Exclusive: China to let banks sell off loans in prelude to possible bailout

Fri Aug 9, 2013 5:28am EDT
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By Heng Xie and Gabriel Wildau

BEIJING/SHANGHAI (Reuters) - China is developing a new trading platform to enable banks to sell off loans to a wider range of investors, in a move that could pave the way for a government bailout of lenders or distressed asset sales to private investors.

The trading platform, now in the testing phase, is designed to introduce banks to a new class of investors, including non-bank financial institutions and large companies.

Currently, the lack of well-established precedents for asset disposals effectively leaves banks only two options: sell non-performing loans in private deals, mostly with big state-backed asset management firms, or keep rolling them over indefinitely to avoid booking a loss.

Most analysts believe Beijing will eventually be forced to use some public funds to help peel off bad loans from state banks, but the ability to draw in at least some private capital could reduce the cost of that bailout.

The new platform could aid the effort to draw in private investors by allowing for price discovery for loan transfers, creating benchmarks that could guide future deals. Greater transparency in pricing could thus lure even more investors.

The China Banking Regulatory Commission (CBRC) will introduce a so-called "credit transfer system" in the country's interbank market, which includes banks as well as non-bank financial institutions and large companies, three sources with knowledge of the situation told Reuters.

The system would allow for the transfer of asset-backed securities (ABS) as well as non-securitized loan packages.

China's banks are struggling with an overhang of potentially bad debt from a state-backed lending binge unleashed from 2008 to 2010 in response to the global financial crisis.   Continued...

A businessman looks at his mobile phone as he walks in the financial area of Pudong in Shanghai May 30, 2013. REUTERS/Carlos Barria