China to let banks sell off loans in bid to tackle debt overhang

By Heng Xie and Gabriel Wildau

BEIJING/SHANGHAI (Reuters) - China will unveil a new trading platform which will allow banks to sell off loans to other investors, laying the groundwork for a potential bailout and recapitalisation of a banking system rife with bad assets.

The China Banking Regulatory Commission (CBRC) will introduce a so-called "credit transfer platform" in the country's interbank market, which includes banks as well as non-bank financial institutions and large companies, three sources with knowledge of the situation told Reuters.

China's banks are struggling with an overhang of potentially bad debt from a state-backed lending binge unleashed in 2008 to 2010 in response to the global financial crisis.

Market participants widely suspect that the true scale of the bad loan problem is far larger than the official, system-wide non-performing loan ratio of under 1 percent.

Allowing banks to unload assets could help prevent a debt crisis that could lead to a sharp recession if asset prices tumble and credit flows to the real economy decline.

It could also free up space on bank balance sheets, enabling them to support the economy with fresh credit. China is on pace for its slowest full-year growth since 1990.

In June, China's cabinet announced its intention to "revitalise the stock" of outstanding assets. The establishment of a market for banks to sell unwanted loans could shed light on what this cryptic but oft-repeated phrase means.

The CBRC declined to comment.

The new platform will be administered by the China Central Depository & Clearing Co., Ltd., the state-backed clearing house that clears trades in the interbank bond market.

"China Central Depository's system is working on supporting both ABS (asset-backed securities) as well as (non-securitised) loan transfers," said a source with knowledge of the system.

Several simulated trades occurred on the system last week, and the formal launch will happen following further internal discussions and a public comment period, said another source who is close to regulators.

But questions remain about who would be willing to buy risky bank assets and at what price.

China set up four state-backed asset management companies (AMCs) in 1999 to buy 1.4 trillion yuan in bad from the nation's Big Four banks. They bought the bad loans at or near face value in an explicit bailout of commercial banks.

This time around, the AMCs may again step in to purchase the lowest-quality assets. But China's top leaders have also stated their desire to attract private capital into China's financial sector.

Private investors, including commercially-oriented AMCs, distressed debt investors, insurance companies, pension funds, would likely require discounts to face value for all but the highest quality loans.

Even with such discounts, the difficulty of performing due diligence on loans originated by other institutions could limit these investors' appetite for these assets, analysts say. (Additional reporting by Zhang Shengnan in BEIJING and Zhao Hongmei in HONG KONG; Editing by Kim Coghill)