Saturday, March 12, 2016

China Weighs Letting Banks Sell Bad Debt to Investors

By CHRIS BUCKLEYMARCH 12, 2016

The New York Times


BEIJING — China is exploring a new way to grapple with its mounting pile of bad corporate debt, though its top central banker sought on Saturday to dispel worries that the plan would simply shift the burden to other parts of the country’s vast economy.

Under the tentative proposal, Chinese officials would allow banks saddled with growing quantities of bad loans to sell that debt to investors, said Zhou Xiaochuan, the governor of the People’s Bank of China. The goal is to help alleviate one of the major drags on China’s economy, the world’s second largest after the United States’ and a major driver of global growth.

But Mr. Zhou and a deputy central bank governor, Pan Gongsheng, said they would take steps to make sure the effort did not create the kind of risk-laden financial products that played a major role in the 2008 global financial crisis. The effort would be modest, regulators would monitor it closely, and mom-and-pop investors would be kept out, they said.

“There’s no need to exaggerate,” Mr. Zhou said at a news conference held as part of China’s annual legislative session in Beijing. “There’s not certainty that this would be a very big market.”



China’s corporate debt has ballooned in recent years during a broader lending-and-spending binge, led by the Chinese government in an attempt to keep the country’s economy humming. China’s total debt now stands at about 2.5 years’ economic output, a level that has raised worries among economists. Much of that is corporate debt, prompting many economists to warn that those loans pose a threat to China’s economic health.

That lending spree has also led to a major surplus of Chinese steel factories, glassworks and other industrial facilities, dragging down China’s economic performance to its slowest rate in 25 years and casting a pall over the broader global outlook.

On paper, China’s banks have some of the world’s lowest loan default rates. But economists inside and outside the country say many banks — in a practice known as “extend and pretend” — do not force companies to pay up or restructure, putting off the problem. That raises concerns that China’s big banks could have considerable amounts of bad loans on their books.

The program sketched by the officials on Saturday followed reports in recent days that as the economy slows, some Chinese companies failing to pay back loans would be given reprieves because the banks would be allowed to convert that debt into shares of those companies. But the central bank officials did not directly address that proposal. On Thursday, a heavily indebted Chinese shipbuilding company revealed that it would issue equity to creditors instead of repaying $2.17 billion of outstanding loans.

Some experts are skeptical that such a program would resolve the problem. “Using shares to pay overdue loans could help banks temporarily shore up their balance sheets, but it could cause greater difficulties down the road,” said Ning Zhu, a finance professor at the Shanghai Advanced Institute of Finance.

Mr. Zhou indicated that under the proposal described on Saturday, the bad debt would be sold to institutional investors rather than being held by the banks. China already allows this practice — known as securitization — so banks and other financial institutions can sell off existing loans, freeing up capital for new business. But the central bankers’ latest comments suggested that the practice was being refined to focus on nonperforming loans.

“Banks are positive about securitization,” Mr. Zhou said. “If some assets can be packaged and sold off, they can adjust their balance sheets.” He said that because the loans sold off would be troubled, they would fetch prices below their face value.

Mr. Zhou and Mr. Pan stressed that the program would be modest at first and absorb lessons from the 2008 financial crisis. China’s new debt products would be kept simple, Mr. Pan said.

“This is just a pilot,” Mr. Pan said. “We’ve selected a small number of major financial institutions with quite high management standards to develop trials, and the credit involved in the initial trials is not large.”

Shang Fulin, the head of the China Banking Regulatory Commission, said at a separate news conference on Saturday that the trial effort to sell off bad debt was needed to ensure that more bank loans flowed into supporting the real economy, rather than turning over old loans.

“Our total volume of loans is quite adequate, but the speed of turnover of loans has been falling year after year,” Mr. Shang said.

Keith Bradsher contributed reporting from Hong Kong.

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