China to create regional asset managers to mop up bad debt - sources

SHANGHAI, July 29 Tue Jul 29, 2014 4:57am EDT

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SHANGHAI, July 29 (Reuters) - China is creating asset-management companies (AMCs) in five regions to buy bad debt from domestic banks, in order to free up their balance sheets to support new lending, sources with direct knowledge of the matter told Reuters.

The move follows a surge in non-performing loans (NPLs) in recent months, most notably in export-focused regions like the Yangtze River Delta and Guandong, where firms are battling rising costs and weak domestic demand.

To help bear the strain, the country's banking regulator (CBRC) has authorised the city of Shanghai, and provinces of Zhejiang, Guangdong, Jiangsu and Anhui, to establish and manage their own AMCs, the sources said.

The initiative could potentially open doors for some private sector involvement.

"AMCs are a very profitable business, so many companies, even foreign venture capital funds, are interested in getting licensed," said a Hong Kong-based hedge fund manager who spoke on condition of anonymity.

"The central government has said only wholly state-owned entities can do the busines, but provincial governments can still hire private enterprises or (joint stock) banks for their service and expertise."

Since 2012, China has steadily upgraded methods to cope with bad loans resulting from a massive credit splurge in 2009, including the development of a trading platform to facilitate banks offloading loans to investors.

Beijing's apparent readiness to let private companies default on bonds has led to an increase in borrowing costs, as lenders price in more risk, putting more firms under stress.

China already has four centrally controlled AMCs, including the recently listed China Cinda Asset Management Co Ltd , along with an array of smaller private AMCs and debt-recovery specialists buying and selling bad debt for profit. (Reporting by Zhao Hongmei and Pete Sweeney; Additional reporting by Tu Lianting at IFR in SINGAPORE; Editing by Simon Cameron-Moore)

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