China bad-loan disposal no easy task with slowdown

Bloomberg

Tougher economic conditions and overcapacity in the steel, coal and cement sectors are making it harder and less profitable for China’s bad-loan managers to dispose of soured credits, according to a survey.
Only 4 percent of 101 respondents at the nation’s distressed asset-management firms said they found it “easy” or “relatively easy” to dispose of bad loans, China Orient Asset Management Co. said in its latest annual survey.
Overcapacity in many sectors of the economy makes it harder for those firms to restructure and thus for asset managers to profit from dealing in soured loans, Orient Chairman Wu Yue said in a statement accompanying the survey.
China’s economy is growing at the slowest pace in a quarter century, adding urgency to the government’s efforts to restructure state companies in industries saddled with overcapacity. In an extreme scenario, the bad-loan ratio at Chinese banks could climb to 21 percent, leading to a capital shortfall of 13.6 trillion yuan ($2 trillion), according to Fitch Ratings.
The large state-owned banks are setting up their own bad-loan management operations in an effort to deal with the problem, while China’s banking regulators are allowing the creation of new asset-management firms in the country’s provinces. Some 59 percent of the respondents in the Orient survey said disposing of soured credit was either “quite hard” or “extremely hard,” while 38 percent said it was “ok.”

True Risk
Most respondents cited weak secondary market demand and declines in asset values as key obstacles to off-loading the loans. The recovery rate on most nonperforming loans was below 30 percent, with a third recouping less than 20 cents on the dollar, according to the survey.
Official bad-loan figures underestimate the true risks, according to 80 percent of bank respondents in the survey. Nonperforming loans climbed to 1.49 trillion yuan by the end of third quarter, equal to only 1.76 percent of their outstanding advances, according to official data.
The government’s drive to cut overcapacity will lead to at least 2 trillion yuan of additional bad loans between this year and 2020, according to a majority of respondents to the Orient survey.