Distressed-Debt Investors Prepare to Snap Up Chinese Loans

Tuesday, 12 Feb 2013 08:01 AM

By Dan Weil

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Vulture investors are getting set to snap up foreign prey — Chinese bank loans that have gone bad.

Distressed-debt firms are starting to raise money from investors, thinking that Chinese banks will soon start selling their bad loans, as they are under pressure to improve their balance sheets, The Wall Street Journal reports.

Shoreline Capital Management, a veteran investor in troubled Chinese debt, brought in more than $300 million for a new fund at the end of last year.

Video:
Economist Predicts 'Unthinkable' for 2013

And hedge fund manager DAC Management, another long-time player in bad Chinese loans, seeks $300 million for a new fund.

“We believe that non-performing loans within the banking and larger financial system are rising in absolute levels already,” David Madden, a member of DAC’s investment committee, tells the Journal.

“The key factors will be when and how the government decides to instruct the banking system to dispose of them.”

Distressed-debt investing is particularly tricky in China, because bankruptcy law gives creditors little power to close a company. The creditors can exchange their loans for an equity stake or negotiate with the company to pay back at least some of the loan.

While China's banking regulator says non-performing loans account for less than 1 percent of total loans in the banking system, Standard & Poor's says that non-performing loans accounted for 3 percent of total loans at the country's top 50 banks as of the end of June.

However, banks are required to not classify loan payments for local government development projects that are past due as non-performing.

The opportunity for distressed-debt investing may grow for a while. New lending by Chinese banks more than doubled in January from December.

Total social financing, a broad measure of liquidity in the economy, surged 56 percent in January, to $407 million, according to Reuters. New lending by China's banks in January beat expectations at $172 billion, more than double the new lending in December.

“These were very strong numbers, particularly total social financing,” Sun Junwei, an economist at HSBC in Beijing, told Reuters. “This means to me that beyond the rebound in bank lending, there is strong demand for credit in the economy.”

Video: Economist Predicts 'Unthinkable' for 2013

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