Three Longs & Three Shorts

China Spins a Trade-Deal Trap in Bad Debt Market

Like India, China’s financial system is also grappling with a mountain of bad debts which now stands at a staggering USD 319bn. China has found a silver lining in the trade war with America by opening its struggling financial sector to US institutions by allowing them to apply for asset management licences. Previously, foreign investors could only operate in the secondary market to buy portfolios of four or more loans from Chinese asset management companies.
Apart from the big four national bad banks established in the 1990s to resolve a heap of bad loans, more than 50 provincial distressed-asset management companies were created over the past three years by the Chinese Government. However, liquidity issues and refinancing risk is taking a toll on them with one bank (Baoshang Bank Co.) already gone bankrupt. China needs fresh capital to overcome its bad debt crisis and getting them through US Institutions is probably the best way.
However, it is not clear how exactly will US institutions make a business case out of this opportunity as Chinese provincial asset managers operate in a fuzzy environment and the quality of assets is dubious. The market remains largely unregulated, with limited oversight and disclosure. Making money for American investors looks very challenging in the Chinese distressed asset market.
“Foreign investors in distressed assets made a killing in the last credit cycle two decades ago. This time won’t be so lucrative. In this sector, at least, Beijing looks like it will come out on top of Trump’s “big, beautiful monster” of a trade deal.”