Role of asset-management firms key to clean bad loans

Bloomberg

Chinese central bank Deputy Governor Fan Yifei talked up the importance of asset-management firms created to clean up bad loans at a briefing on Sunday, saying that they played a key role in reducing corporate leverage.
Speaking in Beijing at the launch of a restructured China Orient Asset Management, a bad-loan manager backed by the Finance Ministry and the government’s National Council for Social Security Fund, Fan pointed at how the weakening economy had caused corporate leverage ratios and nonperforming loans to climb.
“All these require the financial-management companies to play important roles in managing nonperforming assets, melting the risk and reducing the leverage,” Fan said, referring to the bad-loan managers.
China Orient Asset was restructured as a joint stock company earlier this year, with plans to seek strategic investors and an eventual public listing. It was formed along with three other taxpayer-funded asset-management firms during the banking crisis of the late 1990s to dispose of nonperforming loans. They ended up buying about 1.4 trillion yuan ($208 billion) of bad loans from banks at face value, thereby protecting lenders from losses and relieving state-owned enterprises of their debt burdens.
That amount is about the same as the nonperforming loans China’s banks reported in June, figures from the industry regulator show. While the official bad-loan ratio held at 1.75 percent in the second quarter after increasing for almost three years, economists including central bank adviser Huang Yiping have said China underestimates banks’ soured loans.
The State Council, China’s cabinet, stepped up its fight against excessive leverage last week when it issued guidelines to reduce corporate debt and said it won’t bear final responsibility for borrowing by companies. Officials from the central bank and other regulators held a briefing at which they described corporate leverage as high among major global economies.