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China faces new worry as banks sell off bad loans at record rate

During the January to September 2023 period, 60 billion yuan worth of bad loans were exchanged on the official marketplace for credit assets, a 61% increase over the same period in 2022

Chinese banks are selling off bad loans at an unprecedented rate as regulators want a quicker resolution of bad debts in the face of an unsteady post-COVID economic recovery and an increase in customer defaults.

According to statistics from a ratings agency, the issuance of securities backed by non-performing loans (NPLs) this year is expected to reach a record level, up around 40% from 2022, as lenders scramble to unload troubled assets associated with consumer, credit card, and mortgage borrowings.

Six banks, including China Everbright Bank and Bank of Jiangsu, want to issue asset-backed securities (ABS) based on subprime loans worth 1.5 billion yuan (USD 210.49 million) in December 2023, according to sales prospectuses that Reuters examined.

Fund managers, asset management companies, specialised distressed debt investors, and certain hedge funds are examples of typical purchasers.

“Chinese banks now routinely use securitisation as a technique to get rid of poor loans. It’s effective, adaptable, and authorities are approving these products comparatively more quickly,” stated Kan Zhou, S&P Global (China) Ratings’ head of structured finance ratings.

He further stated that the increase in issuance is “also because, in an economic downturn, there’s a growing supply of non-performing assets,” and he predicted that the market would continue to expand beyond this year.

Based on court records, 8.57 million individuals who defaulted on debts ranging from business loans to home mortgages have been placed on a blacklist by Chinese authorities. The total number of defaulters is 50% higher than it was at the start of 2020, underscoring the pandemic’s and its aftermath’s lasting effects.

Data from a section of Chinese ratings agency CCXI shows that as of December 17, Chinese banks have sold 42.5 billion yuan (USD 5.96 billion) of bond-like instruments based on poor loans, up 37% from 2022’s total and the biggest since its records began in 2016.

Furthermore, statistics from an organisation connected to China‘s banking regulator revealed that during the January to September 2023 period, 60 billion yuan worth of bad loans were exchanged on the official marketplace for credit assets, a 61% increase over the same period in 2022.

The bad loan market is increasing, which highlights the difficulties facing the banking industry as China’s post-COVID recovery fades and it deals with rising individual delinquencies, local government debt, and the real estate crisis.

The amount of bad loans outstanding at Chinese banks reached 3.2 trillion yuan at the end of September, up 33% from 2.4 trillion yuan at the end of 2019. This information comes from the nation’s banking regulator.

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