China Toxic Debt Solution Has One Big Problem

On paper, China’s latest effort to rid its banks of bad loans looks sensible. By packaging the debt into securities, lenders hope to unload them onto risk-hungry investors, a potential win-win solution that garnered praise from billionaire Wilbur Ross.

But if the first deals in this 50 billion yuan ($7.6 billion) program are any guide, the whole exercise may end up just shuffling bad debt between banks, doing little to improve the health of China’s financial system as a whole.

Bank of China Ltd. sold at least half of its 301 million yuan debut offering of NPL-backed securities to other Chinese lenders on May 26, according to people familiar with the matter, who asked not to be identified because they aren’t authorized to speak publicly. Ninety-five percent of the deal’s riskiest tranche was purchased by a state-owned asset manager, a sign of tepid demand among private institutions. That same day, China Merchants Bank Co. sold at least 60 percent of a 233 million yuan NPL offering to other banks, people familiar said.

While an initial show of support from lenders could help draw outside investors, skeptics of the program say it’s unlikely to attract widespread demand because the securities are too complex and illiquid for most of China’s non-bank institutions. A failure to purge lenders of their NPLs may fuel expectations for a government-led bailout, which Standard Chartered Plc estimates could cost as much as $1.5 trillion.
Read More: https://www.bloomberg.com/news/articles/2016-06-02/china-toxic-debt-solution-has-one-big-problem-as-banks-buy-npls
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