China Opening Its Banks Is Great, If You Like Bad Debt

Other countries' problems

(Photo: Shutterstock) (Photo: Shutterstock)

So China would like a bit of foreign expertise after all.

In a surprise move, and timed with U.S. President Donald Trump's state visit, China said it would scrap foreign ownership limits for banks and asset management firms.

Asia's biggest economy has been talking about opening its banking industry for a while now. Foreigners are already movers and shakers in the interbank market. As of Sept. 30, offshore investors held more negotiable certificates of deposit than domestic securities firms, a testimony to the success of the Hong Kong-Shanghai bond connect program that started in July.

(Related: China Makes Historic Move to Open Market for Financial Firms)

But there's more to it than international nous.

China desperately wants to recapitalize its mid-sized joint-stock commercial banks, which it sees as posing systemic risks. Last year, the People's Bank of China said that if a mid-sized bank were to default, on average, four to five other lenders would also be affected and more than 8% of the industry's capital would be wiped out.

Taking a look at 41 publicly listed Chinese banks shows that only the very largest — Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and China Merchants Bank Co. among them — are reasonably capitalized. Plenty of lenders, from Postal Savings Bank of China Co. to Bank of Jiangsu Co., are in need of cash.

Will Western financial institutions want in? As my Gadfly colleague Nisha Gopalan has argued, it could be all a little too late. Economic growth in China has slowed and credit creation on steroids has fueled concerns of a resurgence in bad loans. Even the central bank governor is talking of a possible "Minsky moment."

Technology firms also have become a competitive threat to banks' core business. Money-market funds such as Yu'e Bao, owned by Alibaba Group Holding Ltd. payments affiliate Ant Financial, have lured away billions of consumer deposits, while newly listed Qudian Inc. is offering online consumer loans. Better to team with an internet company instead.

The one area that may be of interest to foreigners is bad-debt asset management firms. Beijing has been urging lenders to set up soured-loan managers to conduct debt-for-equity swaps and offload unmet obligations.

Pricing and restructuring bad debt, however, is so technical and tiresome that even China's two most prominent specialists, China Huarong Asset Management Co. and China Cinda Asset Management Co., have been busy earning their keep in the offshore high-yield corporate bond market.

But, as I wrote in August, Beijing is serious about reducing corporate debt and establishing new asset-management companies for that purpose. Authorities want the firms to have a wide range of financing options open to them, from bond issues to private placements and perhaps even tapping interbank liquidity.

Although China's capital markets are getting deeper by the day, more external expertise wouldn't go amiss. So far, only about 10% of the announced 1 trillion yuan ($151 billion) of debt-swap deals have been funded, in part because private-sector investors aren't interested.

That's where foreign financial institutions should be turning their attention. There's business here for the taking.

— For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

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