As China’s economy slows and defaults rise, bad loan managers are quietly buying toxic debt so it does not poison the broader financial system. Yet questions remain about whether these bad banks are savvy investors in distressed assets or conduits for a backdoor bailout of state banks.
Investors widely suspect that the banks’ practice of “extend and pretend” explains why the country’s official non-performing loan ratio remains modest at 1.67 per cent. While this practice is probably part of the explanation, lenders have also kept non-performing loans under control by accelerating sell-offs of soured debt.
Total assets at the big four state-owned asset management companies, the main buyers of such debt, surged from Rmb345bn ($53bn) to Rmb1.73tn ($268bn) between 2011 and 2014. Most is concentrated in industries such as steel, coal and real estate that have borne the brunt of China’s economic slowdown.