China’s debt mountain may be growing, but one sub set of foreign investors view it as an opportunity to make money.
At an industry conference in Shenzhen on Thursday, distressed debt investors said they are looking to put more capital into China even though increased competition means the average acquisition price is now 60 cents on the dollar compared to 10 to 20 cents back in 2000 when the industry first got going.
“We raised $500 million in new capital last year to invest in China’s NPL market over a five-year period,” said Gregory Ritchie, founder of Orient LongXin, a Shanghai-based special situations fund.
“There’s a lot of interest from both global and pan-Asia funds,” Ritchie, a former ING proprietary trader, told the roughly 300 delegates. “But the market is still at an early stage of development.”
Panel discussion: China's NPL market - new challenges and opportunitiesGlobal funds including Blackstone, Oaktree and Bain are among those which have increased their investments in China, where non-performing loans (NPLS) total Rmb1.7 trillion ($270 billion) and overdue loans Rmb3.41 trillion according to the Chinese banking regulator. Among regional funds, Hong Kong-based distressed fund, SSG Capital raised $2.5 billion last year to invest in distressed opportunities across Asia Pacific.
Fund managers at Deutsche Bank and Ping An Insurance said they have been targeting entire portfolios of bad loans, which generate returns around the 15% mark. They admitted that this is not an “outsized” return, but attracts limited partners such as pension funds and insurance companies because it enables them to diversify risk.
Speaking on the same panel, Saif Qureshi, a director at Deutsche Bank said there was a lot of preliminary interest in 2016, which did not initially translate into investment.
"The situation completely turned in 2017,” he commented. “That’s when traditional global distressed credit funds came in as they increased their allocations into the region.
“We also see smaller players starting to raise capital from both domestic Chinese investors and offshore money,” he added.
Jeff Chen, a partner at law firm Dentons told FinanceAsia that foreign investors have started to “smell the money” in China even though they know “it’s not easy to move it back out from what we call the Great Wall of China.
“Foreign exchange is always the number one issue for foreign funds,” said Chen, who has over 15 years of experience in the regional capital markets.
In the past, the biggest issues concerned the lack of a bankruptcy framework and a non-transparent bidding process. This is one of the main reasons why the market failed to take off in the years after a group of foreign investors including Morgan Stanley and Lehman Brothers acquired Rmb10.8 billion of NPLS in December 2001 from Huarong Asset Management at 8.125 cents on the dollar.
The panel concluded they are returning now the government is trying to reduce corporate leverage by letting companies go bankrupt and upholding the liquidation process through the courts.
