I can still see myself, two years ago, sitting in a theatre listening to my lecturer talking about China's Non-Performaing Loans (NPLs).
The class was "Asia-Pacific Capital Markets" and at the time, I got the impression that the NPLs plaguing the Chinese banking sector was an omnipresent threat to the sustainability of the country's 7% growth. The discussions in class were dominated by this question:
How is China going to fix its Non-Performing Loans problem before it comes in direct conflict with the liberalisation reforms?
In fact, China joined the World Trade Organisation on January 1st 2002, after 15 years of marathon negotiations. In doing so the country accepted to implement reforms targeting the dinosaur State Owned Entreprises (SOEs), the telecom, insurance and the banking sector. China's Special Economic Zones (SEZ) were seen as a showcase of China's future as a major player on the WTO.
The Special Economic Zones Hainan Province, Shantou, Shenzhen, Zhuhai and Xiamen cities started as "experiments" indeed. And after little more than
20 years existence they have accomplished miracles:
The volume of overseas investment in Xiamen alone from 1990 to 2001 totals
$US3.904 billion
China's WTO membership was bundled with a host of market access measures to be implemented. The package-deal require the country to open-up to foreign investment sectors of the economy dominated by SOEs. Privatisation: the ticket to free markets and economic prosperity.
Only the level of Non-Performing Loans of the SOEs and the banks worked to keep risk-adverse investors away from Chinese heavy industries (together with the CCP's reluctence to privatise pillar industries).
Now, foreign investors have so much confidence that the Chinese miracle is not a mirage that they start buying the country's NPLs! Two years ago I would have never thought that anyone would spend a penny purchasing loans that probably won't be repaid. Worst, I never thought that Chinese Central power would allow this to happen.
Now I am confused. I was first puzzled when Patricia Cheng, from the Sydney Morning Herald wrote:
"Foreigners want China's bad debts"
Why would this be? I mean there clearly is an investment opportunity here but the risks associated with it should be a major discouragement for foreign investors. At least it ought to be the case if we are talking about a few institutions buying large chunks of the Chinese banks and Asset MAngement Companies (ACMs). No? The CCP has far too much influence on the approval process for this to worth the risk. And at what discount rate? 7%? Come on.
But as I read William Pesek Jr's column for Bloomberg News I understood why Citigroup, Goldman Sachs and Morgan Stanley have bought more than $US4 billion of distressed assets. The column is titled "The Next Great China Gold Rush -- Dodgy Debt". "Gold Rush" captures quite well the nature of the phenomenon, in my opinion. Pesek writes this:
"[...] investors are scrambling to get in on the next Chinese gold rush: More than $450 billion of bad loans held by China's four-biggest commercial banks and their asset management companies. The hope is to buy dodgy loans at a fraction of
their face value and sell the assets at a profit as the world's fastest-growing
major economy expands."
But what about transparency? The Chinese government is not exctly the most transparent when it comes to its crippled banking sector.
There are also reports that the Government issued rules to facilitate the sale of bad loans to foreigners? Despite what credit rating agencies say (that this sale of bad loans is going much too slow) I still think no one should rush. Let's not make this another disaster 98-Asian Crisis style where everyone runs in because the saw that big boys go. Looking at the fundamental picture, China still is largely, if not entirely, underdevelopped in terms of its financial sector's infrastructures and framework. It is maybe too early to literally "rush in".
Recall that crony capitalism still runs wild in the ranks of Chinese officials and business people. Quick sale of Non performing loans is a good way from many to get out of trouble rich.
Anyway, I am just a grad. Maybe I'll understand the situation better later.
These days I am doing a bit of research on Corporate risk management. You know? Hedge funds and all. Well, there too I think wierd things happen. I'll keep you posted.
