Bad-loan management sees changes

China's new round of establishing asset management companies to deal with commercial lenders' bad assets will differ from the experience in 1999, a senior financial executive said on Sunday.

Mei Xingbao, an external supervisor for Bank of China Ltd and former president of China Orient Asset Management Corp, said "stripping off" bad assets from banks by selling them to AMCs is no longer the common practice.

"Instead, lenders, especially some rural banks that are less capable of digesting soured loans, will sell their shares at a much higher price to specific institutions to cover the loss.

"And they will usually entrust AMCs to deal with the bad assets, rather than sell them to these companies," he said.

China set up four big asset management companies in 1999 to remove an estimated 1.4 trillion yuan ($225 billion) in sour loans from its four largest State-owned banks, backed by Chinese treasury bonds valid for 10 years.

Chinese banks' soured loans remain relatively small, and the related risks could be well contained, he said.

Chinese lenders have reported a fifth consecutive quarterly rise in the value of their bad loans, the China Banking Regulatory Commission said on Friday.

Outstanding non-performing loans rose by 64.7 billion yuan to 492.9 billion yuan at the end of 2012, compared with three months earlier.

However, the non-performing loan ratio fell 0.01 percentage point to 0.95 percent.

Mei said the government's attempts to set up more asset management companies to dispose of lenders' bad assets could help fend off some risks.

The authorities are making efforts to separate soured loans at local level from national debt disposal to prevent regional financial risks from spilling over.

Reuters reported in February that the commission and the Ministry of Finance had jointly issued a circular to restrict provincial asset management companies from buying non-performing loans from major State banks.

Instead, regional asset management companies may only buy bad assets from regional financial institutions that do not have nationwide business.

The four big asset management companies - Huarong, Cinda, Great Wall and Orient Asset Management Corp - will buy national financial institutions' non-performing assets, it said.

One year earlier, the ministry and the commission allowed provincial governments to establish such companies to deal with bad loans at local level.

But some analysts, such as Liu Yuhui, director of the financial lab at the Chinese Academy of Social Sciences, have doubted whether local governments could channel enough money to establish such companies.

"Some local governments have already set up regional AMCs. They could also transform certain existing financing vehicles into such companies," Mei said.