US companies could win lucrative job of cleaning up China's bad debt

One surprising part of the trade deal struck between US President Donald Trump and Beijing is that US investors won a direct shot at the potentially lucrative job of helping China clean up its heap of bad debt.

China is embracing foreign capital as it grapples with a tide of soured debt. Some estimate it to have topped $1 trillion as the trade war weighed on economic growth and a long crackdown on shadow banking choked off liquidity. The Communist Party-ruled nation is trying to instill more discipline in the market as corporate defaults have hit records for two straight years and its vast regional banking network struggles to cope. Growing participation by foreign investors could relieve pressure on the mainly state-owned firms that so far have been the front-line in dealing with the bad debt problem. It could also result in a more market-driven pricing of soured borrowings.

US firms including Oaktree Capital Group and Bain Capital Credit have been pushing into one of the world’s biggest distressed debt market. The trade deal will allow financial services companies from the US to apply for licenses to buy non-performing loans, or NPLs, directly from banks, cutting out the middle man they have to go through now.

“China’s NPL market is large and growing, and opportunities for deeply discounted investments are enticing foreign firms with NPL experience in other markets,” said Brock Silvers, managing director at Adamas Asset Management in Hong Kong.

Gaining access is one thing, but succeeding is another. Top-down run China can be an arbitrary place to do business, and local knowledge and contacts are required in the 1.4 billion person nation. Foreign firms have often grappled with unpredictable courts, fraud and challenges of soAurcing bad loans. A web of local enterprises are often closely connected to regional banks and the local government, making it hard to navigate.

The market has grown significantly. But lack of experience has been an obstacle and many firms that stuck their toe in eventually pulled back because of difficulties in working out bad loans in China’s system, according to Benjamin Fanger, a managing partner at ShoreVest Partners, a distressed debt firm.

“Some foreign investors are still continuing to push forward to try to learn and this new agreement opening to direct deals with banks might add more interest again,” he said.