Eight years after Chinese regulators halted its securitization market, Beijing is restarting the financial engineering in an effort to unload more bad debt from its banks’ balance sheets.
It’s the latest maneuver by Chinese authorities to transfer the risk of the country’s crippling bad debt from banks to private retail and institutional investors.
Two Chinese banks recently announced intentions to market 534 million yuan ($82 million) of securities backed by non-performing loans (NPLs), the first instance since 2008 when regulators barred securitization of bad debt following the global financial crisis. In 2012, Beijing restarted securitization of some performing assets such as credit card debt and automobile loans.
Bank of China will issue a 301 million yuan ($45 million) NPL deal on May 26, according to ChinaBond.com, and China Merchants Bank announced a 233 million yuan deal.
In total, Chinese regulators are expected to facilitate up to 50 billion yuan ($7.6 billion) in issuances of asset-backed securities this year, people familiar with the matter told Bloomberg in February.
No Other Viable Option
Frankly, it was a move seen from a mile away.
China’s official NPL ratio at banks was 1.75 percent on March 31. That figure is widely recognized by analysts to be severely understated. Even the most bullish investors peg the true NPL ratio to be in the high single digits, and some independent analysts peg the ratio at up to 22 percent.
So far, Chinese banks have been selling its bad debts to the four state-controlled asset management companies, sometimes at face value (par) to avoid incurring losses at the banks. The so-called bad banks were set up in 1999 to buy up bad debt, and they include China Orient Asset Management, Great Wall Asset Management, China Cinda Asset Management, and China Huarong Asset Management.
But the rate of new NPLs has exceeded the ability of the bad banks to purchase them. Restarting bad debt securitization was another avenue for banks to quickly shed their NPL balances.
Securitization of NPLs into asset-backed securities is a way to turn poor assets into potentially good ones. It’s a type of financial engineering prevalent in Western markets, a version of which (mortgage-backed securities) wreaked havoc among banks and insurance companies during the last financial crisis. Events during that period were famously depicted by Michael Lewis in his book “The Big Short,” which was later adapted to film in 2015.
