Few recent Chinese IPOs have sounded worse for investors’ health than that of China Cinda Asset Management, the company that has bought up more than US$400 billion in bad debt from Chinese banks since 1999.
Commentary on the listing, which launched on Thursday, has been scathing since word leaked earlier this year that the company would go public in Hong Kong. Some have called Cinda “China’s insolvent toxic-waste dump.” Others have simply labeled the floatation not only China’s biggest IPO of the year, but also its worst.
That’s because critics say neither Cinda, nor the three other state-backed asset management companies (AMCs), finished what they were designed to do: Liquidate the piles of debt acquired mostly from state-backed institutions they’ve been sitting on.
Furthermore, in the process of buying up non-performing loans, the company itself has racked up US$17 billion of its own debt.
Think for one moment: That’s loans the company took from banks in order to buy up bad debt from banks. One can only wonder if one of China’s other AMCs – Huarong, Orient or Great Wall – will end up buying Cinda’s debt, should its assets (essentially non-performing loans) not perform. It’s almost comical.
How then, investors ask, did the company raise US$2.5 billion from the public, with cornerstone backers including New York-based Och-Ziff Capital Management and Los Angeles-based Oaktree Capital Management buying up as much as 44% before the sale? And why did the company receive US$65 billion in orders when it priced at US$0.46 this week?
One important but overlooked twist on Cinda was its transition from a “policy company,” or a firm that takes direct orders from the Ministry of Finance and China Banking Regulatory Commission, to a commercialized entity. In the process it’s picked up substantial financial tools.
Regulators have awarded Cinda licenses to conduct business from financial leasing, insurance and broking to trusts, futures, real estate and wealth management. It joins firms such CITIC and Everbright in the sense that it is a commercialized firm with tight connections directly to the government – quite an elite group to join.
This diversification in services could help Cinda pay the interest on the bonds with which it originally bought the toxic-assets, while also possibly giving it space to take on future debt, said Ryan Rutkowski, a researcher at the Peterson Institute for International Economics, a Washington DC-based think tank. But that’s not what interested the institutional investors that bought its shares.
In fact, those who sent in orders for Cinda were probably paying more attention to the balance sheets of China’s biggest banks than they were to Cinda’s.
In the first half of 2013, China’s five biggest banks wrote off US$3.65 billion in bad loans, three times the value expunged in the same period from the year before. One fund manager who spoke with China Economic Review said that, given the poor state of China’s government-backed banks and a debt-to-GDP ratio of 207%, institutions such as Cinda will likely be taking on more bad assets.
Buying into Cinda is essentially a hedge against China’s banks.
“It looks like investment banks plan to package listed AMCs as a bet against listed state-owned banks,” Rutkowski said in September. “If you think the quality of bank assets are bad, then you can buy the AMCs because they will benefit.”
Or at least investors hope they will. But that’s far from guaranteed. Cinda profited well from the Chalco debt it held when the aluminum producer converted the debt into company shares. But not all of the debt Cinda holds will be as easily managed. If the company continues to take on debt at the rate it has during the past three years, it will be the first debt manager to need a debt manager. Nothing is too absurd in China’s financial world.