Chinese banks are putting bad loans up for sale at a record pace, as regulators push for faster disposal of sour debts amid rising consumer defaults during an ailing post-COVID economic recovery.
Issuance this year of securities backed by non-performing loans (NPLs) is set to jump about 40% from a year ago to a record, data from a ratings agency showed, as lenders rush to offload distressed assets linked to mortgage, credit card and consumer borrowings.
This week alone, six banks including China Everbright Bank (601818.SS), opens new tab and Bank of Jiangsu (600919.SS), opens new tab plan to issue 1.5 billion yuan ($210.49 million) worth of asset-backed securities (ABS) based on bad loans, according to sales prospectuses reviewed by Reuters.
Typical buyers include fund managers, wealth management firms, specialist distressed debt investors and some hedge funds.
“Securitisation has become a regular tool for Chinese banks to dispose of bad loans. It’s efficient, flexible, and regulators are giving relatively faster approvals for such products,” said Kan Zhou, head of structured finance ratings at S&P Global (China) Ratings.
Issuance is climbing “also because in an economic downturn, there’s growing supply of non-performing assets,” he said, expecting the market to grow further next year.
Chinese authorities have blacklisted 8.57 million people who missed payments on everything from home mortgages to business loans, according to court data. The cumulative figure is up 50% from the 5.7 million defaulters at the beginning of 2020, highlighting the scars from the pandemic and its aftermath.
As of Dec. 17, Chinese banks had sold 42.5 billion yuan ($5.96 billion) of bond-like securities based on bad loans this year, up 37% from 2022’s total and the highest since its records began in 2016, according to data from a unit of CCXI, a Chinese ratings agency.
In addition, 60 billion yuan worth of bad loans changed hands on the official marketplace for credit assets during the January to September period, up 61% from last year’s total, data from an agency affiliated with China’s banking regulator showed.
The booming market for bad loans underscores the challenges facing a banking sector grappling with a real estate crisis, local government debt woes and rising individual delinquencies as China’s post-COVID recovery fades.
Outstanding bad loans at Chinese banks hit 3.2 trillion yuan at the end of September, up one-third from 2.4 trillion yuan at end-2019, according to the country’s banking regulator.