March 13, 2013 • 1:46 am 0
February 22, 2013 • 1:40 am 0
Timely measures to give market a boost
November 18, 2012 • 1:59 am 0
Read detailed VAM monthly Monthly Market Analysis and Chart October 2012
CPI slowed down as price increases for healthcare and education were nearly completed
May 17, 2012 • 6:55 am 0
Market Update – Read detailed VAM Market Analysis April 2012.
Both exchanges closed up for the month
Both markets and all three indices ended higher this month. The VN-Index closed at 473.77, up 7.4%; the HASTC closed at 79.86, up 10.6%, while the VN-30 closed at 541.20, gaining 8.2% for the month.
Year-to-date, the VN-Index continues to be one of the best performing markets worldwide, gaining 40.41% this year.
CPI for the month lowest in 5 years
April CPI came in at 0.05%, the lowest month increase in the past 5 years. Decrease in Food and Foodstuff (making up over 32% of the index) helped offset the increase of school fees and March’s petrol price. However, May’s inflation figures should see a slight increase due to April’s petrol price increase and May’s basic salary hikes. In addition, the government’s recent approval of coal price increase makes threats of electricity price hikes loom larger in May. If realized, it will definitely have further unfavorable impact on the month’s CPI.
April’s trade figures back in deficit
The trade surplus of USD 224mn recorded in Quarter 1 was rather short lived, as April’s trade figures show exports exceeded imports to the tune of USD 400mn. This brings the YTD trade account back into a deficit position of nearly USD 180mn. At cause for the reduced export values in April were the difficulties exporters faced with both the market and with prices. Among the declines in exports were coffee (25% decrease), textile and garments (7.3% decrease) and seafood (7.4% decrease).
Deposit interest rates brought down to 12%
Following on the 1% rate cut in March, rates on all term deposits were again reduced 1% in early April, bringing the maximum deposit interest rates permitted to 12%. Refinancing rates are set at 13% p.a. while the discount rate is 11% p.a. Lower financing rates reduce the liquidity pressure on banks, thereby reducing the threat of increasing NPL’s.
NPL ratios increase across all banking groups
In the division of banks into 4 groups, Group 1 being the best banks, Group 4 being the worst, the issues of NPLs have become clearer as NPLs have increased across all groups, which also include some state owned banks that are considered to be adhering to the safe lending procedures.
Gold import & export rules to change May 2, 2012
Gold ownership will remain legal but trading, importing/exporting without a permit will not be permitted after May 2. The government is also to maintain a monopoly over future bullion production. Gold as a form of payment will also not be permitted. The rationale behind this decision is to further discourage USD demand and soften gold imports.
Shift towards growth
The government has announced several measures to boost domestic growth, including (i) reclassification of non-productive loans which gives banks more room in lending real estate sector; (ii) SBV’s Document 2506 which asks financial institutions to work with borrowers to reach more favorable terms for borrowers’ existing loans. These measures are expected to bring assistance to struggling businesses.
Aiming to develop an economy where savings are channeled into productive investments, the Prime Minister approved New Financial Strategy, few initiatives of which, stretching to the year 2020, are: limits on government debt guarantees, limits on budget deficits, and a targeted savings rate of 33.5-35% (currently at 25%).The MoF is also considering other measures to support businesses, namely reductions in VAT, reduction or even elimination of Personal and Corporate Incomes taxes.
Foreign reserves up, as dong remains stable
The dong continues to be stable, trading at 20,828 VND per USD while foreign exchange reserves also seem to be fairing well. The SBV did not provide exact figures but stated that reserves now approach 9 weeks of imports. Thus it can be estimated that reserves range between USD 19-20bn, approximately 25% higher than the end of 2011.
Our View – As the AGM season is coming to an end, we observe that most companies suffered heavily from the 2011 global and domestic economic downturn, with Real Estate, Construction, Construction Materials and Transportation sectors getting hit the most as a result of high interest cost, lack of available credit, frozen property market and increasing oil price. Against this gloomy picture, selective Financials and Export companies became the rare bright sparks when they announced strong earnings growth, having benefited from an opportunistically large interest spread during the year, and weaker VND against the USD, respectively. As a defensive sector, Food & Beverage held up steadily through the storm with most companies showing resilient bottom lines.
We believe that monetary policy starts to have positive impact on the economy. Looking forward, we think that with improving macro economic factors and new tax subsidies, companies with good governance and efficient management will gain further success. We continue to like F&B, Banks, Oil & Gas and are starting to go back into Property and Construction Materials.
Source: VAM, 16.05.2012
July 13, 2011 • 11:57 pm 0
- China has experienced rapid credit-led growth in recent years. This growth has been an important contributor to global economic recovery.
- Many commentators anticipate that the rapid nature of Chinese credit growth, allied to a capital allocation process led by political direction and undertaken at highly subsidized rates of interest, will inevitably end in a credit bust.
- Further, these critics point to the opaque nature of China’s banking system, rapidly growing off-balance-sheet exposures and an overblown real estate sector as evidence of a fragile Sino financial system overdue for a crisis that will, in turn, cripple world growth and extended financial systems elsewhere.
- While we are sympathetic to much of the logic behind these fears, we believe that these concerns float on some flimsy analysis. As one example, we cite the mismatch between the oft-cited story of 65 million empty apartments nationwide in China and the inconvenient truth that market estimates indicate that only 60 million apartments have been completed in the last decade.
- More importantly, we believe that the “panda bears” overlook the fact that much of the expansion in China’s financial balance sheet has been quasi-fiscal lending and that such lending is backed and guaranteed by a system that is experiencing rapid growth in income and starting from a low level of overall debt.
- Domestic savings rates are high — indeed, excessive at over 50% of GDP. While external capital has funded much of the rise in banking system liabilities over the last 12 months, China also runs a current account surplus, is largely domestically funded and lacks many of the vulnerabilities that undid Western credit systems in 2007–08.
- We agree that bad debt levels in China will rise — in fact, in a worst-case scenario, there could be as much as 7 trillion RMB of bad loans in the system at present, according to our estimates. But bank balance sheets are strong, profit growth is subsidized by fixed lending and deposit rates, and economic growth itself should be strong enough to absorb most reasonable estimates of losses without serious challenges to financial system stability.
- Bank deposits are the main source of domestic savings. We are confident that Beijing will seek to avoid social discontent arising from any threat to the security of deposits with vigor and resources that would make Western bailouts appear puny by comparison. Our concern is that savings growth rates will slow over the next few years and that deposit growth will be much more pedestrian than over the last decade. The recent consolidation of data on funding growth under the banner of Total Social Financing (TSF) presents a clearer picture of the efficiency of deposit mobilization in funding growth. Even allowing for shortcomings in methodology, the incremental growth per unit of financing — Financial Incremental Capital Output Ratio, or FICOR, as we term it — has deteriorated over the last decade.
- As a consequence of slower savings rates and reduced FICOR, we expect a slowdown in trend growth over the next few years to 7-8% rather than the 8-10% level of recent times. State-led capital allocation and rate fixing was a feature of both Korea and Japan in the past. In both cases, financial crisis arising from this policy mix was triggered by financial reform. We believe the same holds for China, but will take a number of years to unfold.
Read full report Can China´s Savers save the world
Source: BlackRock / Carral Sierra, 12.07.2011
July 13, 2011 • 11:35 pm 0
China ha experimentado en años recientes un rápido crecimiento impulsado por el crédito, el cual ha sido un factor importante en la recuperación económica global. Sin embargo:
- Muchos analistas anticipan que la rápida condición del crecimiento chino gracias al crédito, junto con un proceso de distribución de capital dirigido por sus políticos y emprendido a tasas de interés altamente subsidiadas, inevitablemente derivará en una caída crediticia.
- Estos comentarios señalan la naturaleza opaca del sistema bancario de China, una rápida exposición de las hojas de balance y un sector inmobiliario inflado, como la evidencia de un sistema financiero frágil susceptible a una crisis que, a su vez, afectará el crecimiento mundial y a otros sistemas financieros.
Opiniones del BlackRock Investment Institute: ¿Puede el Ahorro de China Salvar al Mundo?
- En la nueva publicación del BlackRock Investment Institute, “¿Puede el ahorro de China salvar al mundo? (Can China Savers Save the World?)”, los autores analizan las razones que están en la base de estos temores. Al respecto, afirman que esta inquietud podría estar basada en un análisis débil.
- Asimismo, creen que los llamados “pandas” no consideran el hecho de que gran parte de la expansión de la balanza financiera de China se ha basado en préstamos casi fiscales y que tienen el respaldo y garantía de un sistema que experimenta un rápido crecimiento de su ingreso y cuenta con un nivel bajo de deuda.
- En consecuencia, los autores sugieren que China no sufrirá un colapso financiero, sino a lo sumo un descenso en su potencial y en su tasa de crecimiento.
Adjunto te hacemos llegar el documento completo en inglés en formato PDF. En caso de cualquier duda adicional, quedamos a tu disposición.
Para leer el reporte completo click aqui. Can China´s Savers save the world
Source: Black Rock / Carral Sierra, 12.07.2011
July 8, 2010 • 8:54 pm 1
Professor Pettis at Peking University explains that“in China, even if you believe that all the NPLs currently in the banking system have been correctly identified (a claim which few Chinese bankers believe), no one doubts we are about to see a surge in NPLs thanks to the out-of-control lending expansion of the past two years. But things are even worse than the nominal numbers imply. As I discussed in my April 6 entry, when we are trying to estimate the cost of a banking crisis we need to think about more than simply the ability of borrowers to meet current obligations.
This is because, as in the case of the Japanese government obligations, when borrowers are able to benefit from artificially low interest rates, the effect is of hidden debt forgiveness which must be paid for by the net lenders, who are, as in the case of Japan, the beleaguered households. In other words, if you want to know how much real bad debt there is out there that must be cleaned up, you need to calculate what share of the loans would go bad if interest rates were raised by at least 300-400 basis points, the minimum needed to bring Chinese interest rates in line with an appropriate rate. This suggests that the Chinese banks, if obligations were correctly counted, might have much larger amounts of bad debt than any of us realize, and this needs directly or indirectly to be cleaned up.”
Here are some recent reports from financial press sources regarding the health China’s banking sector:
-”SHANGHAI -(Dow Jones)- The non-performing loan ratio in China’s banking industry declined to 1.58% by the end of 2009, 0.84 percentage point lower than the figure at the beginning of 2009, China’s banking regulator said Saturday.”(1)
-”BEIJING: Chinese financial institutions’ non-performing loans (NPL) ratio edged down 0.1 percentage points to 1.48 percent in January, the China Banking Regulatory Commission (CBRC) said Friday.”(2)
-”BEIJING, Apr 14, 2010 (SinoCast Daily Business Beat via COMTEX) — Non-performing loan (NPL) ratio of China Development Bank, a policy bank, had reached 0.85% by the end of March”(3)
I don’t believe those reported percentages are accurate.
For context, here is an analysis of China’s non performing loan issue from 2002:
“Standard and Poor’s (S&P), which rates China as investment grade, said on Thursday it would take Chinese banks 10 to 20 years to cut average non-performing loans (NPLs) ratio to a manageable five per cent.
It estimates the Chinese banking sector’s average NPL ratio is atleast 50 per cent, higher than the 30 per cent estimate of China’s central bank governor Dai Xianglong.
“The cost of necessary write-offs could be equivalent to $518 billion or almost half of China’s estimated gross domestic product of $1.1 trillion for 2001,” Mr Terry Chan, a S&P director in Hong Kong said.
The agency said China would be unlikely to cut NPLs in its banking sector to 15 per cent within five years, as its central bank wishes, given the current operating performance of the sector.”
I seriously doubt that the problem identified in 2002 has been resolved yet. There is an analysis here that supports my assertion.
March 19, 2010 • 8:53 am 0
China is in the midst of “the greatest bubble in history,”
March 17 (Bloomberg) –The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.
“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.”
Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of an overheating and potential crash in China’s economy following a rally in stocks and property prices. The government has raised lenders’ reserve requirements twice this year to cool an economy that grew at the fastest pace since 2007 in the fourth quarter.
Leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance- sheet debt through regional governments and the country’s human rights record are concerns, said Rickards, who worked for LTCM between 1994 and 1999, helping negotiate a $3.6 billion rescue after the hedge fund lost $4 billion in a few weeks in 1998.
“Take Russia and China together, neither of them is really deserving any investment” except for short-term speculation, Rickards said. India and Brazil are two of the “real economies” among the developing countries, he said.
Rickards also disputed an argument that China could hold U.S. policies hostage through its U.S. Treasury securities holdings. The Asian nation remained the largest overseas owner of the debt after trimming its holdings by $5.8 billion in January to $889 billion, according to Treasury Department data released March 15.
China would suffer massive losses if the debt was dumped, reducing the funds available in the U.S. securities market and forcing the prices lower, he said. The U.S. president also has the authority, rarely used, to freeze such positions, he said.
Harvard’s Rogoff said Feb. 23 that a debt-fueled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates Ltd., predicted a slump after excessive property investments.
To contact the reporter on this story: Bei Hu in Hong Kong at firstname.lastname@example.org.
The survey noted that distressed private equity and small to mid-market buyout funds continue to attract a significant degree of investor interest, with 35 per cent and 36 per cent of respondents citing these as areas of the market that present the best current opportunities respectively.
Beijing’s stimulus has spawned thousands of special government investment funds holding billions of dollars in off-balance-sheet debt.
As the world struggles to recover from the most severe economic slowdown in a generation, China seemingly has accomplished a miracle. Growth registered at almost 9% last year, yet the government debt-to-GDP ratio still stood around a modest 20% as of December 31. Has China enjoyed the proverbial free lunch?
Far from it: The Chinese government has financed much of an enormous stimulus package through thousands of investment entities created by local governments. If Beijing doesn’t soon recognize this problem and put a stop to it, banks in China, which have provided the bulk of the funding, may soon face …
Source: SinoRock, 18.03.2010
February 6, 2010 • 1:03 am 0
Domestic bank credit acts in a similarly pro-cyclical way to foreign debt. When growth is booming, credit growth hides bad loans in favorable nonperforming loan ratios because assets are growing so fast – leading to a booming economy.
The problems show up if a macro shock of some sort intervenes. In the case of China, the shock will be a combination of higher inflation and interest rates. As growth slows, NPLs appear, banks pull back on loan expansion, and growth slows even more, creating a new wave of NPLs. Superficially “safe” NPL ratios suddenly reverse dramatically and risk sinking the whole macro ship.
In Shanghai, outstanding loans to the real estate industry accounts for 27 percent of the total outstanding loans, according to Yan Qingmin, head of Shanghai Branch of China Banking Regulatory Commission (CBRC).
“The non-performing loan (NPL) ratio in Shanghai’s commercial housing development loans kept rising in 2009,” Yan warned.
Source: CHINDA, 04.02.2010
November 26, 2009 • 10:58 pm 2
The central bank raises interest rates to 8% and devalues its currency – moves needed to keep inflation in check and growth on target.
Vietnam is first out of the gate in a race no one wants to be in. It is the first nation in Asia to raise interest rates in an effort to put a stop to rising inflation.
The State Bank of Vietnam will increase its benchmark interest rate to 8% from 7% as of December 1. This is the first increase since January, as for most of the year the government has been focused on achieving its 5% economic growth target. And indeed, while analysts said the hike was needed it was also a surprise — the central bank had earlier announced that the basic interest rate would be kept stabilised at least until the end of the year.
“The move came as a surprise, well sort of. We did expect interest rates to increase, but expectations were for early next year. The fact that inflation came in today at 4.4% year-on-year against 3.0% year-on-year last month, and that the currency kept weakening in the black market (not to mention the surging price of gold internationally)… probably prompted earlier action than what we believe authorities would have liked,” noted Ho Chi Minh-based analysts at VinaSecurities in a research report issued last night.
The State Bank of Vietnam also reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, in its third devaluation of the currency in two years. The central bank will also narrow the trading band of the dollar against the dong to 3% from 5%.
This is an effort not only to bring confidence to the currency, but also to correct the difference versus where the dong is trading on the black market, which has been at about 19,700 per US dollar in recent weeks. The governor of the State Bank of Vietnam, Nguyen Van Giau, acknowledged to Vietnamese press on Wednesday that foreign currency is now overly hot and so the government had to intervene.
Investors were spooked by the moves, with the Ho Chi Minh City Stock Exchange’s VN Index falling 4.5% to a three-month low of 503.41, the biggest slide since April 20. But most analysts praised the government’s efforts as prudent.
At 4.4%, consumer price inflation is at its highest since May and more than double the multi-year low of 2% in August. The food part of the basket registered 3.5% inflation, up from 2.5% in October. Housing inflation rose to 8.4% from 2.4%, while transport/communication inflation went from -4.6% to 2.2%. Inflation isn’t a worry — it has arrived.
Also consider that total outstanding loans are currently up 34% versus this time last year, which means the nation is grappling with a rising credit problem. Non-performing loans, of course, have long been a concern.
“In summary, inflation is heading higher which, together with the recent and alarming deterioration in the trade deficit and associated downward pressure on the currency, has finally triggered a policy response from the authorities. The response is also most unlikely to be the last,” wrote Robert Prior-Wandesforde, senior Asian economist for HSBC, in a research note yesterday.
Other moves bandied about by specialists include the Ministry of Finance raising import tariffs and the Ministry of Industry and Trade taking measures to limit imports.
While Vietnam’s currency issue is unique, the inflation issue is potentially not. China, South Korea and Taiwan will no doubt have to start raising rates next year as their stimulus efforts to spur growth may also lead to inflation.
Source: FinanceAsia.com, 26.11.2009
November 19, 2009 • 9:56 am 0
Distressed specialists define their terminology and give their take on the market at the second AsianInvestor/FinanceAsia Distressed and Troubled Asset Investing Summit, held in Tokyo.
“What exactly is distress?” reflected AsianInvestor editor Jame DiBiasio at a panel he moderated on Monday at the Tokyo Distressed and Troubled Asset Investing Summit. “Is it a good asset from a distressed seller, or an asset itself that is in bad shape?”
The panel of distressed experts plumped for the former — they want good assets that are being flogged off by an imperilled owner.
“We prefer something that requires re-engineering, assuming that there is some enterprise value left,” said Steve Moyer, a portfolio manager at Pimco. “Banks couldn’t afford to take the losses on clearing portfolios of loans until they rebuild capital. That accomplished, they can begin the process.”
Edwin Wong, a former distressed-investing managing director at Lehman Brothers, and regarded by some in those halcyon days as the finest exponent of distressed investing practice in the hemisphere, recently started his own fund management company, SSG Capital Management.
“Unlike the Asian crisis of the late 1990s, in which all sizes of companies went bankrupt, we’re not seeing it this time around so much with the big companies,” he said. “However, private companies and smaller corporates have built up a lot of leverage, and that’s where we see the main opportunity in China, India and Indonesia.”
In answer to the old conundrum ‘what is the most famous thing that Belgium has ever produced?’, perhaps Michel Lowy will be a contender, if his new firm SC Lowy succeeds.
Lowy says distressed investors have been sharpening their pencils for the past 18 months, expecting lots of deals, only to be disappointed by the available opportunities. He hopes that will change as commercial banks finally bite the bullet and sell off non-performing portfolios.
He also perceives differences geographically in the structure of opportunities on offer. “In North Asia and other sophisticated Asian economies, there is a weighting towards public companies,” Lowy says. “Elsewhere in Asia, there are more family-owned companies. The latter are often in places where the creditor has more limited rights. It’s going to be harder to gain control of a company there by converting debt to equity.”
Source: AsianInvestor.net, 18.11.2009
November 8, 2009 • 1:11 am 0
One of China’s major distressed asset managers, Cinda, appears to be ready for reform. But questions – and bad debt – linger.
The news came late, but at least it came. Ministry of Finance sources recently told Caijing that Cinda Asset Management had been approved by the State Council for a pilot project aimed at reforming its business model.
It was a huge step for Cinda, which was founded in 1999 as a state-owned financial asset management company (AMC) for disposing of distressed assets on behalf of the government.
Now a decade old, Cinda plans to continue with its original mission. But the latest approval gives the firm a green light to draft a restructuring plan. Technical details would be reviewed by the State Council, China’s cabinet.
Meanwhile, authorities have started eyeing incentive policies aimed at encouraging Cinda’s evolution as a market-driven financial firm. One potential incentive would let Cinda acquire all debt-equity conversions from China’s three, other major AMCs.
Through another incentive move, it’s also likely that a new company will be created to dispose of about 200 billion yuan in NPLs on behalf of Cinda. And the possibility of inviting strategic investors to join the firm for share reform — and perhaps an IPO – has not been ruled out.
During an October 17 interview with the media including Caijing, China Construction Bank Chairman Guo Shuqing showed an interest in investing in Cinda.
“The hardest thing is evaluation,” Guo said. But on a positive note he added, “It will be a purely a business activity.”
Caijing learned that a final audit report and evaluation paper for the firm will be released around the end of the year which could give further impetus to a new direction for Cinda.
Back in 1999, the government created AMCs — including Cinda, Huarong, China Orient and Great Wall — and gave them 10 years to settle accounts on a combined 1.4 trillion yuan in non-performing assets that had been held by state-owned banks.
They initially obtained a combined 604 billion yuan from the central bank to help with refinancing bad assets, then issued 811 billion yuan in 10-year bonds at a rate of 2.25 percent to China Development Bank as well as four, state-owned banks – CCB, Industrial and Commercial Bank of China (ICBC), Bank of China and Agricultural Bank of China.
However, now 10 years later, plenty of work remains. The asset managers face tough decisions in dealing with a lingering mountain of bad loans.
State-owned banks that underwent share reform and restructuring in 2004 used AMCs to dispose of a second pile of bad assets totaling 942 billion yuan. Cinda received 405 billion yuan, Great Wall’s share was 263 billion yuan, Orient took over 250 billion yuan, and Huarong got the smallest chunk worth about 23 billion yuan.
Cinda turned out to be a better performer than the other state-owned asset managers for handling distressed assets. Nevertheless, the firm used almost all its earnings to pay interest on the 10-year bonds.
In September, 10-year bonds totaling 247 billion yuan that CCB issued to Cinda matured. But the bank announced a hold extension of another 10 years for the bonds, as requested by the Ministry of Finance, at a 2.25 percent annual interest rate while the ministry continued to help repay the principal and interest.
Cinda had sought to restructure for years. An obvious hurdle, however, was handling interest payments on bonds and refinancing bad debt assets acquired from state-owned banks. AMCs paid 31.5 billion yuan a year in interest on the bonds, leaving little to supplement their capital base.
Caijing has learned that the finance ministry may grant some preferential policies to Cinda. One would involve relevant debt-to-equity conversion assets from the other three AMCs, which would be allocated to Cinda. These would be comprised of NPLs from state banks and distressed assets from SOEs.
Cinda would have to employ capital market strategies to increase the value of these debt-to-equity assets. That would pave the way for Cinda’s emergence as a main platform for settling these types of assets.
Yet many issues are still unclear. At what price would Cinda acquire these debt-to-equity assets – at a price based on book value or market value? And how might the firm arrange personnel for working with SOEs on these assets? Unless the scheme is carefully thought out, Cinda could end up with no benefits.
Meanwhile, it’s unclear whether the other AMCs will survive separately or combine into a single entity. That decision could come from the State Council, which so far has not indicated any firm direction for transforming AMCs.
One plan being discussed by all parties is that quality assets may be injected into a new company, which in turn could seek to launch an IPO. The 200 billion yuan in non-performing assets would remain the parent, Cinda, while profits generated by the newly listed company could hopefully absorb Cinda’s financial burden gradually.
Meanwhile, AMCs have been busy obtaining a variety of licenses allowing them to offer financial services including securities, financial leasing and trusts. However, only a fraction of these businesses would be actual extensions of distressed asset settlements, the firms’ main business.
Ho Jianhang, vice president of Cinda, told Caijing that the firm “will be consistent with handling non-performing assets settlements and financial firm liquidations. This is Cinda’s core competitiveness.”
China’s non-performing asset market has long been embedded in institutional barriers. When they were established, AMCs were given multiple missions. But these multi-dimensional goals resulted in conflicts that put AMC operations in tough situations.
For example, the task of settling the bad debts of state-owned enterprises and non-performing assets held by state-owned banks is extremely difficult in the context of China’s lack of a social security system and legal shortcomings. AMCs trying to do their job can hardly follow market strategies, as they were told.
In April 2008, the Supreme People’s Court released a new regulation in the form of “conference notes” regarding the transfer of non-performing debt from financial institutions. SOEs and local governments were granted priority in acquiring these NPLs.
The court’s decision may lead to replacing AMCs with SOEs for settling distressed assets. And this means Cinda still faces immense uncertainty while striving for transformation into a market-driven asset manager.
Source: Caijing 06.11.2009 by Zhang Yuzhe and intern reporter Jiang Zhinan contributed to this article
October 31, 2009 • 1:23 am 0
China’s NPL (Non-Performinb Loan) market is getting bigger, but the business model is changing to favore services-oriented local manager who have a large, local, sustainable and scalable operation throughout China. Sino-Rock Investment Management Co Ltd based in HK brings a new dimension to NPL and Distressed Funds for Private Equity and Investors, with indepth knowhow, experience and understanding relations in China and the markets. With the backing of its major shareholder Cinda (China’s largest AMC of NPLs), SinoRock is on the way to become the new star manager in China’s bank related assets/debts.
Foreign managers are losing NPL legal battles because their legal-battle oriented strategy is not working due to new policies and local cultures. If NPL investment could be done by fighting legal battles, everyone could hire lawyers to fight legal battles to make profits. That’s not the case in China.
Source: SinoRock, October 2009
Additional News on China’s growing bank related assets/debts
- China Gains Confidence in Recovery 22.10.2009 GDP Rises 8.9% as Companies and Consumers Begin to Shake Their Reliance on Stimulus Measures.
- BT pension fund invests in distressed debt, August 11, 2009
- Multi-family office Shelterwood Financial is eyeing commodities, distressed debt and securities as banks continue to unload loans from their balance sheets, July 30, 2009
- Distressed Debt Funds’ Price of Success, July 29, 2009
- Bank of China Aims to Continue Lending Expansion, July 28, 2009
- Caijing Editorial: Reality Check for China’s Monetary Policy, July 23, 2009
- US based wealth advisor is currently searching for China-focused distressed funds, July 21, 2009
- There’s Gold in Them Hills – Private Equity and Distressed Investing, July 15, 2009
- Paulson’s Hedge Fund Buys Distressed Debt, Mortgage Securities, June 20, 2009
- Investors fear missing out on distressed debt, June 18, 2009
- Family offices and institutions request information about high-quality launches, June 16, 2009
- China’s Stock Bubble Passes Stiglitz Acid Test, May 15, 2009
- Hedge Funds See Asian Credit Opportunity, April 29, 2009
- Distressed assets investors see Asia bounty ahead, March 26, 2009
October 9, 2009 • 3:15 am 0
Beijing takes a lot of steps backward in cleaning up bank balance sheets.
China’s central bank will soon announce bank loan statistics for September, and there have already been press reports that new lending may be increasing again after a lull in July and August. On top of record new lending in the first half of the year, despite a global slowdown, this is provoking new fears of another nonperforming loan crisis on the horizon. The dilemma for Chinese policy makers will be how to deal with that problem.
This is a critical question because banks are the main intermediary of credit in China and nonperforming loans (NPLs) act as a drag on growth by weighing down bank balance sheets. As of July, the latest month for which figures are available, Chinese bank NPLs totaled approximately 500 billion yuan ($73 billion)—dwarfing those of all other Asian countries except Japan. Shedding these loans allows lenders to rebuild their balance sheets and recapitalize. This exercise is particularly important for Chinese banks, which are growing rapidly and are often capital-constrained—especially when Beijing forces them to lend, as the authorities did earlier this year to help stimulate growth and may well be doing again.
Regulators must first re-examine the structure of the China NPL market. In many parts of the world, banks can sell their NPLs directly to investors at a discount from the face value of the loans. But in China, with few exceptions, banks are only allowed to unload their bad loans to four asset management companies (AMCs) that were established by the government a decade ago as part of a master plan to restructure the nation’s banking system. These companies act as loan wholesalers, selling the NPLs they acquire to third-party investors.
This system has never worked particularly well in China. In establishing selling prices the AMCs focus on securing a price that will cover the cost they paid to the bank for the loans plus a small profit. Investors focus on the amount they’re likely to recover on the loans they buy and the amount of time they think it will take to collect on them. There isn’t often an equilibrium between these two values, so deals rarely get done. Many prominent investors, including Goldman Sachs and Morgan Stanley, quit investing in Chinese NPLs years ago.
Many of those who stayed have had trouble collecting debts through the court system. In late 2007, courts across the nation invoked a self-imposed “three suspension policy”: the suspension of filing of new NPL-related cases, obtaining judgments on existing cases and execution of decisions pending Supreme Court guidance. The move dealt a blow to investors hoping to use the courts to effect payment on their existing loans and has resulted in vastly reduced returns on portfolios as monies remain uncollected.
In March, investors took another major hit when the Supreme Court issued guidance instructing courts not to accept cases against state-owned or state-controlled enterprises if the debtor is in the midst of a reorganization, or against state-owned banks if an investor finds an undisclosed technical fault with a loan that hinders collection after the AMCs have sold the NPLs to the purchaser. The Court also ruled NPL sales can be invalidated for any number of reasons, including if the debtor or guarantor is a government body; if auction formats are not being properly followed, which is often the case; if necessary regulatory approvals haven’t been obtained; or in “any other situations involving national or public interest.” While this guidance served mainly to protect state interests, it was at least clear and investors could use it to price new portfolios.
The real trouble came in July, when the Supreme Court ruled against Swiss bank UBS in a case involving a state-owned enterprise guarantor. The Court’s March guidance clearly stated that when NPLs are transferred by the AMCs to investors, the underlying guarantees remain valid and the guarantor is not required to give its consent for the transfer of the loan. This meant that a valuable piece of land pledged as collateral by a guarantor would remain a prime source of recovery for investors, even if the guarantor didn’t like the fact that someone else now owned the underlying loan.
However, in the UBS decision, the Court cited a 2004 law that said the guarantor must provide consent for the transfer, and further, that the details of the guarantee must be registered with the local State Administration of Foreign Exchange bureau. The Court reasoned that since UBS hadn’t obtained such consent and had not registered the guarantee, the guarantee was invalid. Lawyers and investors believe this ruling is at odds with the law and with established market practice, but there is no sign yet of whether the Court might reconsider any time soon.
The ruling has huge implications. Most NPL investors derive a big source of their recoveries from collecting on guarantees, including collateral pledged by guarantors. If the UBS decision is followed by lower courts as expected, investors will not only have to provide details of guarantees when they register them with the government, but they must also get the consent of the guarantors for the guarantees to be effective. Many guarantees may simply disappear if guarantors won’t willingly consent to a transfer. And there’s the effect on the market of yet another instance of regulatory uncertainty. As one investor recently told me, “every time we think we understand the rules the authorities throw a new roadblock in our path.”
The impact is already being felt. This year to date, I am aware of only two portfolio sales to foreign investors by the AMCs: one to Shoreline Capital, and a 3.2 billion yuan portfolio sold by China Orient to KAMCO, which has yet to close. None of the major China NPL investors over the past few years—including Cargill, Distressed Assets Consulting, Avenue Capital, G.E. Capital, Bank of America, Société Générale and ING—appear to have any appetite for deals until the guarantee issue becomes clearer and the AMCs lower their asking prices.
Meanwhile, China’s pile of NPLs is growing, saddling banks with bad debts. Foreign investors can help solve this problem, if only Beijing will let them.
Mr. Osborn is a partner at PricewaterhouseCoopers Hong Kong/China specializing in debt restructurings and NPLs.
Source: WSJ 04.10.2009