Finding Treasure in China’s Distressed Debt.pdfVIP

From the Hong Kong Securities Institute July/August 2009 Finding Treasure in China’s Distressed Debt Following the financial tsunami, buyers of distressed debt expected to see many opportunities for bargains to emerge. However, there are many risks involved that should not be overlooked. At a conference on distressed debt held in Hong downturn following last year’s financial crisis, thanks Kong earlier this year, the general consensus largely to the Central Government’s four-trillion yuan was that 2009 has not been a buying bonanza stimulus package and the approximately seven for distressed debt in China that had previously been trillion yuan injected into the money supply from expected. The Chinese economy has been quite loans issued by China’s banks during the first half of resilient to the challenge of the global economic this year. “We thought there would be an avalanche [of distressed debt opportunities],” says Handel Lee, a partner of the law firm King Wood. “But because of the amount of money that is now flowing into the Chinese economy this year … many of the projects that were having significant funding issues are still holding on. Distressed opportunities have not presented themselves as what originally people thought.” At the end of June this year, outstanding bad loans totaled 518.1 billion yuan, down 42.2 billion from the beginning of the year, according to the China Banking Regulatory Commission. China’s commercial banks combined non-performing loan (NPL) ratio fell to 1.77% by June’s end, down 0.65 percentage points from the start of 2009. However, more buying opportunities are expected to surface in China in the near future, according to some experienced investors. They say the large increase in lending will be the cause for two reasons. Firstly, there will always be a certain proportion of bad loans that will result from new lending. Secondly, the massive increase in the money supply from this