China consolidates bad debt management amid market reforms

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China plans to merge three of its biggest state-owned bad debt asset managers under the wing of its sovereign wealth fund, the China Investment Corp (CIC). This announcement, reported by Xinhua news agency on Sunday, comes alongside other recent financial reforms, signalling Beijing’s quest to stabilise its capital markets.

The three asset managers – China Cinda, Orient, and Great Wall – specialise in handling non-performing loans and distressed assets. Bringing them under the umbrella of the CIC, one of the world’s largest sovereign wealth funds aims to centralise bad debt management and potentially unlock new avenues for restructuring and recovery.

This consolidation forms part of a broader package of financial reforms unveiled in recent weeks. Just a day earlier, China’s securities regulator temporarily suspended lending for restricted shares, another measure intended to inject stability into the stock market. These initiatives follow a period of market turbulence triggered by growing financial risks, particularly within the real estate sector.

China’s property market has faced significant headwinds since 2020, when authorities tightened regulations on developers’ debt-fueled growth. While promoting long-term financial health, this crackdown led to a slump in the sector, impacting consumer spending and overall economic growth. Evergrande’s recent liquidation struggles are a testament to this downfall.

The real estate troubles in China are not isolated but intricately linked with local government finances. Historically, local governments have heavily relied on revenue from land sales to developers. However, the recent clampdown has disrupted this traditional revenue stream, creating financial challenges for local authorities.

Last week, the central bank’s cut in mandatory cash reserves aimed to ease liquidity constraints for banks. At the same time, a new policy mandate specifically targets alleviating the cash crunch developers face. The consolidation of bad debt management under the CIC adds another piece to this reform puzzle.

By centralising expertise and resources, the merger potentially allows for more efficient restructuring of distressed assets, mitigating risks within the financial system and ultimately contributing to a more stable and resilient property market. The full details of the merger and its long-term implications remain to be seen.

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