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China Now Has So Much Bad Debt, It's Selling Soured Loans On Alibaba
As those who frequent these pages are no doubt aware, NPLs at Chinese banks are rising.
Here’s a kind of 30,000 -foot view from RBS’ Alberto Gallo:
As we documented last month after data on new RMB loans showed that the credit impulse in China simply rolled over and died in October, part of the problem is that banks are becoming increasingly concerned about sour loans, as an acute overcapacity problem, a decelerating economy, and sluggish global growth and trade have conspired to create an environment in which borrowers are now taking on more debt just to service the loans they took out in the past.
As Credit Suisse noted earlier this month, some firms are now borrowing just to pay salaries. Indeed, more than 50% of debt in the commodities space was EBIT-uncovered in 2014. The takeaway: China’s Minksy Moment is nigh.
Still, the official numbers on NPLs (shown above) look surprisingly low for an economy which is supposedly careening towards a debt crisis. There’s a simple explanation for this apparent discrepancy: the numbers, like China’s official GDP prints, are fabricated.
There are a number of strategies China uses to depress the official NPL figures including compelling banks to roll bad debt, but as Fitch outlined in detail back in May, Asset Management Companies play an important role.
“China’s four major AMCs were set up in 1999 to absorb CNY1.4trn in bad assets at par value from China Development Bank and the big four banks (Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China) before their restructuring. NPL disposals to AMCs have increased in recent years as more banks have come under pressure to manage their reported NPL levels,” Fitch wrote, adding that “AMCs’ strategic importance [should] increase with China’s economic rebalancing,”
Here’s more:
Bank loan disposals to AMCs also mask underlying NPL increases, and direct asset purchases by AMCs from borrowers mean bad assets may never be formally recognised as NPLs within the banking system.
AMCs have only been granted licences from the CBRC to acquire restructured DAs directly from non-financial enterprises (NFE) since 2011. DAs purchased from these enterprises have since constantly increased as a share of the total. Fitch’s International Public Finance team estimates that 60%-70% of DAs restructured in 2010-2014 relate to the real estate sector. Many of the distressed property assets could be directly offloaded to AMCs without ever being recognised as bad loans through the banking system. This partly explains how reported NPL ratios for property loans are kept so low in China.
The primary source of traditional DAs is banks. Upon completion of debt acquisition, the AMC assumes the pre-existing rights and obligations between the banks and debtors, and realises or enhances the value of the assets primarily through debt restructuring, litigation and sales. However, most of the DAs acquired by AMCs since 2011 have come from NFEs. AMCs also buy restructured DAs from banks and non-bank financial institutions.
When AMCs acquire restructured DAs, they enter into an agreement with the creditor and debtor to confirm the contractual rights and obligations, and then acquire the debt from the creditor. The AMC, the debtor and its related parties also enter into a restructuring agreement that details the repayment amounts, the repayment method, repayment schedule, and any collateral and guarantee agreements. The restructuring returns and payment schedule are fixed at the time the restructuring agreements are made.
Yes, "upon completion of debt acquisition, the AMC assumes the pre-existing rights and obligations between the banks and debtors, and realises or enhances the value of the assets primarily through debt restructuring."
Unless of course they decide they'd rather just sell them to the highest bidder online.
As WSJ reports, China's AMCs are now so flush with "duds" they're finding it easier to auction the "assets" on Taobao.
No, really.
"These 'bad banks' nowadays would rather auction their inventory wholesale than restructure it the more traditional, painstaking way," The Journal says, adding that "the latest round is a giant dump of soured loans on Alibaba Group’s popular Taobao e-commerce platform by China Huarong Asset Management Co., the nation’s largest distressed-debt buyer by asset size."
Huarong intends to sell some CNY51.5 billion worth of nonperforming loans on Taobao. This follows Cinda’s listing of CNY4 billion worth DAs and as Barclays notes, is "in line with [the] view that AMCs in general will more frequently resort to a “wholesaling model” for distressed asset disposal (i.e. quick sale of acquired NPL to other parties, thereby earning slimmer margins as opposed to gains on asset value appreciation), given the increasing NPL supply amid the current credit cycle."
In other words, loans are going bad so quickly in China that AMCs need to resort to "wholesaling" in order to keep pace.;Here's Barclays full take on the news:
- We believe most of the reported distressed assets should be NPL from banks to be disposed of under the TDA model. According to media report (cnfol.com, 12 Dec 2015), the RMB51.5bn worth of distressed assets consist of debt claims to over 2,360 borrowers and 97% of these assets are lending secured by pledges, collaterals or guarantee. In terms of geographical distribution, 60% of the assets are from Zhejiang, Guangdong and Jiangsu province, according to the news report, consistent with the overall NPL formation trend we have observed in recent years.
- The size of Huarong’s reported Taoba listing (RMB51.5bn) is larger than its outstanding TDA (RMB34.6bn) by the end of 1H15. According to news reports, it represents Huarong’s entire distressed asset book — which is unlikely to include the restructured distressed assets (RDA), in our view. Even if the company had not disposed of any TDA since 1H15, it would imply that it had acquired RMB16.9bn TDA so far in 2H15, exceeding the amount of RMB16.5bn acquired in 1H15. In comparison, Cinda’s listing of RMB4bn worth of distressed assets accounted for only 7% of its TDA balance as of 1H15 (RMB60bn).
- We believe such a “wholesaling model” should reduce inventory risks for AMCs, thanks to the much faster asset turnover rate. In addition, it may provide more visibility on the operating trend of the business. As noted in our report (China Cinda Asset Management Co., Ltd.: Oversold high growth story, 13 Oct 2015), out of the RMB1bn worth of distressed assets Cinda auctioned on Taobao, 87% were successfully sold. However, given little disclosure on the acquisition cost, it is difficult to estimate the realized return rate on the disposed assets, which is quite sensitive to the assumption of acquisition cost (Figures 1 and 2).
- In our view, the much larger size of Huarong’s reported Taobao TDA auction size compared to Cinda’s suggests that Huarong has a relatively weak franchise in the traditional NPL disposal business, as it may lack other means to dispose of the bulk of distressed assets acquired in recent years. Moreover, we believe AMCs should only dispose of assets that have relatively low appreciation potential under the new “wholesaling model” and aim to realize higher return rate on assets that have higher appreciation gain potential, which would generate sustainable income in the future even as it takes a longer time to dispose them of. As noted, we believe Cinda has a stronger franchise and strategic focus in the traditional NPL disposal business than Huarong in terms of both volume and return rate, thus we prefer Cinda given its higher probability of positive earnings surprise amid the NPL cycle.
Apparently, business is good if you're one of China's big four bad banks. "Cinda said its first-half profit this year rose 47.7% to 7.8 billion yuan from a year earlier," WSJ notes, while "Huarong’s net profit in the same period rose 39.4% to 9.87 billion." In all, "profit at China’s Big Four asset management firms rose 27.6% last year."
Of course all of this is completely opaque. There's no way to determine what price the AMCs get at auction and although WSJ says "there are few signs that [AMC purchases from banks] have been outright bailouts of state lenders [given that] analysts estimate bad banks have been buying distressed assets at 40 cents on the dollar or less," there's no question that these operations are part of the larger effort to artificially suppress the offical bad loans data.
The takeaway, of course, is that NPLs are soaring in China which is a harbinger of more trouble to come in 2016. On the bright side, you now know where to go if you want to bid on $8 billion is nonperforming loans to Chinese corporates.
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Sub PLime
No suplises here. So move on.
No different that US lawyers that buy debt, like the phone bill you never paid for pennies on the dollar.
My manager told me these companies used to buy their accounts receiveables for 60 cents on the dollar.
Now, he said the deadbeats are so broke, the collection agencies will pay less then 10 cents to him on the dollar.
Related article:
One in five Americans say they'll die in debt: report
http://www.nydailynews.com/news/national/americans-die-debt-report-artic...
What's wong with crowdfunding?
Chinks... even their market is slanted.
'Sub PLime' ......LOL
Sounds like we are back in 2007!
The agenda will soon be implemented in full......
http://beforeitsnews.com/conspiracy-theories/2015/12/as-events-spiral-ou...
Anyone that believes that NPL's are only 1.6% is crazy.
No wonder the IMF is allowing China to become a new reserve currency. It's just as bankrupt as the USA.
Good idea - I have some debt, I'll go check out e-Bay see what I can do there. Thanks!
Your debt is someone else's asset, maybe this ebay rehypothecating thing could take off!
Unfortunately, I think your bank has ebay-ed it. It's sold to some collector thugs. Run for cover.
My friend was one of these collectors, it usually works out well for the person in debt, they negotiate such a low price on the loan from the bank that they can cut the holder a good amount of slack and still turn a profit.
Yeah, China, its currency, and its sovereign bonds are surely going to replace the USA, USD and US treasuries any day soon, they are SO SO SO ready to be the world monetary, economic, financial and military leader.
I had to lock my office door and turn off the phone to block all the institutional and high-net worth investment clients who are demanding that I move their money from the boring risky USA to the much more exciting safer China.
[I had to take tranquilizers to stop laughing long enough to write this]
China is TOAST. They have about 1.5 billion people trying to pump out 5 billion pairs of sneakers for about 1 billion people who are even interested in sneakers.
Forget about them. They fell into the consumer forever trap.
LOL! how stupid are these so called Bankster/world leaders/consumer/idiots?
USA regime only manipulates economic data to promote the regime,
BUT
China regime invents economic data the way a screenplay writer invents a story, ie pure goal-seeking fiction.
China will keep devaluing the yuan untill the debt has inflated away.
At least that's the plan.
Just outlaw selling them like the stocks. Outlaw write downs while you are at it
Oh for fuck sakes... Janet buys EVERYTHING!
Shop til you drop.
At least there's tangibles arising from China's over-investment (ie: empty cities). What does the USA have as a result of its bubbles? A pile of worthless social media technology companies which have never earned a dime and probably never will. And a bloated government and financial sector apparatus whose dismantling will cause massive economic and social chaos when the government/finance and tech bubbles finally pop.
In other words, China can afford a collapse, because they have the production and can eventually transition that to domestic consumption. But America can't, as it has nothing but debt and little corresponding production.
I agree. China is building highways, airports, ports, refineries, heating plants, generating plants, housing, malls, parks, office buildings, universities, research parks and laboratories, and more. America gets nothing in return for their spending. BTW, the China naysayers are not aware of the plan to move 200 million rural citizens into cities in the next 20 years? Where do they think these people will live? You build the housing first so they don't end up living in tents and under highway overpasses.
The Chines people have a savings rate of 36%. They can deal with a downturn in the economy if they need to. Not so Americans.
I like the chinks. I just dont want to fully emulate all there culture as some in leadership do. If GRC was promised, let them have at it. There smog reminds me of L.A. and acid rain in our past. Let there dudes die to protect global trade for a change instead of just reaping benefits of it. They seem willing...
Oh really? Is that why those ghost cities are falling into severe disrepair, is that it?
Why is it so hard for you to understand that China AND USA have severe problems and chances are they are not going to make it?!
You don't know shit. Name one "ghost city" that you personally inspected and saw the "falling into severe repair". Stop watching Fox News. I live in China and I have to laugh at all these retards who are experts on China from the other side of the planet.
Get a passport and a visa. Travel around China. Eat your words.
The problem with overbuilding is that maintenance costs, interest, tax costs can eat up all your income. This is the problem with central planning. Wasted resources.
You cannot push people into cities before they are ready.
China used much of their bailout QEs on infrastructure as said above.
In USA, the Gubmint and Fed lined the pockets of bankers and CEOs while our roads and bridges are falling apart.
New homes in China are sold as concrete shells, The can be kept this way without degrading for decades. They don't need heat, water, or electricity. The only maintenance needed are the public areas and lighting. There is no property tax in China. Holding empty properties for years is cheap. Most of the "empty homes" in the "ghost cities" you see were sold for cash for speculation or for the children when they marry about age 30. Mortgages are rare for these types of properties. There is no interest to worry about.
Nobody is being "pushed" into cities. Already there 200 MILLION migrant workers from rural areas living in barracks type housing in the cities building homes, office buildings, highways, universities, etc. Life as a subsistence farmer back in the village is not fun. In the cities they have better jobs, western style homes in high rises, health care, good schools, easy shopping, and all the amenities of civilization. They would LOVE to have their families join them in the city.
You should go to China and learn something about the country before you make silly statements.
"There is no property tax in China."
How do they provide the electrical power grid to these concrete shells of housing? The water and sewer lines, wastewater treatment plants, gas lines and distribition hubs, etc.?
Who sets up the necessary police and fire protection, garbage collection & landfills, traffic control systems, road maintenance, school systems, etc. necessary to turn concrete shell neighborhoods into habitable communities?
China isn't magic; they face the same challenges in running cities that the rest of humanity faces. There is no free lunch. Cities burn through resources insatiably.
Don't be a retard. They don't have property tax in China.I live in China and own real estate. Everybody knows there is no property tax in China. They collect taxes on other things. Workers have a withholding from their gross pay. Businesses pay a tax on profits. Taxes are low in China. They don't have military bases in 130 countries and their armies are not fighting wars. The Army is used like the Army Corps Of Engineers used to be in America. They also jump in during natural disasters like earthquakes and floods.
Everything is cheaper. For $6000 USD a year they can duplicate an American middle lifestyle. $9000 USD buys an upper middle class lifestyle bsed on American standards.
It's not magic. America has a bloated military budget. The taxpayers pay half their taxes in interest on things they charged years ago. It is very expensive to do anything in the US.
Also, those concrete shells get turned into a very nice home for an additional 20%. There is a huge industry that does this. There are design centers everywhere. You pick out your styles, materials, fixtures, etc. Workers come in and finish the job. I paid $101,000 cash for my 2BR unit on the 18th floor in a gated community. It cost another $20,000 to finish and furnish it. It is very nice. The price also increased to $230,000 in the past 3 years. It's a very nice, civilized place to live. The sea is at the end of my streeet and I have the mountains just a 5 minute drive away. My wife is Chinese. When we retired 3 years ago, we moved here. We live in a clean, safe, modern, friendly city with good air and great natural beauty.
You need to travel and see how pathetic America has become. Or maybe it would just make you depressed.
hahaha, you're still in the honeymoon phase i see.
China spends a few hundred billion a year to suppress internal riots, they spend more on that than on the military, and that first number is rising every year. the army is full of corruption and incapable of fighting an actual war, the reason they jump into action is half PR for the central government and because local governments are too corrupt to be trusted to have any sort of support infrastructure.
Property taxes most certainly exist in china, all property for business use is taxed, rates for mortgages are higher than standard which is effectively a tax, and your paycheck has housing fund money taken out... which, for most, is impossible to get back. You also end up having to essentially bribe everyone for what should be public services based on residency... property taxes are far less insideous.
the concrete shells are shit for quality and after 2 years are falling apart. look out for manmade landslides and warehouse explosions too. public space is not maintained in any way by anyone, especially not the proeprty management people you are paying the equivalent of property taxes to every year.
$6k is NOT an "american middle lifestyle" in china and $9k is not anywhere close to american standards for a middle much less an upper middle class. most consumer goods are low quality and rather unsafe, there are no consumer protections and the courts are useless even if they were not corrupt. it's cheap to live shitty here, but for anything middle-class? it costs FAR MORE than in the US or Europe. Healthcare is an absolute joke, services are an absolute joke and the government is actively looking for any excuse it can to blame foreigners the instant this house of cards starts coming down. If you are incapable of seeing this, you are either an wumao or just blinded by ignorance.
I have lived here for over 15 years, I very much know what I am talking about, and there's a reason why all us longtimers are getting the hell out of here now.
so where are you moving now ?
This is peanuts. All of US Government debt is bad.
What difference of this china moves, with the wallstreet caaino sellimg toxic CDS/CDO to clueless people/institutions??
China does not have Yellen and endless printing to save them.
1. Can I buy the liens on some barely-used CAT heavy equipment for pennies on the 1000 Yuan? Sounds like a good deal;
2. How about a ghost city for a few bucks, which I could rent out to European countries looking for places to put their incoming refugee migrants;
3. Can I buy the creditors' side on all my debts? A great way to avoid paying full price.
Recently, I saw a video of an interview of the Finance Minister of Puerto Rico, in which he laughed about trapping investors who bought Puerto Rico's bonds. He said they had lent much more than PR could ever pay. Then he revealed (laughing) that the ultimate strategy was to buy up the distressed debt and cancel it.
So, the obvious strategy for any debtor is: 1. Default; 2. Wait until the creditors' claims are trading for pennies on the Dollar; and 3. Buy up the creditors' claims. This should work wonders for distressed shale drillers.
commodity loans against commodities that didn't exist or were stolen years ago from the warehouse where they supposedly were stockpiled for sale on Ali Baba. Somewhere, someone will find the necessary paperwork to make a derivative out of it and sell it to the masses.
This is funny, why not craigslist debt ad?
/sarc
G Edward Griffin - More Deadly Than War - The Communist Revolution in America
china's big 4 banks are just as fascist as the 5 biggest in the usa. head we win tail you lose.
The Chinese brought Keynesianism to a new record level in order to help out the corrupt system in America.I can see the U.S being the next one in line to bring money printing to a new level in order to help out Japan,China and Europe.