Eight years after regulators shut it down, China is jumping back into the securitization market as a way to sell off the bad debt growing on bank balance sheets.

The bad-debt securitization program is expected to see issuance of 50 billion yuan this year. It will reopen this month with two deals worth 534 million yuan ($81.6 million), reported the Financial Times on Friday. The Bank of China will issue a 301 million yuan deal next week, according to a filing at ChinaBond.com, and China Merchants Bank will release a 233 million yuan product.


China’s net debt grew to $25 trillion in the first quarter of the year, equivalent to a record 237% of gross domestic product.

Much of this sits on bank balance sheets, causing concern among investors worried that the slowing economy will result in more sour loans.

The official average non-performing loan ratio at China’s commercial banks was 1.75% at the end of March. But analysts reckon it could be as high as 19% and eventually require a government bailout, reported the FT.

Francis Cheung, the head of China strategy at the CLSA brokerage, estimates Beijing will need to inject 10.6 trillion yuan of new capital into the banking system, or 15.6% of GDP, assuming a non-performing loan ratio of 20% and provisions at 100% of losses, said FT.

“It’s very uncertain what the market will look like at this point … The worst-case scenario would be for the government to come in and tell life insurance companies to buy up the products at a certain price,” Matthew Smith, China financials analyst at Macquarie Securities in Shanghai told the Financial Times. “What we would like to see is rational pricing and interest from private equity players.”

Leave a comment