Overcapacity will continue to plague real estate developers in 2009.
In Shanghai, Zhou Lin almost has it all. The 27-year-old has a steady job with an auditing firm and a new husband. Now she and her spouse are looking for the next piece of the newlywed puzzle. Her husband already owns an apartment in Beijing, but Zhou’s family wants them to buy something close to home in Shanghai and she’s been scouring the city’s Putuo district for deals.
Three key questions arise from the recent sale of stakes in Chinese banks by their global counterparts, two of them widely asked, one not. Observers are wondering what the impact will be on global banks’ relations with China, and what will happen when the lock-ups on foreign bank stakes in ICBC expire in April. Rather fewer are asking if, irrespective of the global lenders’ capital positions, this is anyway a good time to be bailing out of Chinese banks.
As soon as Bank of America shelved a deal to shift some of its stake in China Construction Bank in December, many observers leapt to a swift conclusion: China had nixed the deal because it didn’t like the idea of the sale, or the timing. It is understood that Bank of America chairman and chief executive Ken Lewis pulled the sale after speaking with his opposite number at CCB, Guo Shuqing, but state pressure is unlikely to be the full story, as subsequent events have demonstrated. It appears that at least part of the reason was a technical and legal issue springing from the fact that Bank of America’s stake had been amassed in two different purchases with different lockup periods, and it was unclear what rules on allocation of profits would apply to the mooted sale; the fact that the sale did go through less than a month later supports the view that it was a technical delay rather than a veto. Subsequent sales of Bank of China stakes by UBS and Royal Bank of Scotland also undermine the view that China has tried to block sales.
The groups tasked with selling off China’s bad debts face a challenge in keeping investors interested.
December 31 was significant for China’s financial industry. This was the day when the first wave of bad loans from the Big Four state banks – US$170 billion taken off their books in 1999 – was supposed to be cleared.
The deadline wasn’t met but the work of the asset management corporations (AMCs) set up to manage the non-performing loans (NPLs) was not the embarrassing underperformance expected this time last year after much foot-dragging over sales.
During the past two decades, investors have been following the global trail of nonperforming loans from one economy to another.
These days, that trail is leading to China, where investors who see opportunity in troubled loans have been buying such loans, or NPLs — many of which were spawned more than 10 years ago. And now the market could expand further if China is hit with another wave of defaults driven partly by the large amount of debt created by the country’s recent real-estate boom, says Jack Rodman, a Beijing-based partner at Ernst & Young LLP.
A major part of China’s current reform efforts involves strengthening the financial system and re-structuring and re-capitalizing, or selling, most of the companies still owned by various levels of government. Estimates of the number of remaining state-owned enterprises (SOEs) varies from 30,000 to 50,000 depending on the percent of state ownership involved. Non-performing loans (NPL) held by the commercial banks in China are estimated to be about 13% of total lending.
Center Director, Penny Prime, talked with Phil Groves, President of DAC Management, LLC., a distressed asset management company. Mr. Groves has been involved in evaluating and participating in the market for these companies and NPLs in China for the last several years.