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Chinas growing worries

China is in the midst of “the greatest bubble in history,”
March 17 (Bloomberg) –The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.”
Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of an overheating and potential crash in China’s economy following a rally in stocks and property prices. The government has raised lenders’ reserve requirements twice this year to cool an economy that grew at the fastest pace since 2007 in the fourth quarter.

Leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance- sheet debt through regional governments and the country’s human rights record are concerns, said Rickards, who worked for LTCM between 1994 and 1999, helping negotiate a $3.6 billion rescue after the hedge fund lost $4 billion in a few weeks in 1998.

“Take Russia and China together, neither of them is really deserving any investment” except for short-term speculation, Rickards said. India and Brazil are two of the “real economies” among the developing countries, he said.

U.S. Treasuries
Rickards also disputed an argument that China could hold U.S. policies hostage through its U.S. Treasury securities holdings. The Asian nation remained the largest overseas owner of the debt after trimming its holdings by $5.8 billion in January to $889 billion, according to Treasury Department data released March 15.

China would suffer massive losses if the debt was dumped, reducing the funds available in the U.S. securities market and forcing the prices lower, he said. The U.S. president also has the authority, rarely used, to freeze such positions, he said.
Harvard’s Rogoff said Feb. 23 that a debt-fueled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates Ltd., predicted a slump after excessive property investments.
To contact the reporter on this story: Bei Hu in Hong Kong at

March 18 (Bloomberg) — Chinese companies owned by the central government should speed up plans to pull out of property development if it doesn’t form part of their main business, their watchdog said today amid complaints that private real- estate groups are being squeezed out of the market.

PEs preferring China, India for investments in 2010
The survey noted that distressed private equity and small to mid-market buyout funds continue to attract a significant degree of investor interest, with 35 per cent and 36 per cent of respondents citing these as areas of the market that present the best current opportunities respectively.
Economics Inside China bubbling, NPL rising and local government fiscal insolvency are clearly increasing. Though still under debate, macro tightening (monetary policy and property) has begun
China’s 8,000 Credit Risks
Beijing’s stimulus has spawned thousands of special government investment funds holding billions of dollars in off-balance-sheet debt.

As the world struggles to recover from the most severe economic slowdown in a generation, China seemingly has accomplished a miracle. Growth registered at almost 9% last year, yet the government debt-to-GDP ratio still stood around a modest 20% as of December 31. Has China enjoyed the proverbial free lunch?

Far from it: The Chinese government has financed much of an enormous stimulus package through thousands of investment entities created by local governments. If Beijing doesn’t soon recognize this problem and put a stop to it, banks in China, which have provided the bulk of the funding, may soon face …

Source: SinoRock, 18.03.2010

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China to lead Asian distressed debt opportunity in 2010

Domestic bank credit acts in a similarly pro-cyclical way to foreign debt. When growth is booming, credit growth hides bad loans in favorable nonperforming loan ratios because assets are growing so fast – leading to a booming economy.
The problems show up if a macro shock of some sort intervenes. In the case of China, the shock will be a combination of higher inflation and interest rates. As growth slows, NPLs appear, banks pull back on loan expansion, and growth slows even more, creating a new wave of NPLs. Superficially “safe” NPL ratios suddenly reverse dramatically and risk sinking the whole macro ship.
In Shanghai, outstanding loans to the real estate industry accounts for 27 percent of the total outstanding loans, according to Yan Qingmin, head of Shanghai Branch of China Banking Regulatory Commission (CBRC).
“The non-performing loan (NPL) ratio in Shanghai’s commercial housing development loans kept rising in 2009,” Yan warned.

Source: CHINDA, 04.02.2010

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Vietnam hikes interest rates and devalues currency

The central bank raises interest rates to 8% and devalues its currency – moves needed to keep inflation in check and growth on target.

Vietnam is first out of the gate in a race no one wants to be in. It is the first nation in Asia to raise interest rates in an effort to put a stop to rising inflation.

The State Bank of Vietnam will increase its benchmark interest rate to 8% from 7% as of December 1. This is the first increase since January, as for most of the year the government has been focused on achieving its 5% economic growth target. And indeed, while analysts said the hike was needed it was also a surprise — the central bank had earlier announced that the basic interest rate would be kept stabilised at least until the end of the year.

“The move came as a surprise, well sort of. We did expect interest rates to increase, but expectations were for early next year. The fact that inflation came in today at 4.4% year-on-year against 3.0% year-on-year last month, and that the currency kept weakening in the black market (not to mention the surging price of gold internationally)… probably prompted earlier action than what we believe authorities would have liked,” noted Ho Chi Minh-based analysts at VinaSecurities in a research report issued last night.

The State Bank of Vietnam also reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, in its third devaluation of the currency in two years. The central bank will also narrow the trading band of the dollar against the dong to 3% from 5%.

This is an effort not only to bring confidence to the currency, but also to correct the difference versus where the dong is trading on the black market, which has been at about 19,700 per US dollar in recent weeks. The governor of the State Bank of Vietnam, Nguyen Van Giau, acknowledged to Vietnamese press on Wednesday that foreign currency is now overly hot and so the government had to intervene.

Investors were spooked by the moves, with the Ho Chi Minh City Stock Exchange’s VN Index falling 4.5% to a three-month low of 503.41, the biggest slide since April 20. But most analysts praised the government’s efforts as prudent.

At 4.4%, consumer price inflation is at its highest since May and more than double the multi-year low of 2% in August. The food part of the basket registered 3.5% inflation, up from 2.5% in October. Housing inflation rose to 8.4% from 2.4%, while transport/communication inflation went from -4.6% to 2.2%. Inflation isn’t a worry — it has arrived.

Also consider that total outstanding loans are currently up 34% versus this time last year, which means the nation is grappling with a rising credit problem. Non-performing loans, of course, have long been a concern.

“In summary, inflation is heading higher which, together with the recent and alarming deterioration in the trade deficit and associated downward pressure on the currency, has finally triggered a policy response from the authorities. The response is also most unlikely to be the last,” wrote Robert Prior-Wandesforde, senior Asian economist for HSBC, in a research note yesterday.

Other moves bandied about by specialists include the Ministry of Finance raising import tariffs and the Ministry of Industry and Trade taking measures to limit imports.

While Vietnam’s currency issue is unique, the inflation issue is potentially not. China, South Korea and Taiwan will no doubt have to start raising rates next year as their stimulus efforts to spur growth may also lead to inflation.

Source:, 26.11.2009

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Fears of China property bubble

A large bubble is forming in China’s property market as a result of Beijing’s credit-driven stimulus programme, one of the country’s most prominent real estate developers warned.

Zhang Xin, chief executive of Soho China, one of the country’s most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country’s long-term growth prospects.

“Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,” Ms Zhang said. “The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried.”

Ms Zhang’s assessment was echoed by Fan Gang, a member of the central bank’s monetary policy committee, who warned on Wednesday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

Urban property prices in 70 big and medium-sized Chinese cities rose 3.9 per cent in October from a year earlier, accelerating from September’s 2.8 per cent rise, according to government figures.

Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements.

Investment in real estate development, a key driver of economic growth, rose 18.9 per cent in the first 10 months of the year on a year earlier, a marked acceleration from 17.7 per cent growth in January-September.

Ms Zhang said the current speculation should be a serious warning for the industry and the general economy.

“In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers,” she said.

“If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn’t be so optimistic.”

Source: FT, 18.11.2009 Jamil Anderlini in Beijing

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Asia:NPLs and SMEs to provide distressed opportunities

Distressed specialists define their terminology and give their take on the market at the second AsianInvestor/FinanceAsia Distressed and Troubled Asset Investing Summit, held in Tokyo.

“What exactly is distress?” reflected AsianInvestor editor Jame DiBiasio at a panel he moderated on Monday at the Tokyo Distressed and Troubled Asset Investing Summit. “Is it a good asset from a distressed seller, or an asset itself that is in bad shape?”

The panel of distressed experts plumped for the former — they want good assets that are being flogged off by an imperilled owner.

“We prefer something that requires re-engineering, assuming that there is some enterprise value left,” said Steve Moyer, a portfolio manager at Pimco. “Banks couldn’t afford to take the losses on clearing portfolios of loans until they rebuild capital. That accomplished, they can begin the process.”

Edwin Wong, a former distressed-investing managing director at Lehman Brothers, and regarded by some in those halcyon days as the finest exponent of distressed investing practice in the hemisphere, recently started his own fund management company, SSG Capital Management.

“Unlike the Asian crisis of the late 1990s, in which all sizes of companies went bankrupt, we’re not seeing it this time around so much with the big companies,” he said. “However, private companies and smaller corporates have built up a lot of leverage, and that’s where we see the main opportunity in China, India and Indonesia.”

In answer to the old conundrum ‘what is the most famous thing that Belgium has ever produced?’, perhaps Michel Lowy will be a contender, if his new firm SC Lowy succeeds.

Lowy says distressed investors have been sharpening their pencils for the past 18 months, expecting lots of deals, only to be disappointed by the available opportunities. He hopes that will change as commercial banks finally bite the bullet and sell off non-performing portfolios.

He also perceives differences geographically in the structure of opportunities on offer. “In North Asia and other sophisticated Asian economies, there is a weighting towards public companies,” Lowy says. “Elsewhere in Asia, there are more family-owned companies. The latter are often in places where the creditor has more limited rights. It’s going to be harder to gain control of a company there by converting debt to equity.”

Source:, 18.11.2009

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Distressed Market: Cinda Tries a New Trail on Bad Debt Trek

One of China’s major distressed asset managers, Cinda, appears to be ready for reform. But questions – and bad debt – linger.

The news came late, but at least it came. Ministry of Finance sources recently told Caijing that Cinda Asset Management had been approved by the State Council for a pilot project aimed at reforming its business model.

It was a huge step for Cinda, which was founded in 1999 as a state-owned financial asset management company (AMC) for disposing of distressed assets on behalf of the government.

Now a decade old, Cinda plans to continue with its original mission. But the latest approval gives the firm a green light to draft a restructuring plan. Technical details would be reviewed by the State Council, China’s cabinet.

Meanwhile, authorities have started eyeing incentive policies aimed at encouraging Cinda’s evolution as a market-driven financial firm. One potential incentive would let Cinda acquire all debt-equity conversions from China’s three, other major AMCs.

Through another incentive move, it’s also likely that a new company will be created to dispose of about 200 billion yuan in NPLs on behalf of Cinda. And the possibility of inviting strategic investors to join the firm for share reform — and perhaps an IPO – has not been ruled out.

During an October 17 interview with the media including Caijing, China Construction Bank Chairman Guo Shuqing showed an interest in investing in Cinda.

“The hardest thing is evaluation,” Guo said. But on a positive note he added, “It will be a purely a business activity.”

Caijing learned that a final audit report and evaluation paper for the firm will be released around the end of the year which could give further impetus to a new direction for Cinda.

Back in 1999, the government created AMCs — including Cinda, Huarong, China Orient and Great Wall — and gave them 10 years to settle accounts on a combined 1.4 trillion yuan in non-performing assets that had been held by state-owned banks.

They initially obtained a combined 604 billion yuan from the central bank to help with refinancing bad assets, then issued 811 billion yuan in 10-year bonds at a rate of 2.25 percent to China Development Bank as well as four, state-owned banks – CCB, Industrial and Commercial Bank of China (ICBC), Bank of China and Agricultural Bank of China.

However, now 10 years later, plenty of work remains. The asset managers face tough decisions in dealing with a lingering mountain of bad loans.

State-owned banks that underwent share reform and restructuring in 2004 used AMCs to dispose of a second pile of bad assets totaling 942 billion yuan. Cinda received 405 billion yuan, Great Wall’s share was 263 billion yuan, Orient took over 250 billion yuan, and Huarong got the smallest chunk worth about 23 billion yuan.

Cinda turned out to be a better performer than the other state-owned asset managers for handling distressed assets. Nevertheless, the firm used almost all its earnings to pay interest on the 10-year bonds.

In September, 10-year bonds totaling 247 billion yuan that CCB issued to Cinda matured. But the bank announced a hold extension of another 10 years for the bonds, as requested by the Ministry of Finance, at a 2.25 percent annual interest rate while the ministry continued to help repay the principal and interest.

Cinda had sought to restructure for years. An obvious hurdle, however, was handling interest payments on bonds and refinancing bad debt assets acquired from state-owned banks. AMCs paid 31.5 billion yuan a year in interest on the bonds, leaving little to supplement their capital base.

Caijing has learned that the finance ministry may grant some preferential policies to Cinda. One would involve relevant debt-to-equity conversion assets from the other three AMCs, which would be allocated to Cinda. These would be comprised of NPLs from state banks and distressed assets from SOEs.

Cinda would have to employ capital market strategies to increase the value of these debt-to-equity assets. That would pave the way for Cinda’s emergence as a main platform for settling these types of assets.

Yet many issues are still unclear. At what price would Cinda acquire these debt-to-equity assets – at a price based on book value or market value? And how might the firm arrange personnel for working with SOEs on these assets? Unless the scheme is carefully thought out, Cinda could end up with no benefits.

Meanwhile, it’s unclear whether the other AMCs will survive separately or combine into a single entity. That decision could come from the State Council, which so far has not indicated any firm direction for transforming AMCs.

One plan being discussed by all parties is that quality assets may be injected into a new company, which in turn could seek to launch an IPO. The 200 billion yuan in non-performing assets would remain the parent, Cinda, while profits generated by the newly listed company could hopefully absorb Cinda’s financial burden gradually.

Meanwhile, AMCs have been busy obtaining a variety of licenses allowing them to offer financial services including securities, financial leasing and trusts. However, only a fraction of these businesses would be actual extensions of distressed asset settlements, the firms’ main business.
Ho Jianhang, vice president of Cinda, told Caijing that the firm “will be consistent with handling non-performing assets settlements and financial firm liquidations. This is Cinda’s core competitiveness.”

China’s non-performing asset market has long been embedded in institutional barriers. When they were established, AMCs were given multiple missions. But these multi-dimensional goals resulted in conflicts that put AMC operations in tough situations.

For example, the task of settling the bad debts of state-owned enterprises and non-performing assets held by state-owned banks is extremely difficult in the context of China’s lack of a social security system and legal shortcomings. AMCs trying to do their job can hardly follow market strategies, as they were told.

In April 2008, the Supreme People’s Court released a new regulation in the form of “conference notes” regarding the transfer of non-performing debt from financial institutions. SOEs and local governments were granted priority in acquiring these NPLs.

The court’s decision may lead to replacing AMCs with SOEs for settling distressed assets. And this means Cinda still faces immense uncertainty while striving for transformation into a market-driven asset manager.

Source: Caijing 06.11.2009 by Zhang  Yuzhe and intern reporter Jiang Zhinan contributed to this article

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SinoRock new star in China’s bank related assets/debts market

China’s NPL (Non-Performinb Loan) market is getting bigger, but the business model is changing to favore services-oriented local manager who have a large, local, sustainable and scalable operation throughout China.  Sino-Rock Investment Management Co Ltd based in HK brings a new dimension to NPL and Distressed Funds for Private Equity and Investors, with indepth knowhow, experience and understanding relations in China and the markets.  With the backing of its major shareholder Cinda (China’s largest AMC of NPLs), SinoRock is on the way to become the new star manager in China’s bank related assets/debts.

Foreign managers are losing NPL legal battles because their legal-battle oriented strategy is not working due to new policies and local cultures.  If NPL investment could be done by fighting legal battles, everyone could hire lawyers to fight legal battles to make profits.  That’s not the case  in China.

Source: SinoRock, October 2009

Additional News on China’s growing bank related assets/debts

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China: Handling Bad Loans Badly

Beijing takes a lot of steps backward in cleaning up bank balance sheets.

China’s central bank will soon announce bank loan statistics for September, and there have already been press reports that new lending may be increasing again after a lull in July and August. On top of record new lending in the first half of the year, despite a global slowdown, this is provoking new fears of another nonperforming loan crisis on the horizon. The dilemma for Chinese policy makers will be how to deal with that problem.

This is a critical question because banks are the main intermediary of credit in China and nonperforming loans (NPLs) act as a drag on growth by weighing down bank balance sheets. As of July, the latest month for which figures are available, Chinese bank NPLs totaled approximately 500 billion yuan ($73 billion)—dwarfing those of all other Asian countries except Japan. Shedding these loans allows lenders to rebuild their balance sheets and recapitalize. This exercise is particularly important for Chinese banks, which are growing rapidly and are often capital-constrained—especially when Beijing forces them to lend, as the authorities did earlier this year to help stimulate growth and may well be doing again.

Regulators must first re-examine the structure of the China NPL market. In many parts of the world, banks can sell their NPLs directly to investors at a discount from the face value of the loans. But in China, with few exceptions, banks are only allowed to unload their bad loans to four asset management companies (AMCs) that were established by the government a decade ago as part of a master plan to restructure the nation’s banking system. These companies act as loan wholesalers, selling the NPLs they acquire to third-party investors.

This system has never worked particularly well in China. In establishing selling prices the AMCs focus on securing a price that will cover the cost they paid to the bank for the loans plus a small profit. Investors focus on the amount they’re likely to recover on the loans they buy and the amount of time they think it will take to collect on them. There isn’t often an equilibrium between these two values, so deals rarely get done. Many prominent investors, including Goldman Sachs and Morgan Stanley, quit investing in Chinese NPLs years ago.

Many of those who stayed have had trouble collecting debts through the court system. In late 2007, courts across the nation invoked a self-imposed “three suspension policy”: the suspension of filing of new NPL-related cases, obtaining judgments on existing cases and execution of decisions pending Supreme Court guidance. The move dealt a blow to investors hoping to use the courts to effect payment on their existing loans and has resulted in vastly reduced returns on portfolios as monies remain uncollected.

In March, investors took another major hit when the Supreme Court issued guidance instructing courts not to accept cases against state-owned or state-controlled enterprises if the debtor is in the midst of a reorganization, or against state-owned banks if an investor finds an undisclosed technical fault with a loan that hinders collection after the AMCs have sold the NPLs to the purchaser. The Court also ruled NPL sales can be invalidated for any number of reasons, including if the debtor or guarantor is a government body; if auction formats are not being properly followed, which is often the case; if necessary regulatory approvals haven’t been obtained; or in “any other situations involving national or public interest.” While this guidance served mainly to protect state interests, it was at least clear and investors could use it to price new portfolios.

The real trouble came in July, when the Supreme Court ruled against Swiss bank UBS in a case involving a state-owned enterprise guarantor. The Court’s March guidance clearly stated that when NPLs are transferred by the AMCs to investors, the underlying guarantees remain valid and the guarantor is not required to give its consent for the transfer of the loan. This meant that a valuable piece of land pledged as collateral by a guarantor would remain a prime source of recovery for investors, even if the guarantor didn’t like the fact that someone else now owned the underlying loan.

However, in the UBS decision, the Court cited a 2004 law that said the guarantor must provide consent for the transfer, and further, that the details of the guarantee must be registered with the local State Administration of Foreign Exchange bureau. The Court reasoned that since UBS hadn’t obtained such consent and had not registered the guarantee, the guarantee was invalid. Lawyers and investors believe this ruling is at odds with the law and with established market practice, but there is no sign yet of whether the Court might reconsider any time soon.

The ruling has huge implications. Most NPL investors derive a big source of their recoveries from collecting on guarantees, including collateral pledged by guarantors. If the UBS decision is followed by lower courts as expected, investors will not only have to provide details of guarantees when they register them with the government, but they must also get the consent of the guarantors for the guarantees to be effective. Many guarantees may simply disappear if guarantors won’t willingly consent to a transfer. And there’s the effect on the market of yet another instance of regulatory uncertainty. As one investor recently told me, “every time we think we understand the rules the authorities throw a new roadblock in our path.”

The impact is already being felt. This year to date, I am aware of only two portfolio sales to foreign investors by the AMCs: one to Shoreline Capital, and a 3.2 billion yuan portfolio sold by China Orient to KAMCO, which has yet to close. None of the major China NPL investors over the past few years—including Cargill, Distressed Assets Consulting, Avenue Capital, G.E. Capital, Bank of America, Société Générale and ING—appear to have any appetite for deals until the guarantee issue becomes clearer and the AMCs lower their asking prices.

Meanwhile, China’s pile of NPLs is growing, saddling banks with bad debts. Foreign investors can help solve this problem, if only Beijing will let them.

Mr. Osborn is a partner at PricewaterhouseCoopers Hong Kong/China specializing in debt restructurings and NPLs.

Source: WSJ 04.10.2009

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