Investors wary of China’s bad debt clean-up, report claims

Chinese banks have a large amount of bad debts to clean up, but low returns and the lengthy process of getting a deal done may impede foreign investors from participating in the clean-up effort, according to a Reuters report published Monday.

Banks won't sell their debts at a price foreign investors would consider reasonable, and the foreign investors are worried they will not be able to enforce their rights as creditors when it comes to collecting on the debt, the report said.

A government price-setting system that priced loans too high was a major contributor to the low returns.

Some of those who tried to get involved in previous clean-up efforts were left jaded from tough court decisions and a bureaucratic system they say is tilted in favor of local buyers.

"Historically it took more than twice as long for foreign buyers to do a deal in China compared to other Asian markets, and the returns were less than half," said Ted Osborn, a Hong Kong-based partner at PwC and a specialist in non-performing loans.

Some economists believe the current bad loan mess will need a bigger clean-up than was required after the late-1990s Asian financial crisis.

There is no ban on foreign investors buying up bad loans in China.

From 1999 to 2007, about $323 billion in bad loans were swept out of the banks, according to a PriceWaterhouseCoopers

(PwC) review of media reports over the period.

By 2006, according to PwC's own estimates, foreigners bought up $26.5 billion, or around 18 percent of bad loans sold by four State-backed vehicles that had been created to clean them up at the country's four biggest banks.