [end quote]
George Magnus is an associate at the China Centre at Oxford University. He is also a former chief economist of the Union Bank of Switzerland.
He authored “Red Flags: Why Xi’s China is in Jeopardy.”
He commented: “Instead of fulfilling their mandate to clean up bad loans and fade away, they just became progressively more adventurous in their funding and structuring, exacerbating the non-performing loans they were set up to dispose of.”
Hao Guanghui is the president of Suiyong Rongxin Asset Management Co.—a private bad-debt manager in Shanghai.
Guanghui said, “The AMCs essentially were loan sharks.”
“They were giving out loans in the name of asset acquisition and restructuring, that’s why they are called shadow banks.”
Now, these asset management companies have to pay for the real estate bets they made in the past. Due to credit impairments, the largest fund, Huarong, expects to lose 18.9 billion yuan ($2.75 billion) in the first half of the year, leading Moody’s credit rating agency to review the fund for a possible downgrade.
If the Chinese regime puts money into these asset management companies, it could strain the country’s finances more. Professor Shih said China’s debt to GDP ratio is already at 308%. This dangerous level makes it hard for the regime to give out more stimulus.