solutions over China’s mounting debts

Krisis Finansil Cina: Perspektif Kebijakan Moneter, Corporate Finance (Analisa Laporan Keuangan), dan Investment Banking (Valuasi Nilai)
oleh : Sando Sasako
Jakarta, 28 Maret 2016

ISBN 978-602-73508-5-4

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Krisis Finansil Cina
 


Daftar Isi

Kata Pengantar iii
Kata Pengantar dalam buku ‘Corporate Financing’ v

Daftar Isi vii
Daftar Tabel x
Daftar Bagan xi

Pendahuluan 1
Masalah Pengukuran 1
Data, Informasi, Fakta 2
Data Mining 4
Pemilahan Data 5
Business Intelligence 7
Analisa Kuantitatif 8
Analisa Data 8
Self-Organising Map 9
Hambatan bagi Efektivitas Analisa Data 11
Confirmatory Data Analysis 11

Analisa Finansil 11
Standar Akuntansi Keuangan (PSAK, GAAP, IFRS) 12
Peran Perusahaan Audit dalam PSAK 12
Analisa Finansil sebagai Alat Ukur Kinerja Keuangan 12
Analisa Fundamental 13

Rasio-rasio Finansil 14
Pertumbuhan 14
Produktivitas 14
Kontribusi terhadap Stakeholder 14
Dividend Policy Ratios 14

Rasio-rasio Aktivitas Usaha 15
Perputaran aset (asset turnover) 15
Perputaran aset rata-rata (asset turnover) 15
Rasio perputaran aset tetap (fixed assets turnover) 15
Perputaran piutang (receivables turnover) 16
Rata-rata periode penagihan (average collection period) 16
Perputaran inventaris (inventory turnover) 16
Periode inventaris (inventory period) 16

Rasio-rasio Likuiditas 17
Rasio lancar (current ratio, CR) 17
Rasio modal kerja (working capital ratio) 18
Rasio cepat (quick ratio, QR) 18
Rasio kas (cash ratio) 18
Pendapatan lancar (current income) 19
Rasio pendapatan bunga (Time Interest Earned, Interest Coverage) 19
Rasio investasi terhadap kebijakan (investment to policy ratio) 19
Rasio utang lancar terhadap inventaris (current debts to inventory ratio) 19

Rasio-rasio Profitabilitas 19
Marjin laba kotor (gross profit margin) 20
Marjin laba bersih (net profit margin) 20
Return on Equity (ROE) 20
Return on Asset (ROA) dan Return on Capital Employed (ROCE) 20
Return on Capital (ROC) dan Return on Invested Capital (ROIC) 21
Return on Investment (ROI) 21
Beban bunga (Interest Coverage, Times Interest Earned) 22
Beban finansil (financial leverage) 22
Efisiensi beban finansil (efficiency of financial leverage) 22

Rasio-rasio Struktur Modal 23
Rasio utang terhadap modal (debt to equity ratio) 23
Rasio kapitalisasi (capitalisation ratio) 24
Tingkat pertumbuhan ekuitas (equity growth rate) 24
Beban finansil (financial leverage) 24
Rasio utang (debt ratio) 24
Rasio modal saham terhadap aset tetap bersih 24
Rasio utang lancar terhadap modal saham (Current Debts to Net Worth Ratio) 24
Rasio kewajiban total terhadap modal saham (Total Liabilities to Net Worth Ratio) 25
Rasio aset tetap terhadap modal saham (Fixed Assets to Net Worth Ratio) 25

Rasio-rasio Kecukupan Modal 25

Solvabilitas 25
Solvency ratio (SR) 26
Rasio utang terhadap aset (Debt to Asset Ratio, DAR) 26
Rasio utang terhadap modal (Debt to Equity Ratio, DER) 26
Kemampuan laba menutup biaya tetap (Fixed Charge Coverage). 26
Rasio pinjaman terhadap aset (Loan to Asset Ratio, LAR) 27
Rasio pinjaman terhadap simpanan (Loan to Deposit Ratio, LDR) 27

Risks vs Rewards 27
Risiko Mencari Keuntungan 28
Efek Domino Risiko 29
Rent-Seeking Behaviours 30

When the Deal Slips Away 32
Indikator Kesulitan Finansil 34
Indeks Kerentanan 36
Stress Test 38
Indeks Stabilitas Sistem Keuangan 40
Financial Stability Index 43
Indeks Kesehatan Finansil ala IMF 44
Laporan Stabilitas Finansil Global ala IMF 48
Operasi Moneter 48
Inflasi Terencana sebagai Prasyarat Kestabilan Finansil 50

Dinamika Pasar Finansil 52
Dinamika Aset Finansil 53
Kerapuhan Sistem Finansil 54

Krisis Finansil 55
Menelikung Krisis Finansil 56
Kasus LTCM 57
Krisis Subprime Mortgage 60
Kasus Lehman Brothers 63
Krisis Eurozone 64
Spiral Kekacauan Krisis Eurozone 65
Debt Exposures of PIGS 66
AS 68
Inggris 69
Jerman 69
Perancis 70
Jepang 71
Yunani 72
Irlandia 73
Italia 74
Portugis 74
Spanyol 75
Some PIGS are More PIGS 76
Krisis Finansil Cina 77
Kenapa Cina menjadi begitu penting? 78
Bermain dengan nilai tukar 81
Pasar CNH 82
Dominansi nilai tukar CNH terhadap CNY 87
Qualified Foreign Institutional Investor 90
Renminbi Qualified Foreign Institutional Investor 90
Qualified Domestic Institutional Investor 91
Qualified Domestic Individual Investor 91
Shanghai-Hong Kong Stock Connect 91
Pilot Free Trade Zones 91
Mainland-Hong Kong Mutual Recognition of Funds 92
Kenapa pasar finansil Cina bisa crash? 92
Ketika gelembung finansil Cina mulai pecah 93
Pelonggaran likuiditas sebagai solusi ancaman resesi 94
Aksi pemadam kebakaran ala pemerintah Cina 96
Permasalahan fundamental ekonomi Cina 99
Beban utang Cina 101
Kebijakan dan otoritas moneter Cina 102
Pasar obligasi Cina 103
Obligasi Panda 105
Obligasi dim sum 106
Daftar emisi obligasi dim sum 108
Aksi pemerintah Cina terhadap masalah tunggakan utang 110

Policy and Politicisation 113
Primary Dealer 113
Solusi Teoritis, Bisa dan Benarkah? 116
Kebijakan Too Big To Fail 117
Cashless Solution 118
Minyak sebagai Mata Uang dan Sumber Kemakmuran 120
Negative Interest Rates Policy 125

Kas 129

Pengadaan Aset 130
Asset Investment 130
Asset Financing 131
Capital Expenditures 132
Menghitung Biaya Modal 134
Biaya utang 134
Biaya saham preferensi 134
Biaya laba ditahan 134
Biaya ekuitas eksternal 135
WACC 135
Biaya modal marjinal 136
Break point 136

Off-Balance Sheet Financing 136
Perubahan Portofolio The Fed 136
OBS sebagai Produk Inovasi Menyembunyikan Risiko Finansil 137
MBS sebagai Produk Rekayasa Finansil Penyebab Krisis 2008 139
Bencana Prilaku Berisiko Berlebihan 141
Bertaruh pada Aset Fiktif 142
Akuntansi OBS 144
Fleksibilitas Pasal Karet 145
Penyesuaian Pasal Karet 146
Memanfaatkan Celah Hukum 147

Equity Financing 148

Debt Financing 149

Struktur Modal 152
Teori Struktur Modal 153
Teori Pensinyalan 154
Struktur Modal dalam Praktek dan Realitas 155
Menghitung Tingkat Optimal Struktur Modal 155
Besar Beban Operasi 156
Analisis EBIT/EPS terhadap Efek Beban Finansil 157
Besar Beban Finansil 157
Besar Beban Total 158
Efek Struktur Modal terhadap Harga Saham dan Biaya Modal 159
Likuiditas dan Arus Kas 159

Struktur Finansil 160
Ukuran Optimal Beban/Struktur Finansil 161

Valuasi Nilai 162
Corporate Financing vs Investment Banking 163
Pentingnya Valuasi Nilai 164
Valuasi Usaha 164
Komponen Pendapatan 166
Komponen Neraca 167
Komponen Arus Kas 167

Time Value of Money 168
Future Value 169
Future Value Interest Factor for i & n 169
Present Value 169
Present Value Interest Factor for i & n 169
Future Value untuk Anuitas Biasa 169
Future Value Interest Factor untuk Anuitas Biasa 170
Future Value untuk Anuitas Awal 170
Present Value untuk Anuitas Biasa 170
Present Value Interest Factor untuk Anuitas Biasa 170
Present Value untuk Anuitas Awal 170
Present Value untuk Perpetuities 171
Present Value untuk Aliran Arus Kas Variabel 171
Future Value untuk Aliran Arus Kas Variabel 171
Future Value untuk Periode Semesteran atau lainnya 171
Amortisasi Pinjaman 172

Referensi 173
Web 173
e-book 177
Buku 180

Daftar Lampiran

Lampiran – Variabel yang umum dipakai sebagai ukuran stabilitas finansil 181
Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (AT-ES) 181
Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (GB-TR, ECB, IMF) 182
Variabel yang umum dipakai sebagai ukuran stabilitas finansil 183

Lampiran – Ukuran dan skenario dalam laporan stabilitas finansil global, Okt. 2015 185
Ukuran likuiditas 185
Ukuran utang korporasi di pasar emerging 187
Asumsi dalam skenario gangguan pada pasar aset global 189
Mekanisme transmisi kejutan dalam skenario gangguan pada pasar aset global 190
Asumsi dalam skenario normalisasi yang berhasil 191
Mekanisme transmisi kejutan dalam skenario normalisasi yang berhasil 192

Lampiran – Ukuran Kerentanan Finansil 193
Indikator valuasi risk appetite / aset 193
Indikator ketidakseimbangan non-finansil 194
Indikator kerentanan finansil 195
Indikator Kebijakan Macroprudential 196

Lampiran – Daftar Indikator dalam ISSK Bank Indonesia 197

Lampiran – Profil Cina 199

Lampiran – Jumlah (instrumen) utang Cina menurut emiten, domestik, nasional, internasional, 2015Q2-2015Q4 201

Daftar Tabel

Table 1 – Aktivitas M&A di business intelligence dengan nilai >$100 juta, 2009-2014q1 7
Table 2 – Beberapa indikator kebijakan macroprudential 36
Table 3 – Indikator pengukuran stabilitas sistem keuangan 42
Table 4 – Indikator utama kesehatan finansil ala IMF 45
Table 5 – Indikator tambahan (encouraged) bagi kesehatan finansil ala IMF 45
Table 6 – Indikator parsial dan bobot dalam indeks stabilitas perbankan Republik Ceko 47
Table 7 – Indikator kesehatan finansil ala ECS (Macro-Prudential Indicators) 47
Table 8 – Tiga skenario stabilitas finansil 48
Table 9 – Operasi moneter menurut standing facility 49
Table 10 – Pentingnya likuiditas yang lentur (resilient) 50
Table 11 – Penambahan likuiditas menurut jenis instrumen OPT 50
Table 12 – Penyerapan likuiditas menurut jenis instrumen OPT 50
Table 13 – Nilai ekspor dan impor AS-Cina untuk 5 produk utama, 2014-2015 (US$ juta) 100
Table 14 – Nilai ekspor dan impor AS-Cina untuk produk teknologi tinggi, 2015 (US$ juta) 100
Table 15 – PDB Cina, 2010-2014 dalam milyaran ¥ dan US$ 101
Table 16 – Nilai obligasi pemerintah dan korporasi di Cina, 2002-2015 (US$ milyar) 101
Table 17 – Buletin harga obligasi di pasar uang Hong Kong, 11 Maret 2016 107
Table 18 – Daftar 22 primary dealer di Amerika Serikat, 2014 114
Table 19 – Beberapa veteran primary dealer pilihan Bank Sentral Amerika 114
Table 20 – Daftar 19 primary dealer di Indonesia, 2014-2015 115
Table 21 – Nilai derivatif 25 bank terbesar di AS, Nov. 2015 (US$ milyar) 119
Table 22 – Ringkasan Perlakuan Transaksi Sekuritisasi menurut UK GAAP 145
Table 23 – Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (AT-ES) 181
Table 24 – Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (GB-TR, ECB, IMF) 182
Table 25 – Variabel yang umum dipakai sebagai ukuran stabilitas finansil 184
Table 26 – Ukuran likuiditas 186
Table 27 – Ukuran utang korporasi di pasar emerging 188
Table 28 – Asumsi dalam skenario gangguan pada pasar aset global 189
Table 29 – Mekanisme transmisi kejutan dalam skenario gangguan pada pasar aset global 190
Table 30 – Asumsi dalam skenario normalisasi yang berhasil 191
Table 31 – Mekanisme transmisi kejutan dalam skenario normalisasi yang berhasil 192
Table 32 – Indikator valuasi risk appetite / aset 193
Table 33 – Indikator ketidakseimbangan non-finansil 194
Table 34 – Indikator kerentanan finansil 195
Table 35 – Indikator Kebijakan Macroprudential 196
Table 36 – Daftar indikator pembentuk ISSK 197
Table 37 – Profil Singkat Cina 199
Table 38 – Indikator Ekonomi Cina, 2011-2017 200
Table 39 – Utang Cina menurut emiten, domestik, nasional, internasional, 2015Q2-2015Q4 202

Daftar Bagan

Figure 1 – Diagram alur hierarki DIKW (Data-Information-Knowledge-Wisdom) 3
Figure 2 – Kontinuum pemahaman dalam konteks DIKW 3
Figure 3 – Proses data mining 4
Figure 4 – Hubungan antara Data, Informasi, dan Intelijen 6
Figure 5 – Analisa eksplorasi data 9
Figure 6 – Taksonomi ketidakpastian 27
Figure 7 – Igloo ketidakpastian 28
Figure 8 – PV perusahaan berutang 32
Figure 9 – Skema indeks kerentanan dan komponennya 37
Figure 10 – Siklus pengawasan macroprudential 38
Figure 11 – Prasyarat bagi antisipasi dan pencegahan ketidakstabilan sistem finansil 39
Figure 12 – Hubungan antara stabilitas sistem finansil dan stabilitas moneter 39
Figure 13 – Keterkaitan antar-variabel dalam BAMBI (Banking Model of Bank Indonesia) 41
Figure 14 – Beberapa indikator pembentuk Indeks Stabilitas Sistem Keuangan (ISSK) 42
Figure 15 – Peran Bank Indonesia dalam menciptakan stabilitas moneter 49
Figure 16 – Bentuk interaksi antara BI, pempus, dan pemda dalam mengendalikan inflasi 51
Figure 17 – Perkembangan aktivitas perbankan internasional 52
Figure 18 – Aset Riel dan Aset Fiktif Bank-bank di AS, 1995–2000 58
Figure 19 – Nilai Derivatif dan Modal 25 Bank AS Ternama (US$ milyar) 59
Figure 20 – CDOs direpresentasikan dalam bentuk building blocks, The Big Short, 2015 60
Figure 21 – Pasar rumah di AS, 1989-2006 61
Figure 22 – Pemetaan proses penularan krisis finansil 2008 62
Figure 23 – Pinjaman sektoral dari Bank of England, 1997-2012 63
Figure 24 – Utang-piutang PIGS 67
Figure 25 – Utang AS ke 4 negara adidaya dan PIGS 68
Figure 26 – Utang Inggris ke 4 negara adidaya dan PIGS 69
Figure 27 – Utang Jerman ke 4 negara adidaya dan PIGS 70
Figure 28 – Utang Perancis ke 4 negara adidaya dan PIGS 71
Figure 29 – Utang Jepang ke 4 negara adidaya dan PIGS 71
Figure 30 – Utang Yunani ke 4 negara adidaya dan PIGS 72
Figure 31 – Utang Irlandia ke 4 negara adidaya dan PIGS 73
Figure 32 – Utang Italia ke 4 negara adidaya dan PIGS 74
Figure 33 – Utang Portugis ke 4 negara adidaya dan PIGS 75
Figure 34 – Utang Spanyol ke 4 negara adidaya dan PIGS 76
Figure 35 – Cadangan Devisa Cina, Des. 1999 – Jan. 2016 78
Figure 36 – Tiga Kekuatan Ekonomi Dunia 79
Figure 37 – Nilai perdagangan Cina dengan negara lain (impor + ekspor) 80
Figure 38 – Nilai tukar bilateral yuan terhadap 3 mata uang dunia, USD, ¥, dan €. 81
Figure 39 – Cadangan devisa Cina dan nilai tukar CNY dan CNH 83
Figure 40 – Selisih CNY dengan CNH, Agustus 2010-Januari 2016 83
Figure 41 – Selisih tajam antara CNY dan CNH berdampak pada lonjakan bunga antar-bank di bulan Januari 2016 84
Figure 42 – Intervensi pasar CNH bisa menyesuaikan bunga CNH dengan CNY, 20151110-20160126 85
Figure 43 – Pasar deposit CNH, Maret 2009 – Des. 2015 86
Figure 44 – Distribusi CNH menurut bank sentral (offshore yuan’s swap line), Nov. 2015 88
Figure 45 – Penyelesaian perdagangan dalam CNH, 2009Q3-2015Q4 89
Figure 46 – Pasar deposit CNH menurut negara, 2014 89
Figure 47 – Beberapa alternatif indikator pertumbuhan ekonomi Cina mengacu pada penurunan yang lebih besar (greater slowdown), 2010–2015 95
Figure 48 – Indeks Saham Gabungan Shanghai (SCI), Mei 2015 sampai 5 Februari 2016 97
Figure 49 – Indeks Saham Gabungan Shanghai, 1 Januari 2015 – 8 Maret 2016 98
Figure 50 – Triple policy trilemma 99
Figure 51 – Pasar obligasi Cina, 2003-2014 104
Figure 52 – Aktivitas perdagangan pasar sekunder obligasi Cina, 2000-2014 104
Figure 53 – Pangsa pasar obligasi Cina menurut jenis obligasi, Des. 2014 104
Figure 54 – Daftar emisi obligasi Panda, 20151010-20160121 106
Figure 55 – Emisi obligasi CNY, 2008-2015 111
Figure 56 – Emisi obligasi CNH, 2008-2015 111
Figure 57 – Asset backed securities di Cina, 2005-2014 112
Figure 58 – Peristiwa bersejarah dan harga minyak mentah, 1861-2014 (US$/b) 121
Figure 59 – Harga minyak mentah Brent (US$), 20040102-20160106 123
Figure 60 – Kelebihan pasokan minyak mentah dunia, 2012q3-2015q3 123
Figure 61 – Distribusi ladang produksi minyak shale AS, April 2015 124
Figure 62 – Suku bunga deposito dan pembiayaan ulang ECB, 2008-Maret 2016 127
Figure 63 – Prediksi nilai tengah suku bunga Federal Funds, Des. 2015-2019 127
Figure 64 – Federal funds target rata (%), 1983-2015 128
Figure 65 – Federal funds rate, 1 Juli 1954-18 Feb. 2016 128
Figure 66 – Skema sumber pendanaan perusahaan 130
Figure 67 – Factors adding to reserves and off balance sheet securities lending program 137
Figure 68 – Multiplikasi Penciptaan Aset Fiktif 143
Figure 69 – Klasifikasi struktur aset, struktur finansil, dan struktur kapital 161


Contents
06 20151123 Chinese asset-backed securities rise from the ashes
05 20160229 China Moves to Bolster Lending by Easing Banks’ Reserve Ratio
03 20160305 Red ink rising
02 20160310 For China Banks, Swapping Stock for Debt Is a Stopgap With Pitfalls
04 20160311 0211 Exclusive: China to ease commercial banks’ bad debt burden via equity swaps – sources
01 20160312 China Weighs Letting Banks Sell Bad Debt to Investors

06 20151123 Chinese asset-backed securities rise from the ashes
2016-03-15 10:38 AM
http://www.chinaeconomicreview.com/chinese-asset-backed-securities-rise-ashes
Soaring complexity
Chinese asset-backed securities rise from the ashes
Hudson Lockett (@KangHexin), Monday, November 23, 2015

Ann Rutledge was in Hong Kong when Mao died, got in on the ground floor of economic reforms and helped set up the modern risk system for the then-colony’s futures exchange before starting R&R Consulting, which focuses on asset-backed securities (ABS)-the same financial tools widely blamed for the global financial crisis of 2008.

By now one might expect China’s financial markets to have long since stopped surprising her. When Rutledge applied for a grant with the SWIFT Institute to study China’s asset-backed securities market, she said, “I assumed the Chinese market would look similar to the US market, but with Chinese-flavored assets… but I figured wrong.”

What she discovered instead was a burgeoning sector bisected by dueling regulators and beset by legal vagaries-but one that could potentially do for China what it did for the United States: Free up otherwise inaccessible liquidity to make the country’s debt market far more dynamic, opening new sources of funding for the smaller companies while also diversifying investment opportunities for the country’s banks and other financial institutions. All, ideally, without culminating in a meltdown.

The market for ABS in China has grown more rapidly than ever this year thanks to a new issuance system, and further healthy growth could also help pull a substantial sum out of the country’s notoriously opaque shadow banking sector and put it back on banks’ books. Kingsley Ong, a partner at law firm Eversheds International who was asked in 2007 to help draft China’s asset-backed security laws, said only half-jokingly that potential for securitization in China was “quite unlimited”.

But for now, a lack of industry experience and widespread failure to disclose vital information on the nuts and bolts of the products on offer in this emerging market have raised questions about its ultimate impact on the broader economy. Even Rutledge acknowledged there was a real risk.

“I believe China has no choice but to do ABS, and moreover I think they have some safeguards that we [in the US] don’t have,” she said. “But they also have a very long learning curve, and a lot can happen between now and then.”

Death and resurrection

China’s first real securitization market took shape in April of 2005 when the People’s Bank of China and the China Banking Regulatory Commission established a pilot market and regulations. Those were suspended in 2009 following revelations about the role of American mortgage-backed securities in what was by then a global financial crisis-a move for which few fault Beijing.

“While I am sometimes a critic, I will say I can understand China saying, ‘Hey, we better figure out this product and this market before we allow it to go full bore in ours,'” said Christopher Balding, a professor of economics at Peking University.

Once the dust had settled policymakers looked again to securitization to diversify China’s capital market structure, and in May of 2012 regulators fully lifted a ban on issuance-though they outlawed the structures, known as re-securitizations and synthetics, that were behind the crisis in the US. They also forbade any further issuance of products backed by non-performing loans.

Since the thaw, issuance of ABS in China has shot up dramatically: In 2014 China overtook South Korea to become the largest securitization market in Asia, and this year issuance had passed RMB269 billion (US$42.14 billion) as of the end of October, according to China Central Depository & Clearing and Shanghai Clearing House.

Eddie Hu, a partner at the Shanghai office of consultancy King & Wood Mallesons who has advised banks, auto finance companies and financial firms on asset-backed securitizations, chalked this year’s rapid issuance up to an easing of regulations. Before November of 2014, firms had to get case-by-case approval from the authorities; now they can sell freely once they’ve registered with regulators.

“The administrative process has been simplified, incentivizing those who originate and issue to do more securitization,” Hu said.

Yet for all that growth ABS remains a practical pipsqueak compared to bank lending or the broader bond market in China, with the latter valued at RMB35.89 trillion (about US$4.24 trillion) in 2014, according to Goldman Sachs (pdf). The question of what’s holding mainland securitization back requires a closer look at what exactly it entails.

Beastly complexity

Balding attributed ABS’s relatively minuscule market size in part to two main factors: A preference among Chinese investors for less complex financial products and a lack of understanding of what exactly ABS are. In the case of the latter they are not alone, as the complexity of securitization is among the many attributes that help make the sector seem impenetrable to outsiders-while also making it incredibly versatile.

An asset-backed security essentially takes contractual future cash flows or expected operating cash flows and converts them into immediately fungible funds by borrowing against those flows and the assets that generate them. For example, as has been done with certain expressways in China, the company that owns a toll road can use that road as collateral in order to get financing from investors now based on the income it has yet to make from tolls paid by drivers who will use said road.

To actually come up with the money, the company can set up a financing vehicle that offers interest-bearing securities to investors based on those expected cash flows from future toll payments. Once investor financing is secured, the vehicle will actually buy the toll road from the company-so the company gets money now, and the financial instrument begins directing money from toll payments directly to the investors holding the securities until the promised payouts are paid off in full.

If the cash flows from the toll road dry up, the investors can take the road and sell it off as compensation. And because the company doesn’t actually own the road anymore, it can’t stop the issuer from transferring ownership to those investors.

A financial institution typically helps set up the issuer – known as a special purpose vehicle (SPV) – that issues securities to investors, often in different batches that are classified based on their level of risk, which is tied to priority of repayment. The risk level of each batch is certified by one or more ratings agencies.

The credit rating for such securities can be higher than that of the company from which they originated because the risk being evaluated is that of the cash flows themselves. “So your company might not be triple-A, but you can still issue bonds that are triple-A,” Eversheds’ Ong said. “That is a phenomenal advantage.”

Thus, securitization can enable a company to raise funds more easily than might be otherwise possible through a loan based on its balance sheet. It also creates a new class of investment with risk portioned out to suit the tastes of investors, which can range from more cautious pension funds to less risk-averse private hedge funds.

But Beijing has added another wrinkle to the proceedings by separating ABS into two categories, administered by two different regulators.

Showcase shortcomings

The first, most-favored variety falls under the Credit Assets Securitization Scheme (CASS), trades on China’s interbank market and is regulated by the China Banking Regulatory Commission. Here, assets originate with banks, trust companies, lenders and auto finance firms, securities for which are issued by trust companies on their behalf to be snapped up by institutional investors.

CASS is the bigger and more liquid ABS market: According to the working paper Rutledge authored for the SWIFT Institute, 62% of all 206 Chinese securitizations were CASS, accounting for 82.2% of total principal issuance of RMB605 billion (US$94.52 billion) as of June 25.

Of the 127 CASS deals analyzed in the working paper, nearly three quarters were collateralized loan obligations (CLOs)-securities backed by a pool of debt, typically sourced from small- and medium-sized enterprises. The next-largest cohort, auto loans, stood at just over 10%.

Yet while similar CLO offerings are priced higher than general-purpose corporate bonds in US and UK markets, Balding noted that’s not the case in China.

“What that seems to indicate is that either the companies aren’t selling the [securitized] bonds properly… or the investors don’t believe what the companies are saying they don’t believe that the securitized bond is giving them anything more tangible in return,” he said.

This apparent undervaluation of the interbank market’s most popular ABS offering may lie in the shortage of two key assets: Information and experience. Rutledge said that about 90% of the deals in China’s showcase CASS market lacked vital information demanded by international standards.

“The only deals that I can get what we call servicer data – what we call underlying performance data – on are coming out of deals that foreign manufacturers are doing, specifically the auto manufacturers,” she said.

Disclosures from automakers like Nissan, BMW and Volkswagen is standardized, allowing ABS investors to determine how many loans are delinquent, how many have defaulted and the likelihood of being repaid in full on time.

Indeed, Hu said the performance record of auto loans’ underlying asset pools was “quite good compared with other corporate loans because they’re very diversified.” That’s the kind of performance record that attracts international investors, he said.

For the remaining 90% or so of the CASS market that isn’t backed by auto loans such data isn’t made public, though it is collected by the China Central Depository & Clearing, the official clearing company for the interbank market.

Trust issues

Outside of China’s interbank market ABS growth is being held back by the uncertain legal status of the framework currently available for use by non-financial institutions in securitizing assets.

The question is that of the vehicle created to issue securities to investors on behalf of a company and which takes on ownership of the assets. While financial institutions use special-purpose trusts, which are well-established in PRC law, those aren’t an option outside of the inter-bank market.

Under the current setup, known as the Asset Backed Specific Plan (ABSP), non-financial firms have to use contracts to transfer ownership of assets. The resulting ABS cannot be traded on the interbank market and are regulated by the China Securities Regulatory Commission, but can be offered to retail investors and even listed on the mainland stock exchanges. But regulatory backing for such deals only amounts to administrative rules, which can be overruled by a host of higher regulations.

As laid out in a recent study (pdf) of China’s securitization law published in the Capital Markets Law Journal and co-authored by Ong, such rules “may have different levels of enforcement in different parts of China, and may be subject to policy changes over time, or even competing political interests.”

Ong said the guidelines were of real use and worked under most circumstances. But if a securitization backed by a company’s most precious assets were to default and investors came calling, a judge might have to decide between honoring the contract and following other, higher-level state laws that hold workers’ rights in higher regard.

“Would the judge say that the securitization investors – who are the big boys, the professional investors – should get the money? Or will they say no no no, the money should be returned to the workers so they can feed their families and what have you?” Ong said. “I think under those circumstances it is less clear.”

This fundamental uncertainty helps explain why as of late June principal issuance in the ABSP market had grown only 3.4 times that seen prior to the 2008 market hiatus, while average deal size had fallen to RMB3.87 billion (US$607.7 million), just 56% of its pre-freeze level.

By comparison, ABS trading on China’s interbank market has expanded to colossal proportions: Principal issuance of CASS had grown to RMB497.6 billion (US$78.09 billion), eight times what it was in 2008, while average deal size grew just over 1% to RMB3.29 billion.

Untapped potential

Eddie Hu at King & Wood Mallesons said that the clearer picture for investors of underlying assets and risk pointed to brighter prospects going forward of ABS issued by financial institutions. But even here he was conservative, citing recent cuts by the central bank to China’s benchmark lending rate as easing any pressure mainland banks were under to find more funding.

“I don’t think there will be a leaping increase in issuance numbers or size, but I think the number of issuances and issuance size will increase gradually in the coming years,” Hu said, pointing in particular to local commercial banks at the city level and below as likely to try their hand at ABS.

That is looking more likely in light of recent regulatory easing: In June, Reuters reported that the China Banking Regulatory Commission had granted provincial branches permission to green-light new issuance for cities’ commercial banks for their ABS plans-though big banks apparently still needed issuance approval from the commission’s headquarters in Beijing.

Yet even those approved by the banking regulator remain opaque by the basest standards of international ABS investing, Rutledge said, adding that local knowledge of the routines industry analysts typically use to rate the different batches produced by securitizations was sketchy in China at best.

“People are doing deals and the deals seem to work, but one of the reasons the deals are working is because the high-performing collateral is what’s being securitized,” said Rutledge. That could change.

Moreover, cordoning off financial institutions’ ABS trading to the interbank market also means they ostensibly aren’t helping disperse risk that is concentrated in the banking sector, instead serving largely to help banks ease pressure on their balance sheets.

But Rutledge cautioned against taking for granted that such restrictions were always observed in practice. Without more performance data transparency, she said, it will remain difficult to judge whether cash flows are as healthy as claimed and going where they’re supposed to.

“When people want to see a market grow they’ll say anything, and they’ll turn a blind eye to things that are obviously problematic,” Rutledge said. “You can’t put a fence up and expect it to contain water. Water flows. Money flows.” ?

China Central Depository & Clearing http://www.chinabond.com.cn/Channel/19012917
Shanghai Clearing House http://www.shclearing.com/sjtj/tjrb/
http://www.goldmansachs.com/gsam/glm/insights/market-insights/china-bond-market/china-bond-market.pdf
working paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2665975
reported http://www.reuters.com/article/2015/06/18/china-economy-abs-idUSL3N0Z42WR20150618


05 20160229 China Moves to Bolster Lending by Easing Banks’ Reserve Ratio
2016-03-15 10:31 AM

China Moves to Bolster Lending by Easing Banks’ Reserve Ratio
NEIL GOUGH, FEB. 29, 2016

China is grappling with persistent capital outflows amid expectations that the renminbi could weaken further. Credit Rolex Dela Pena/European Pressphoto Agency

HONG KONG – China said Monday evening that it would free up banks in the country to lend more, as the government tries to shore up slowing economic growth.

The country’s top financial policy makers are trying to reassure the rest of the world that their management of the economy remains on track, and that they still have many tools at their disposal to avoid an even sharper slowdown in growth. China is also grappling with persistent capital outflows because of expectations that the currency, the renminbi, could weaken further.

The country’s top leaders are to convene in Beijing on Thursday for the first of the so-called two meetings, the annual gatherings of the full membership of the national legislature and a sprawling committee of political advisers.

Graphic – Why China Is Rattling the World
China’s economy is faltering, prompting concerns that are now shaking global stock markets.
http://www.nytimes.com/interactive/2015/08/26/business/-why-china-is-rattling-the-world-maps-charts.html

Effective Tuesday, China’s central bank said, the amount of cash that commercial banks are required to set aside as reserves will be reduced. Lowering the reserve requirement ratio essentially gives the state-controlled banking system more money to lend.

The move is the latest example of the fine line that China’s policy makers are trying to walk as they look to bolster the economy, the world’s second-largest after the United States.

A major lending binge in recent years has left China with too many steel and cement factories and has saddled many state-owned companies with too much debt. At the same time, China’s leaders are trying to channel lending to areas long underserved by state-owned banks, such as small and midsize businesses, that the leaders see as essential to nurturing growth.

Photo
The headquarters of the People’s Bank of China in Beijing. The country is battling a persistent slowing in its economy. Credit Kim Kyung Hoon/Reuters

This is the fifth time that the central bank, the People’s Bank of China, has cut the reserve requirement ratio since the start of last year. The move on Monday could release around 630 billion renminbi, or about $96 billion, in additional liquidity to China’s banking system, according to estimates from Bank of America Merrill Lynch.

For the biggest banks, the ratio of total deposits that must be kept in reserve was reduced to 17 percent, from 17.5 percent.

By lowering the reserve requirement ratio, or R.R.R., by half a percentage point, the central bank is partly seeking to offset its own actions in support of the currency. The central bank has been selling dollars and buying renminbi to prop up the value of its currency, which has been under pressure.

Graphic – China’s Exodus of Capital
As the economy stumbles, individuals and companies are pulling money out of China en masse, leaving the government scrambling to limit the outflows.
http://www.nytimes.com/interactive/2016/02/13/business/dealbook/china-exodus-flows-currency.html

But that has siphoned liquidity out of the system. In response, the central bank has been injecting billions of renminbi into the country’s financial system. The reserve requirement ratio cut serves the same purpose, essentially representing a lending quota.

In a news release on Monday, China’s central bank said the reduction was intended “to maintain adequate and reasonable liquidity in the financial system and guide the steady moderate growth of money and credit.”

In recent months, the People’s Bank of China has slowly been switching its focus away from changing reserve requirements. Instead, it has been putting greater emphasis on interest rates as a way to control liquidity. Still, the pressure on the renminbi to weaken remains such that the central bank will probably need to dig deeper into its monetary policy toolbox.

Although the central bank has been moving toward more market-driven interest rates, traditional measures like the reserve requirement ratio cut still create across-the-board stimulus, Mark Williams, the chief China economist at Capital Economics, wrote Monday evening in a research note.

“The move underscores a message that officials have repeated in recent days, including at the G-20 meeting: Policy makers still have room to support the economy,” he said.

Follow Neil Gough on Twitter @n_gough.

A version of this article appears in print on March 1, 2016, on page B4 of the New York edition with the headline: China Moves to Encourage Banks to Do More Lending


03 20160305 Red ink rising
2016-03-15 10:27 AM
http://www.economist.com/news/finance-and-economics/21693963-china-cannot-escape-economic-reckoning-debt-binge-brings-red-ink-rising
Free exchange
Red ink rising
Mar 5th 2016 | From the print edition

China cannot escape the economic reckoning that a debt binge brings

HOW worrying are China’s debts? They are certainly enormous. At the end of 2015 the country’s total debt reached about 240% of GDP. Private debt, at 200% of GDP, is only slightly lower than it was in Japan at the onset of its lost decades, in 1991, and well above the level in America on the eve of the financial crisis of 2007-08 (see chart). Sooner or later China will have to reduce this pile of debt. History suggests that the process of deleveraging will be painful, and not just for the Chinese.

Explosive growth in Chinese debt is a relatively recent phenomenon. Most of it has accumulated since 2008, when the government began pumping credit through the economy to keep it growing as the rest of the world slumped. Chinese companies are responsible for most of the borrowing. The biggest debtors are large state-owned enterprises (SOEs), which responded eagerly to the government’s nudge to spend.

In this section
The well runs dry
Living off the people
Toe in the water
Cash talk
Capital in fetters
The new mediocre
Rotten advice
Red ink rising

State sponsors of error

The borrowing binge is still in full swing. In January banks extended $385 billion (3.5% of GDP) in new loans. On February 29th the People’s Bank of China spurred them on, reducing the amount of cash banks must keep in reserve and so freeing another $100 billion for new lending. Signs of stress are multiplying. The value of non-performing loans in China rose from 1.2% of GDP in December 2014 to 1.9% a year later. Many SOEs do not seem to be earning enough to service their debts; instead, they are making up the difference by borrowing yet more. At some point they will have to tighten their belts and start paying down their debts, or banks will have to write them off at a loss-with grim consequences for growth in either case.

An IMF working paper published last year identified credit growth as “the single best predictor of financial instability”. Yet China is not obviously vulnerable to the two most common types of financial crisis. The first is the external sort, like Asia’s in 1997-98. In such cases, foreign lending sparks a boom that eventually fizzles, prompting loans to dry up. Firms, unable to roll over their debts, must cut spending to save money. As consumption and investment slump, net exports rise, helping bring in the money needed to repay foreign creditors. China does not fit this mould, however. More than 95% of its debt is domestic. Capital controls, huge foreign-exchange reserves and a current-account surplus help defend it from capital flight.

The other common form of crisis is a domestic balance-sheet recession, like the ones that battered Japan in the early 1990s and America in 2008. In both cases, dud loans swamped the banking system. Central banks then struggled to keep demand growing while firms and households paid down their debts.

China’s banks are certainly at risk from a rash of defaults. Markets now price the big lenders at a discount of about 30% on their book value. Yet whereas America’s Congress agreed to recapitalise banks only in the face of imminent collapse, the Chinese authorities will surely be more generous. The central government’s relatively low level of debt, at just over 40% of GDP, means it has plenty of room to help the banks. Indeed, with the right policies, China could survive a deleveraging without too much pain.

By borrowing and spending, firms boost demand; when paying down debts they subtract from it. In the absence of new borrowing elsewhere in the economy, growth will atrophy. China’s government could try to compensate by borrowing more itself to finance a fiscal stimulus. It might also use low interest rates to encourage households to borrow more. (This week’s cut in banks’ reserve requirements seems designed to buoy China’s property market.) But orchestrating such a switch in growth engines is not easy. Firms and households might instead be forced to deleverage simultaneously, exacerbating the pain. Household debt in China is low but rising fast, raising the risk of a double crunch in future.

Moreover, China would have to ensure that existing bad debts are written down and bankrupt SOEs shut-a tall order politically. Reports this week claimed it plans to lay off 5m workers, but big firms will resist a proper reckoning. The bumbling response to the stockmarket and currency wobbles of the past year calls into question the leadership’s competence. The government may be able to prevent an outright banking crisis, but the slump that usually accompanies a deleveraging will be harder to avoid.

Foreign demand could perhaps help make up for the shortfall in domestic spending. Deleveraging commonly occurs alongside large depreciations; as spending in indebted economies falls the value of the currency declines, giving exports a boost. That, in turn, helps put idle capacity to work and bolsters the income of firms repaying loans. Big depreciations can also boost inflation, helping keep the deleveraging economy out of a debt-deflation trap, in which falling prices and incomes make debts with fixed values more expensive to service. Countries that see big depreciations while deleveraging, as many Asian ones did in 1997-98, typically suffer sharp but short downturns before reverting to growth. In contrast, in countries that resist depreciation, as Japan did in the 1990s and peripheral Europe has done recently, deleveraging is slower and more painful.

China’s government seems determined to prop up the yuan. But it may struggle to do so while the economy deleverages. The grinding recovery that would imply has political costs. And cutting rates to boost borrowing elsewhere in the economy would place further downward pressure on the yuan, forcing the government either to tighten capital controls yet more, run down its foreign-exchange reserves or let the currency drop.

With a deft enough touch, China’s debt bomb could fizzle. The rapid pace of credit growth makes a benign outcome ever less likely, however. Given China’s size, a prolonged deleveraging would place a dangerous drag on global demand growth, which the world’s weakened economies would struggle to cope with. The sooner China turns off the credit taps, the better.

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From the print edition: Finance and economics


02 20160310 For China Banks, Swapping Stock for Debt Is a Stopgap With Pitfalls
2016-03-15 10:24 AM

For China Banks, Swapping Stock for Debt Is a Stopgap With Pitfalls
KEITH BRADSHER, MARCH 10, 2016

Dozens of Chinese shipbuilders have been under financial pressure as prices worldwide for new vessels have been halved in the last two years. Credit Agence France-Presse – Getty Images

HONG KONG – A new approach to managing China’s corporate debt burden may offer temporary relief for banks but spell further difficulties for the country’s economy: having deeply troubled companies use stock to pay overdue loans.

Early evidence of the strategy emerged late Thursday, when a heavily indebted Chinese shipbuilder disclosed that it would issue equity to its creditors, instead of repaying $2.17 billion in bank loans.

If Chinese companies were to broadly adopt the approach for their debt issues, banks could temporarily shore up their balance sheets by replacing troubled loans with shares that have at least some value. But accepting stakes in highly indebted companies is likely to make banks even more reluctant to shut them down.

And that could mean China will be stuck with enormous overcapacity in industrial sectors including shipbuilding, steel and cement, hampering economic growth for years to come.

“The program amounts to a sleight of hand that beautifies bank balance sheets but hardly comes to grips with the basic problems of bad loans, distorted incentives in the banking and state enterprise systems, and weak financial regulation,” said Eswar S. Prasad, an economist at Cornell University who used to lead the China division at the International Monetary Fund. “This is a classic case of putting lipstick on a pig. Bank balance sheets may look prettier but nothing fundamental changes.”

This latest strategy has some advantages. It would allow companies to cut their debt loads. In doing so, they could potentially improve their credit profiles, borrow more from banks, and keep their businesses running.

It also makes banks’ loan books appear healthier, since they can reduce the amount of past-due loans. Financial markets have been fixated on Chinese banks’ portfolios of so-called nonperforming loans. And halting the recent expansion of these loans has become a high priority for Chinese bank executives.

Every weekday, twice a day, get the news driving the markets and the latest on mergers and acquisitions.

While repaying loans with shares might seem a quick solution to China’s enormous debt overhang, it could make the problems more pernicious.

In effect, it is just another way for troubled Chinese companies to put off making hard choices, like laying off employees or closing operations. Rather, businesses can continue to limp along, even when their underlying operations are not making money and customer demand has evaporated.

Such problems have been at the root of China’s economic issues, as many state-owned enterprises, or S.O.E.s, and private companies have continued to roll over the debt and keep their operations going. The government has supported the tactic, in an effort to avert mass layoffs and maintain social stability.

The new approach is “in a nutshell, very bad news for S.O.E. reform and, more specifically, for the solvency of Chinese banks,” said Alicia Garcia Herrero, the chief economist for Asia at Natixis, a French investment bank.

At this point, it is unclear how widespread this strategy has become among Chinese companies. The shipbuilder, China Huarong Energy Company Limited, had to disclose the move only because it is listed on the Hong Kong stock market. Mainland companies not listed overseas do not face the same stringent rules.

Two finance specialists with ties to mainland China regulators say the government is working on a broader plan to allow troubled companies to repay loans with shares instead of cash. They declined to speak on the record, citing the sensitivity of the issue within China. Reuters on Thursday reported on regulators’ efforts to help ease banks’ bad debt.

Officials at the People’s Bank of China, the country’s central bank, and the China Banking Regulatory Commission could not be reached for comment late Thursday night. Zhou Xiaochuan, the central bank’s governor, and three of his deputies are scheduled to hold a news conference on Saturday morning in Beijing, near the session of the National People’s Congress.

The debt issue is core to the debate over where China’s economy is headed.

China avoided most of the ill effects of the global financial crisis by ordering the state-controlled banking system to engineer a major increase in the money supply. Those banks channeled huge loans to companies and to government construction projects.

China’s economy is faltering, prompting concerns that are now shaking global stock markets.

While the stimulus helped stoke growth, the country’s debt burden ballooned.

Overall debt in China was equal to slightly more than one year’s economic output as recently as 2008. It now stands at 2.5 years’ economic output – above levels considered dangerous in other countries. The debt is still rising, and most of it is owed by companies.

The stock-for-debt strategy speaks to the underlying trouble at many companies.

China Huarong Energy is one of dozens of Chinese shipbuilders in financial distress as prices worldwide for new ships have halved in the past two years. It is a similar story for steel makers, cement makers and many other businesses in heavy industry.

China Huarong Energy has been a dismal performer on the Hong Kong stock market. Its shares have tumbled even more steeply than broad mainland Chinese stock indexes, falling 83 percent since late April 2015.

The stock-for-debt swap is taking shape as Hong Kong financiers say that China’s bad debt problem has worsened appreciably in recent weeks. The problem, they said in recent interviews, is that more companies are stopping payments on their loans from mainland Chinese banks with the country’s economy continuing to slow.

That has begun to produce ripples in China’s financial system. Desperate borrowers have pledged in recent weeks to pay several percentage points in extra interest to borrow in Hong Kong, after finding that banks and other financial institutions on the mainland were reluctant to lend.

HSBC warned on Thursday that allowing borrowers to pay in shares was a limited solution to bad debt problems. International bank standards on capital assign a large penalty to holdings of shares, meaning banks must hold extra money against the stock.

But China’s five biggest banks have somewhat more capital than the standards require. So they may be able to swap some loans for shares without falling below the required minimums for capital, but are unlikely to resolve large portions of their portfolios of troubled loans through this method.

“We think it is unlikely to be of significant scale given there are limited ways of replenishing” capital once it has been allocated to offset equity holdings, HSBC said in a research note.

A version of this article appears in print on March 11, 2016, on page B1 of the New York edition with the headline: In China, Swapping Stock for Debt Is a Risky Stopgap. Order Reprints| Today’s Paper|Subscribe


04 20160311 0211 Exclusive: China to ease commercial banks’ bad debt burden via equity swaps – sources
2016-03-15 10:28 AM
http://www.reuters.com/article/us-china-banks-npls-exclusive-idUSKCN0WC0MD
Exclusive: China to ease commercial banks’ bad debt burden via equity swaps – sources
Markets | Fri Mar 11, 2016 2:11am EST

(Reporting by Hong Kong Newsroom, Samuel Shen, Pete Sweeney and Matthew Miller in Beijing and Suvashree Choudhury in Mumbai; Writing by Pete Sweeney, Shu Zhang and Ryan Woo; Editing by Sam Holmes, Neil Fullick and Ian Geoghegan)

A woman walks out of the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing in this November 20, 2013 file photo.
Reuters/Jason Lee/Files

A man uses his mobile phone while walking past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, in this November 20, 2013 file photo.
Reuters/Jason Lee/Files

China’s central bank is preparing regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms, two people with direct knowledge of the new policy told Reuters.

The new rules would reduce commercial banks’ non-performing loan (NPL) ratios, and free up cash for fresh lending for investment in a new wave of infrastructure products and factory upgrades that the government hopes will rejuvenate the world’s second-largest economy.

NPLs surged to a decade-high last year as China’s economy grew at its slowest pace in a quarter of a century. Official data showed banks held more than 4 trillion yuan ($614 billion) in NPLs and “special mention” loans, or debts that could sour, at the year-end.

The sources, who spoke on condition of anonymity, said the release of a new document explaining the regulatory change was imminent. The People’s Bank of China (PBOC) did not immediately respond to requests for comment.

“Such a rule change shows banks’ bad loans have risen to such a level that this issue has to be tackled now before it’s too late,” said Wu Kan, Shanghai-based head of equity trading at investment firm Shanshan Finance.

State banks have extended loans to government financing vehicles and state-owned coal and steel producers, so this policy can help give lenders time to deal with non-performing assets as China pushes supply-side reforms, Wu added.

The quality of assets held by banks is worse than it looks, analysts have said. To avoid stumping up capital and to protect their balance sheets, some banks have under-reported bad loans and under-recognized overdue debt.

The top banking regulator has warned commercial lenders to pay special attention to risks.

Warren Allderige, chief executive of Hong-Kong based alternative investment management firm Pacific Harbor, said the plan was positive for banks and the economy.

“It shows the government is “backstopping” the banking sector. It is also a clear sign that the government is strongly supporting GDP growth by assisting weaker companies and increasing the banks’ available capacity for additional lending,” he said.

Allderige, who has more than 20 years business experience in Asia, said the move would also reduce the risk of “moral hazard” in future bank lending.

“It keeps banks involved in realizing the economic value of their own defaulted loans,” he said.

CABINET APPROVAL

The sources said the new regulations would get special approval from the State Council, China’s cabinet-equivalent body, thus skirting the need to revise commercial bank law, which bars banks from investing in non-financial institutions.

Previously, Chinese commercial banks usually dealt with NPLs by selling them at a discount to state-designated asset management companies which, in turn, would try to recover the debt or re-sell at a profit to distressed debt investors.

The sources had no further detail on how banks would value the new equity stakes, which would represent assets on their balance sheets, or what ratio or amount of NPLs they would be able to convert this way.

On paper, the move would also represent a way for indebted companies to reduce their leverage, cutting the cost of servicing debt and making them more worthy of fresh credit.

Beijing has prioritized the closure of so-called “zombie” firms responsible for much of China’s corporate debt overhang, and has taken aim at overcapacity in industries such as steel and coal.

Lai Xiaomin, chairman of China Huarong Asset Management Co (2799.HK), the country’s biggest bad debt manager, said he had no direct knowledge of the move, but would welcome such debt-to-equity swaps.

These would help companies “improve their financial situation” and “prevent the spread of financial risk”, Lai told Reuters. Coal, steel, real estate and machinery were among the sectors he thought most suitable for debt-to-equity swaps.

“(In China) credit to non-financial corporates has risen in the last five years from 120 percent of GDP to more than 160 percent in May 2015,” Jose Vinals, director of monetary and capital markets at the International Monetary Fund, said at an event in Mumbai.

“These vulnerabilities … will need to be addressed strongly as the economy moves towards a more market-based financial system, including for the exchange rate.”


01 20160312 China Weighs Letting Banks Sell Bad Debt to Investors
2016-03-15 10:20 AM

China Weighs Letting Banks Sell Bad Debt to Investors
CHRIS BUCKLEY, MARCH 12, 2016

Zhou Xiaochuan, the head of the People’s Bank of China, said on Saturday that the securitization program would be modest and closely monitored. Credit Mark Schiefelbein/Associated Press

BEIJING – China is exploring a new way to grapple with its mounting pile of bad corporate debt, though its top central banker sought on Saturday to dispel worries that the plan would simply shift the burden to other parts of the country’s vast economy.

Under the tentative proposal, Chinese officials would allow banks saddled with growing quantities of bad loans to sell that debt to investors, said Zhou Xiaochuan, the governor of the People’s Bank of China. The goal is to help alleviate one of the major drags on China’s economy, the world’s second largest after the United States’ and a major driver of global growth.

But Mr. Zhou and a deputy central bank governor, Pan Gongsheng, said they would take steps to make sure the effort did not create the kind of risk-laden financial products that played a major role in the 2008 global financial crisis. The effort would be modest, regulators would monitor it closely, and mom-and-pop investors would be kept out, they said.

“There’s no need to exaggerate,” Mr. Zhou said at a news conference held as part of China’s annual legislative session in Beijing. “There’s not certainty that this would be a very big market.”

China’s corporate debt has ballooned in recent years during a broader lending-and-spending binge, led by the Chinese government in an attempt to keep the country’s economy humming. China’s total debt now stands at about 2.5 years’ economic output, a level that has raised worries among economists. Much of that is corporate debt, prompting many economists to warn that those loans pose a threat to China’s economic health.

That lending spree has also led to a major surplus of Chinese steel factories, glassworks and other industrial facilities, dragging down China’s economic performance to its slowest rate in 25 years and casting a pall over the broader global outlook.

On paper, China’s banks have some of the world’s lowest loan default rates. But economists inside and outside the country say many banks – in a practice known as “extend and pretend” – do not force companies to pay up or restructure, putting off the problem. That raises concerns that China’s big banks could have considerable amounts of bad loans on their books.

The program sketched by the officials on Saturday followed reports in recent days that as the economy slows, some Chinese companies failing to pay back loans would be given reprieves because the banks would be allowed to convert that debt into shares of those companies. But the central bank officials did not directly address that proposal. On Thursday, a heavily indebted Chinese shipbuilding company revealed that it would issue equity to creditors instead of repaying $2.17 billion of outstanding loans.

Some experts are skeptical that such a program would resolve the problem. “Using shares to pay overdue loans could help banks temporarily shore up their balance sheets, but it could cause greater difficulties down the road,” said Ning Zhu, a finance professor at the Shanghai Advanced Institute of Finance.

Mr. Zhou indicated that under the proposal described on Saturday, the bad debt would be sold to institutional investors rather than being held by the banks. China already allows this practice – known as securitization – so banks and other financial institutions can sell off existing loans, freeing up capital for new business. But the central bankers’ latest comments suggested that the practice was being refined to focus on nonperforming loans.

“Banks are positive about securitization,” Mr. Zhou said. “If some assets can be packaged and sold off, they can adjust their balance sheets.” He said that because the loans sold off would be troubled, they would fetch prices below their face value.

Mr. Zhou and Mr. Pan stressed that the program would be modest at first and absorb lessons from the 2008 financial crisis. China’s new debt products would be kept simple, Mr. Pan said.

“This is just a pilot,” Mr. Pan said. “We’ve selected a small number of major financial institutions with quite high management standards to develop trials, and the credit involved in the initial trials is not large.”

Shang Fulin, the head of the China Banking Regulatory Commission, said at a separate news conference on Saturday that the trial effort to sell off bad debt was needed to ensure that more bank loans flowed into supporting the real economy, rather than turning over old loans.

“Our total volume of loans is quite adequate, but the speed of turnover of loans has been falling year after year,” Mr. Shang said.

Keith Bradsher contributed reporting from Hong Kong.

A version of this article appears in print on March 13, 2016, on page A12 of the New York edition with the headline: China Weighs Pilot Program to Let Banks Sell Troubled Loans to Investors . Order Reprints| Today’s Paper|Subscribe


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