BEIJING Feb 18 China has clarified bad debt
rules in a move that effectively segregates sour loans of deeply
indebted regional governments from the nation's systemically
vital big four banks, two sources with direct knowledge of the
matter told Reuters on Monday.
The differing treatment of debt disposal at the national and
local level is an important development for investors and
analysts attempting to quantify the risk to China's
state-directed financial system of 10.7 trillion yuan ($1.7
trillion) in bad debts racked up by local governments by the end
The two sources cited a circular from the Ministry of
Finance and the bank regulator stipulating that provincial asset
management firms may only buy bad debt from regional financial
institutions that do not have nationwide businesses, barring
regional asset management firms from buying non-performing loans
from giant state banks.
"Asset management firms established or authorized by
provincial governments, autonomous regions and municipalities
directly under the central government will be allowed to
purchase non-performing assets of financial firms in the local
area," one of the sources close to the finance ministry told
"The four big assset management companies will buy
non-performing assets of national financial institutions," he
added, asking not to be identified as he was not authorized to
speak to the media.
Chinese local governments borrowed heavily at Beijing's
behest to fund massive infrastructure spending at the heart of a
4 trillion yuan economic stimulus plan unveiled at the depths of
the global financial crisis in 2008.
China's four giant asset managers are Huarong, Cinda, Great
Wall and Orient Asset Management Corp, which were set up by
Beijing in 1999 to remove an estimated 1.4 trillion yuan's worth
of bad loans from its top four lenders in one of the world's
largest bank bailouts.
The move was regarded as vital for putting the Chinese
financial system on a sound footing.
Those four asset management companies were backed by bonds
issued by the Chinese government valid for 10 years, during
which they were supposed to have sold all the non-performing
loans. The terms were renewed in 2010 for another 10 years.
The separation of local from national debt disposal
underlines Beijing's continual assertion that sour loans at
local government level and the so-called "shadow banking sector"
do not pose systemic risks.
The latest circular is a more detailed version of rules
issued last February that allowed provincial governments to set
up asset management firms to dispose of bad loans at a local
level, but which did not distinguish whether the loans were made
by nationwide lenders and local counterparts.
This move is the latest bid by Beijing to speed the clean-up
of debt piles left by local government financing vehicles.
(Reporting by Hongmei Zhao and Shengnan Zhang; Writing by
Aileen Wang and Koh Gui Qing; Editing by Nick Edwards)