China is planning to package together billions of renminbi’s worth of its strained financial sector’s non-performing loans, with the aim of selling them to international investors. According to local Chinese media, regulators have already approved RMB 50bn worth for sale.
By mid-2015, non-financials had collectively built up $14.5trn worth of debt – four times its level in 2007
The move comes as the country’s financial sector is under increasing pressure from bad debt. By mid-2015, non-financials had collectively built up $14.5trn worth of debt – four times its level in 2007. In the same period, China’s total debt level rose to $31.9trn from just $6.6trn.
Many loans taken out in China have become non-performing due to a slowdown in economic growth. This debt build-up and government efforts to prop up firms squeezed by loans they can no longer service have caused a lot of concern from international investors. According to The Japan Times, these firms, with debts they cannot service and reliant upon government assistance, are called “vampire companies” in China.
The plan would relieve the pressure on China’s banks – as well as reduce the risk to the economy at large – by removing non-performing loans from the financial sector. However, the supply of NPL securities is likely to outstrip demand and the securities will not be rated by the industry standard credit ratings agencies, which is often a minimum requirement for any international investor.