Where Do Bad Debts Go When They Die?

China's Toxic Debt Doctors Prepare for Surgery
Regulators eager to resolve China's local government debt conundrum are setting standards for an emerging class of asset management companies (AMCs) responsible for settling bad loans without Beijing's help.

One standard, issued in early-December by the China Banking Regulatory Commission (CBRC), set the floor for each local AMC's registered capital at 1 billion yuan. It was the first financial parameter of its kind since CBRC and the Ministry of Finance started promoting these debt restructuring vehicles in May 2012.

Also in December, CBRC spelled out management staff requirements and corporate governance rules for AMCs.

Every province, autonomous region and municipality in the country is being encouraged to form a single AMC to take over and restructure non-performing assets held by local banks and local government financing vehicles.
The good news is the government is being proactive and getting ahead of the collapse. The bad news is

Exactly how much debt might fall into local AMC laps is subject to debate. The central government's National Audit Office said direct liabilities held by all local governments totaled 10.9 trillion yuan as of July 1. About 45 percent of that amount was supposed to come due before the end of this year, although it's likely much of this debt could be rolled over.

State-owned banks have shouldered the bulk of this bad debt. According to the CBRC, non-performing loans on the books and ratios of non-performing-to-total outstanding loans rose slightly in the third quarter 2013 from the second quarter. Other sources, however, call these recent increases substantial.

As of October 1, CBRC said, banks were saddled with 563 billion yuan in bad debts, up 24 billion yuan from the end of the second quarter. The country's Big Five banks – Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, Agricultural Bank of China and Bank of China – finished the third quarter with a combined toxic debt balance of 336.5 billion yuan, the banking regulator said.

The entire banking industry's ratio of non-performing loans to total outstanding loans was 0.97 percent as of October 1, up 0.01 percentage points from the previous quarter, CBRC said. The ratio for the Big Five was 0.98 percent
Non-performing loans surge when the economy weakens; the number almost always looks good until it doesn't.

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