And it just got bigger: A joint venture aims to make non-performing 　　assets perform well for them and foreign investors
　　
　　“B” FOR BULLISH: Foreign investors, including UBS Warburg, are bullish on the NPA disposal market in China
　　After a year’s preparation, Rongde Asset Management Corp. finally kick-started its first business, marking the beginning of direct disposal of non-performing assets (NPAs) by foreign investors.
　　When loans, the lifeblood of banks, go bad, they have to be managed.
　　That’s where Rongde’s new business comes into play. With the Chinese Govern-ment’s go-ahead, Rongde is engaged in the purchase, management, disposal and restructuring of bad assets.
　　Rongde was officially launched on August 29, with joint investment from China Huarong Asset Management Corp., Cathay Capital Co. (No.2) Ltd., a joint venture between Deutsche Bank and American International Group, and the International Finance Corp. (IFC). Its registered capital stands at 1.79 billion yuan, and Huarong, Cathay and IFC hold 51 percent, 35 percent and 14 percent of the shares, respectively.
　　Before that, only the four state-owned asset management companies (AMCs), namely, Huarong, Great Wall, Cinda and Orient, could dispose of NPAs in China and foreign investors could only buy packages of NPAs from the four state-owned AMCs.
　　Here’s the good news for foreign investors: Rongde’s emergence means that they can buy NPAs directly from banks.
　　“The establishment of Rongde is an innovative measure for international investors to invest in the Chinese NPA market,” said Ding Zhongchi, President of Huarong.
　　Yes, it’s that. It’s also an opportunity for AMCs to get help while they are transiting into better corporations, and of course, a really big opportunity for Rongde itself.
　　
　　Akin to free beer
　　
　　In the late 1990s, with the aim of promoting banking reform, China stripped NPAs of the four largest state-owned commercial banks and established the aforesaid four wholly state-owned AMCs in 1999 to dispose of them. When the four AMCs were first established, they owned NPAs worth 1.4 trillion yuan.
　　In October 2001, the Ministry of Finance, the People’s Bank of China and the Ministry of Foreign Trade and Economic Cooperation (formerly the Ministry of Commerce) jointly released the Interim Provisions on Drawing Foreign Capital into the Asset Restructuring and Disposal by Financial Asset Management Corporations, allowing and encouraging foreign investors to participate in the disposal of NPAs.
　　At the time, this was great news for foreign investors.
　　A month after the provisions were released, a bidding group composed of Morgan Stanley, Lehman Brothers Holdings, Salomon Smith Barney under Citigroup, KTH Fund Management and Zhongjin Fengde Holdings Ltd. purchased four assets packages from Huarong whose book value surpassed 10.8 billion yuan, triggering large purchases of NPAs by foreign investors.
　　Since foreign investors buy most NPAs at prices lower than 10 percent of the book value, even as low as 1.5 percent, they can be loosely compared to free beer, attracting a lot of attention.
　　
　　Not only famous investment banks like Morgan Stanley, Goldman Sachs, Salomon Smith Barney, Lehman Brothers Holdings and UBS Warburg, but also companies engaged in asset disposal and mutual funds such as Lone Star from the United States have entered into asset disposal. Many NPA packages of the four state-owned AMCs have gone to foreign investors.
　　According to statistics released by the China Banking Regulatory Commission (CBRC), from establishment in 1999 to the end of March 2006, the four Chinese AMCs had disposed of NPAs of 866.34 billion yuan. An aggregate of 180.56 billion yuan of cash was recovered, accounting for 20.84 percent of the total NPAs. Among the total disposed NPAs, foreign investors purchased more than $10 billion, 12 percent of the total.
　　Foreign investors used to participate in disposal of NPAs by cooperating with Chinese state-owned AMCs. After they bought an asset package, they would establish a project company with a state-owned AMC. Registered as a contractual joint venture, the project company could only dispose of the NPAs they had purchased through litigation or auctions but could not buy other NPAs. After finishing the disposal of the NPAs, the project company had to be closed.
　　Now, as the first permanent equity joint venture AMC in China, not only can Rongde purchase NPAs, it can also charge commissions on the disposal.
　　As of now, Huarong has established nine project companies with Morgan Stanley’s bidding group, Goldman Sachs, UBS, JP Morgan Chase & Co., Lehman Brothers Holdings and GE Commercial Finance.
　　Zhao Xijun, professor at Renmin University of China, believes that the establishment of equity joint ventures in the disposal of NPAs indicates that foreign investors are optimistic about the market for NPA disposal in China.
　　At present, there are more than 1 trillion yuan of NPAs in China. Further, the quantity of NPAs is still increasing in Chinese banks. Statistics from the CBRC show that in the first half of this year, non-performing loans among Chinese banks increased 71.7 billion yuan.
　　Now foreign investors, with a license to dispose of NPAs, can avoid a lot of inconvenience, especially in litigation.
　　
　　Diversifying AMCs
　　
　　FROM BAD TO GOOD: Morgan Stanley and China Construction Bank finalize an agreement to set up a joint venture asset management company to handle 4.3 billion yuan of the local bank’s non-performing loans
　　As for the developing Chinese market, the introduction of equity joint venture AMCs is beneficial in attracting more investment to speed up NPA disposal and improve the efficiency of recovering assets.
　　When the four state-owned AMCs were first established, the Ministry of Finance stipulated that they must complete disposal of the 1.4 trillion yuan of NPAs by the end of 2006 and terminate their operations after 10 years since their establishment or after selling all the NPAs.
　　And it’s time for the four state-owned AMCs to begin making their exit, or at least transformation.
　　Certain departments of the Central Government, such as the Ministry of Finance and the State-owned Assets Supervision and Administration Commission, intend to make the four AMCs change into companies engaged in financial services. Conditions permitting, they may engage in businesses like auto financing, funds, securities and purchasing stocks of commercial banks. Huarong specifically aims to transform into a financial holding company.
　　According to the requirements of the Ministry of Finance, the four state-owned AMCs should complete disposal of the 1.4 trillion yuan of NPAs by the end of this year, but as of the end of last March, the four AMCs had only disposed of 866.34 billion yuan, or 60 percent of the total. The four AMCs have a lot of pressure to dispose of the remaining 40 percent within this year.
　　Hence, the establishment of Rongde can be considered a preparation for the transformation of Huarong. Diverting the disposal of NPAs into the joint venture, Huarong can smoothly finish its transformation.
　　Ding, Huarong’s President, also points out that forming Rongde with foreign investors is an important step for Huarong to be more commercial.
　　Besides Huarong, the other three state-owned AMCs are also faced with the same problem. Orient has newly established departments like market development, investment banking and strategic planning. At present, over 500 employees of the company have obtained the qualifications of certified accountants, certified evaluators, lawyers and securities traders.
　　Yet another AMC hopes to become an investment bank. Cinda has obtained qualifications as an institutional securities sponsor. In the First State Fund Management Co. Ltd. established on July 20, Cinda holds 54 percent of the shares. This is the first fund management company held by an AMC, laying a foundation for the transformation of Cinda into an investment bank.
　　Great Wall also publicly says that its aim is to become a financial holding company.
　　Meanwhile, the four state-owned AMCs are under scrutiny because of their inability to adequately dispose of NPAs. The public does not recognize their role in the banking reform and social economy. Especially in 2005, when the four AMCs were found to have 71.5 billion yuan of misused funds disclosed by the National Audit Office, the future of these AMCs has been under discussion by related departments.
　　“The Chinese financial industry is still not competitive enough and must be improved in capital strength, personnel training, risk control and market base,” Zhao, the professor, said. “To the AMCs, the challenge for their transformation is how to develop their own market under new circumstances.”
　　Already, many foreign investors have made their fortunes after buying NPAs.
　　In the new scheme of things, where the NPA market has opened up, these investors could be poised for a new windfall of success.

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