China locks foreign investors out of another bad-debt cleanup

Sun Sep 8, 2013 5:33pm EDT
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By Stephen Aldred

HONG KONG (Reuters) - Chinese banks have a colossal mess of bad debts to clean up for the second time in as many decades, but they are unlikely to call in the financial world's most efficient mop and broom.

Foreign investors that specialise in buying up distressed debt are queuing outside the industry's door, but bankers say China's reluctance to pay the price of a privately funded clean-up means that door probably won't open -- to the cost of Chinese tax-payers and, ultimately perhaps, the wider economy.

Some economists believe the current mess will need a bigger clean-up than was required after the late-1990s Asian financial crisis. From 1999 to 2007, about $323 billion in bad loans were swept out of the banks, according to a PriceWaterhouseCoopers (PwC) review of media reports over the period, in what amounted to a taxpayer-funded bailout.

"Sometimes the door is open for foreigners to come up and make money, and sometimes it's closed," said one veteran debt specialist who has bought and sold Chinese debt for global investment banks. He declined to be named due to the sensitivity of discussing China's sovereign debt.

"Our belief right now is that the door is closed."

There is no ban on foreign investors buying up bad loans, but veterans of the 1999-2007 clean-up say the environment is as hostile to outsiders now as it was back then. A decade ago, they played only a limited role due to time-consuming red tape and difficulties enforcing their rights as creditors, such as being able to seize assets pledged as collateral for a soured loan.

By 2006, according to PwC's own estimates, foreigners bought up $26.5 billion, or around 18 percent of bad loans sold by four state-backed vehicles that had been created to clean them up at the country's four biggest banks.

From 2002 to 2007, investment banks like Goldman Sachs, Morgan Stanley and UBS bought billions of dollars of bad loans from these four so-called asset management companies.   Continued...