‘Financial monsters’: China’s bad banks complicate property crisis

To contain the fallout from the Asian financial crisis two decades ago, Beijing created a group of bad banks and saddled them with the nation’s most toxic debt. But with deepening distress in China’s property sector threatening to trigger wider economic turmoil, those bad banks are now scrambling to help.

The problem is that the balance sheets of China’s “big four” asset management firms – China Cinda Asset Management, China Huarong Asset Management, China Great Wall Asset Management and China Orient Asset Management – have become so bloated that their capacity is limited.

The groups are “financial monsters,” said Chen Long, a partner at Beijing-based consulting firm Plenum, “I wouldn’t trust them to play a big part” in handling the property crisis.

While the world’s most indebted developer, Evergrande, has taken the spotlight in the country’s unfolding property crisis, the squeeze on bad banks exposes Beijing’s challenge in mobilizing bailout options.

This underscores the influence of longtime President Xi Jinping A campaign to reduce leverageWhich challenged highly indebted developers, highlighting the risks asset management companies (AMCs) face in a property crisis they are needed to help alleviate.

The bad banks, established in the 1990s, have expanded far beyond their mandate, becoming financial conglomerates fueled by debt from domestic and foreign investors. Huarong, the largest major debt manager, bailed out in 2021 after delaying disclosure of its $16 billion loss for months.

A debt restructuring is now expected for Great Wall after the company delayed publishing its 2021 annual report in June, signaling weakness across the sector even as its services become more important to the health of the world’s second-largest economy.

Huarong’s problems spooked investors in China’s dollar bond market in April 2021, prompting downgrades and warnings from global agencies.

Although trading recovered following the bailout announcement, investors are sensitive to the health of China’s AMCs. They sold their bonds again in July after the Great Wall missed its reporting deadline. Huarong’s $37 million 4.25% perpetual bond fell from 91 to 75 cents on the dollar in July before recovering to around 79 cents in August.

Together the bad banks have about $500 billion ($740 billion) in assets and will have settled about $400 billion of bad debt in the real estate market in 2021, a fifth of the total, according to an estimate by China International Bank.

In the People’s Bank of China’s latest attempt to tame the rising discontent over unfinished apartments – including Mortgage foreclosures are growing – The central banks ask To raise loans from state banks from a Rmb200bn funding pool for stalled property developments.

The AMCs have been involved in bailout discussions with central bankers and housing regulators since Evergrande defaulted last year, according to bank and AMC executives.

Orient and Great Wall each raised 10 billion euros in bonds in March to “de-risk quality property projects and rescue the sector’s sour debt,” according to bond prospectuses.

Cinda has placed one director on Evergrande’s board and another on a risk resolution committee to help with its restructuring proposal, which is now delayed after She missed the deadline set for herself of July 31. Distressed developers such as Sunac China Holdings and Fantasia Holdings are actively talking to AMC about possible rescue plans. Rescue funds at the city level were also established with the help of AMCs.

But the extent of funding support from AMCs is expected to be selective and cautious, said David Yen, vice president and senior credit officer at Moody’s Investor Services, as they already hold large amounts of exposure to property developers on their balance sheets.

The groups are inextricably linked to the asset crisis, said Xiaoxi Zhang, a China financial analyst with Gavekal Dragonomics, a research group in Beijing.

The AMC’s are “substantial creditors” to the property developers, with the sector accounting for between 25% and 42% of total debt assets.

“Continued defaults by promoters indicate that the effects of the asset decline on financial institutions are still building,” Zhang said in a recent report. “Regulators have pushed AMCs to reduce their exposure to assets, but it remains the largest sector in their portfolios “, she added.

Huarong and Great Wall are the most exposed to the property sector because of their heavy reliance on their debt assets to generate income, compared to Sinda and Orient, according to Zhang.

However, even Cinda issued a profit warning on July 26 that its profit for the six months would fall by 30% to 35% as “certain financial assets measured at amortized cost held by the company are under greater pressure.” In May, Moody’s downgraded Cinda’s Hong Kong unit, citing “increasing risks arising from the company’s large real estate exposure.”

Smaller AMCs that operate only within provinces are expected to bear more responsibility for this round of property sector bailouts due to their close ties with local governments, analysts said.

One manager of a smaller regional AMC in Jiangxi, a city in southeastern China, said some local asset managers could contribute to the recovery by investing in bonds tied to unfinished housing projects.

He described it as a “quick in and quick out” approach, with the goal that the houses would be “delivered in about six months.”

A second option being considered is for AMCs to form consortiums with new developers or third-party construction groups to take over and rebuild the projects, eventually ousting the current developers. But such deals will be thorny and can take two to three years.

“In general, they face their own challenges,” said Yin of Moody’s about the bad banks. “With a capital base cap and ongoing pressure on property qualities, it is not very realistic for them to invest much in the real estate sector, and as commercially oriented entities, they do not have a strong motivation to support distressed property projects in lower cities.”

‘Financial monsters’: China’s bad banks complicate property crisis Source link ‘Financial monsters’: China’s bad banks complicate property crisis

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