Less soured debt is the least of this bad bank’s worries

As recently as two years ago, owning shares in a bad bank charged with cleaning up nonperforming loans in China probably seemed like a good bet. Not so any more, at least for China Cinda Asset Management Co.
The Beijing-based firm’s costs are rising and soured-loan growth has leveled off, or in some cases, dropped at the banks Cinda purchases nonperforming advances from. Cinda’s Hong Kong-listed stock is down 46 percent from its peak in January 2014 and is trading at a price-to-book ratio of 0.67 times, well below the one times at which it was listed at the end of 2013. Rival China Huarong Asset Management Co. is trading at a 0.95 times multiple.
Policy makers set up Cinda, China Orient Asset Management Corp., Huarong Asset Management and China Great Wall Asset Management Corp. in 1999 to clean up a financial system on the brink of bankruptcy after years of government-directed lending to unprofitable enterprises. They built sprawling financial empires, with distressed assets just one part of operations that included business lending, advisory, securities brokerage, commodities trading and wealth management. Like its peers, Cinda has been impacted by the government’s anti-leverage campaign. That’s pushed up bond yields as well as rates in the interbank market, both key funding sources.
According to Credit Suisse Group AG, Cinda commanded 44 percent of the nonperforming bank loan market in 2016, despite its various diversification plays. (Cinda has been especially aggressive in Hong Kong, buying Nanyang Commercial Bank Ltd. in May last year.)
And nonperforming loans in China aren’t about to go away any time soon, meaning Cinda will always have its work cut out. Moody’s Investors Service trimmed its rating on China’s debt for the first time since 1989 recently, throwing doubt on authorities’ ability to rein in leverage while maintaining the pace of economic growth. Meanwhile, benchmark-eligible Chinese bonds on negative credit watch are now $8 billion, or 16 percent, of the emerging market total, Bloomberg Intelligence data show.
A more pressing issue for Cinda, though, is Beijing’s debt-to-equity campaign, which aims to lower leverage at state-owned enterprises by transferring the associated risks to the banking sector. Moody’s estimates that the value of swaps announced is a small fraction — around 1 percent — of SOE liabilities. “Moreover, there is very little transparency about the terms of these transactions or their likely impact on SOEs’ and banks’ creditworthiness,” the ratings company said.
Cinda has been lumped with plenty of equity, swapped mainly from the debt of struggling commodity players. Although rising prices have helped it exit some of those stakes, a substantial portion of its 40 billion yuan debt-to-equity swap portfolio is commodity related.
That’s where investors’ focus should be. Moderating nonperforming loan growth in the world’s second-biggest economy isn’t the only reason to shy away from this Chinese bad bank.
— Bloomberg