How Cinda squares China's debt triangles

[BEIJING] China Cinda has spotted a clever arbitrage. The Chinese "bad bank", which is revving up for a Hong Kong initial public offering (IPO), has recently been doing brisk business by borrowing cheaply from other banks and using those funds to buy up companies' short-term loans to each other. In doing so, it has found a way to square China's dreaded "debt triangles".

Cinda was originally set up to take on bad loans racked up by China Construction Bank. In recent years, however, it has made an increasing amount of its money by restructuring inter-company debt. It's the only one of China's four bad banks which is allowed to buy debt from non-financial companies. These kinds of assets have grown from nothing three years ago to the majority of its distressed debt holdings at the end of June.

Here's how it works: First, Cinda borrows from a bank, typically for around 5-6 per cent, according to people familiar with the situation. It then finds a company with a customer which can't pay its trade bills - say, a cement maker that is owed cash by a real estate developer. Cinda buys that receivable for a small discount to its face value. The developer puts up collateral or secures a third-party guarantee, and its debt to the cement maker becomes a loan from Cinda.