Apparently plans are afoot to set up a fifth asset management corporation (AMC) to take over US$12.5 billion worth of bad debts in the northeast of the country held by the four existing AMCs. If anything, this is a sign of how the existing AMCs – Huarong, Great Wall, Cinda and Orient – have failed in their task of clearing US$230 billion in non-performing loans (NPLs).
Debt sales may have increased in the last year but this has yet to compensate for the years of feet-dragging that preceded it. China’s AMCs and debt clearing process as a whole is beset by problems. They include:
1) Future of the AMCs. The AMCs were prescribed no particular post-debt clearing function and so it can be argued they have spent too much time worrying about their futures. There may be a host of NPLs they can dispose of on behalf of the city commercial banks but, based on the quality of the debt pool they received from the Big Four banks, the AMCs seem to believe their commercial futures lie elsewhere. Investment banking has been a popular call.
2) Competition. Was it really necessary to have four separate AMCs and then allow them to compete against each other and buy debts from each other? Korea got by with one state-owned body that was put in place to do a particular job, not add new layers of confusion to an already complex system.
3) The way in which the NPLs were transferred. Keen to make their books look good to foreign investors, a large proportion of the banks’ NPLs were transferred to the AMCs at close to full book value. There is no way the AMCs have or will be able to settle or sell on the NPLs for anything like that amount. This leaves the banks holding IOUs which the AMCs will never be able to cover without significant government bail-outs.
4) The qualit of the assets. Some of the distressed assets on sale are, to put it frankly, distressed beyond recovery. It has been suggested that, of the NPLs they couldn’t clear on their own, the AMCs bundled up the best ones and sold them off. Goodness knows what stake some of the NPLs still lurking on the books are in.
5) Unreasonable price demands. Largely because they took over the distressed debts at such high prices for the sake of banking reform, the AMCs have been demanding unrealistically high prices for them at auction. This has put off foreign investors looking to enter the NPL market.
It’s unclear what will happen to the distressed debts and the AMCs that hold them. But is creating a new corporation really the answer? It has been said that the new AMC would relieve itself of the debts by securitizing them – but this depends on having something that customers think it is worth buying into.
Surely, in the back of the regulator’s mind, there must be a little voice saying, ‘Why oh why can’t we just use the forex reserves to wipe out the legacy NPLs and consign these irritating AMCs to the dustbin of history?’
One thing is certain: any future bad debts the Big Four come up with should be cleared in-house. A bank can only behave in a truly commercial manner if it takes responsibility for resolving its own slip-ups over loaned money. And the Big Four should have instigated sufficient internal governance standards that this won’t prompt a repeat of past corruption problems.