[BEIJING] China's banking regulator has tightened up its scrutiny of the country's distressed asset managers, in a bid to crack down on improper bad debt transactions with commercial banks, an internal document reviewed by Reuters shows.
China's asset management companies (AMCs) are prohibited from signing with banks any private agreements, including implicit repurchase guarantees, which would distort the transaction structure or change risk-bearing party of non-performing loans (NPLs), the China Banking Regulatory Commission (CBRC) said in the document.
The CBRC also asked its local offices to strengthen its offsite and onsite inspection of bad debt companies, taking regulatory measures to address "illegal conduct" and holding related personnel responsible, the document said.
The banking regulator's notice, which is dated March 17, is intended to address "in-the-closet" credit risks as some lenders temporarily conceal their real NPL levels by making repurchase agreements privately with AMCs to warehouse their bad lending.
China's banking sector faces its greatest challenge since the global financial crisis, with NPLs hitting a 10-year-high of 1.27 trillion yuan (US$194.9 billion) last year, or 1.67 per cent of all loans outstanding, official data showed. But the real level may be much higher, analysts warned.
While the bilateral repurchase agreements give banks the appearance of cleaning-up their books, the credit risk of the soured loans is not transferred, explained a local banker working at a mid-tier commercial lender. "The NPLs of some banks are so bad that AMCs just don't want to buy them," the banker told Reuters. "But if banks agree to repurchase them later, AMCs may be willing to collaborate." The document, if strictly implemented, will shut the door for such practice, a local AMC executive told Reuters.
The domestic 21st Century Business Herald reported on the document earlier. The CBRC did not immediately respond to a fax from Reuters seeking comment.
China established its Big Four AMCs, led by China Huarong Asset Management Co and China Cinda Asset Management Co, in 1999 to help digest bad loans from the country's four largest state banks, which were facing an insolvency crisis. They have since taken on more than 4 trillion yuan in bad loans.
The government also has set up more than a dozen local AMCs over the last two years in provinces such as Zhejiang and Guangdong.
More than 70 per cent of assets of some provincial AMCs come from this type of channel business, along with most of their profits, the banking analysis team of Guotai Junan Securities said in a note to clients on Monday.
The CBRC document did not directly address this practice, but required AMCs "not to provide any channels for banks to avoid regulatory supervision over asset quality," it said.
AMCs are also only authorised to buy non-performing assets from non-financial institutions, the CBRC notice said. They are not allowed to buy fabricated debts or assets, or provide financing for companies or projects in the name of bad debt purchases, the CBRC warned.
AMCs also "must not set up special purpose vehicles to operate in prohibited businesses," the notice said.
The CBRC also stated that AMCs "must not use unreasonable extension, restructuring, internal transfer or roll-over as means to conceal risks," the notice said.