China’s Bad Debt Managers See Their Profits Collapse on Property Losses
(Bloomberg) – China Huarong Asset Management Co. and China Cinda Asset Management Co., the country’s two largest state-owned distressed debt funds, reported falling first-half profits as credit writedowns increased following a worsening real estate crisis.
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Net profit for Cinda’s first six months fell 33% to 4.51 billion yuan ($652 million), after impairments on assets jumped 85%, an exchange filing shows. . Huarong, which is also due to release its report on Monday, expected to post a net loss of 18.88 billion yuan for the same period, compared with a profit of 158 million yuan a year ago.
China’s troubled debt managers have been in turmoil as aggressive lending to beleaguered developers and unchecked expansion in other areas during the sector’s boom years beleaguered funds by $730 billion with heavy credit losses, causing their obligations to plummet. Beijing is currently considering a preliminary plan to restructure the sector that could see state-backed entities take over three of the companies, people familiar with the matter said.
China Great Wall Asset Management on Friday reported a net loss of 8.56 billion yuan for the past year after twice extending the disclosure deadline, citing deteriorating asset quality and losses from changes in the fair value. This compares to 2.1 billion yuan in profit the previous year.
Beijing-based Huarong, Cinda, Great Wall and China Orient Asset Management Co. were formed to buy up bad debts from banks following the Asian financial crisis of the late 1990s, when decades of government loans to state-owned enterprises had left China’s largest. lenders on the brink of insolvency. The so-called AMCs subsequently expanded beyond their original mandate, creating a maze of subsidiaries to engage in other financial activities, including shadow lending.
They have lent money to the majority of the top 50 developers in the country over the years. Real estate represents approximately 44% of Cinda’s acquisition and restructuring activities.
“Real estate businesses pose significant credit risks and some local governments face serious debt risks,” Cinda said in the statement. “Distressed entities and distressed assets will increase. AMCs must play their professional strengths to the full, take the initiative to act and actively participate in the prevention and defusing of major risks.
Over the past year, Chinese authorities have ordered AMCs to reduce non-core activities and shift assets from securities to insurance to reduce risk and return to their original mandate. More recently, they have been seen as potential white knights in the crumbling real estate sector, only to find themselves knee-deep in the troubles themselves.
As part of the overhaul that could take place after the Communist Party Congress this year, one solution being considered is for Great Wall to be acquired by state-owned China Everbright while Orient and Cinda are merged. The long-term goal would be for Cinda and Orient combined to become the only bad debt manager with a national operation to manage troubled assets, people familiar said. Huarong and Great Wall would focus on managing the non-performing loans of their new parents – China Citic Group and Everbright.
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