Regional AMC should develop into the local development bank
The quiet launch of Jiangsu Asset Management Co. marks the start of the first local government-backed asset management company (AMC) to dispose of local banks' non-performing loans. Headquartered in Wuxi, Jiangsu Province, Jiangsu AMC has registered capital of 5 billion yuan. Its controlling shareholder is the city government's investment vehicle, Wuxi Guolian Development (Group) Co.
Nie Riming, a researcher of Shanghai Institute of Finance and Law, indicated that the AMC founded by local governments should build the M&A market and promote the transition of economic growth patterns in the first place. In some degree, regional AMC may play the role of “local development banks.”
Accurate Valuation for Non-performing Assets
China Securities Journal: How have the local non-Performing loans been generated?
Nie Riming: Since China’s entry of WTO, the foreign demands have increased rapidly, and fast development has been gained for export-oriented industries with the manufacturing industry as the main part. But this does not mean that the production capacity may expand infinitely. With the global expansion of China’s production capacity, the increase of external demands has gradually slowed down. After the breaking out of the international financial crisis which brought in the slowing down of foreign trade export growth, China should have adjusted the production capacity and properly slowed down the expansion speed. However, the government finally has postponed the course of production capacity adjustment through credit expansion and raising the debt ratios of enterprises.
Viewing from international comparison, the percentage of Chinese enterprise debts that occupy GDP is twice that of mature economies, and the profit level of Chinese enterprises is only their half. In order to resolve bad loans, it is necessary to solve the excessive production of the manufacturing industry. In order to reduce production capacity, it is inevitably to bear the pressure of enterprise bankruptcy and sliding down of the economic growth etc.
China Securities Journal: What experience of the four major asset management companies that local AMC may use for reference?
Nie Riming: Viewing in form, Jiangsu AMC has copied the pattern of four major AMCs of Huarong and China orient etc. At that time, in order to start the bank reforms, the government established the four AMCs that were responsible for receiving and handling the non-performing assets of the corresponding banks. Only after stripping off the non-performing debts, the four major state-owned banks may list in stock market and complete related reforms.
But if asset management companies want to receive non-performing assets, evaluation is a big problem. The precondition for effective evaluation needs a perfect securities market or a merger market so as to carry out accurate valuation for non-performing assets. If there is no accurate evaluation, the non-performing assets will be handled at will and be sold out with a cheep price.
Though the non-performing assets of banks have been stripped off, bad loans occur due to false judgment of banks. If non-performing loans are imputed to AMC indiscriminately, it would lead great moral hazard and encourage banks to issue loans with no rules. Taking Wuxi City as an example, the local photovoltaic and steel trade industrial enterprises were on the verge of bankruptcy in 2008, but the banks still provided loans for them. If there were no newly added loans, these enterprises would not have the chance to form more non-performing loans.
Orientation Should not be Big and Complete
China Securities Journal: How should local AMC give play to their special roles?
Nie Riming: We should make clear the orientation of local AMC. The first kind involves purely stripping off bad loans of banks, and the stripping off involves pricing problem and stripping off with what prices. At present, AMC in Jiangsu still have no specific plans. The second kind involves rescuing enterprises and let them maintain surviving and even recovering, then naturally the bad loans are not a problem. The third kind involves acquisition and reorganization, and the core way is to sell out the non-performing assets “with value,” the competition between regional AMCs and the four AMCs will facilitate the form of efficient M&A market in China. Of course this is a good plan. But viewing at present, it is estimated that regional AMC may have all the three, and I’m afraid that it is not a piece of good news.
Local governments establish regional AMC to strip off bad assets, the domestic M&A market is formed, and AMC will mainly handle this business in the future 5 to 10 years. According to the function orientation of local governments, classifications should be carried out for the non-performing assets of local investment and financing platforms, those that can be solved by market should be privatized, and governmental responsibilities should be enhanced for those with market failure. Here AMC present a transitional role, and building new markets should completely follow the market principles, maybe there will be temporary fiscal subsidies, but finally AMC should take market construction and market perfection as their own duties.
Besides, though the market plays a main role in economic growth, the position of local governments in the economic growth process can not be ignored. For the industrial structural transformation problem that China currently faces, in order to activate the non-performing assets, the economic structure must be changed. In the future, if we want AMC to play a role, the cultivation for new demands should be emphasized to guide the economic structural transformation and act as the role of “local development banks.”
The orientation of regional AMC should not be large conglomerates. How to operate assets and manage assets is what a market should do. Even if for the M&A between enterprises, it should also be submitted to the commercialized financial institutions to handle as far as possible. It can not only increase efficiency, but also can reduce the subsidies of taxpayers to commercial corporations. After handling non-performing assets, AMC in Jiangsu may act as regional development banks or funds, merely the future supporting and development direction should not be focused on the manufacturing industry, but should aim at forming a complete system for the infrastructure of modern service industry, so as to promote the transformation of economic structure to a more balanced and healthy direction.
(China Securities Journal | Reporter: Guan Pin | 2013-6-28)
