Sat, July 13

Unification Amidst Financial Evolution: The Merging Landscape of China’s Asset Management Giants

The world’s tumult ultimately cannot escape the inevitability of “unification after division and division after unification”. According to reports from Xinhua Finance on January 28th, the three major asset management companies, China Cinda, Orient Asset, and Great Wall Asset, will be merged into China Investment Corporation (CIC) and renamed as China CITIC Financial Assets. With this, after more than 20 years of independence, China’s four major asset management companies have been merged again. Our asset management companies were established in 1999. At that time, due to the impact of the Asian financial crisis, the non-performing assets of state-owned banks and enterprises surged directly. To resolve financial risks, asset management companies were established.

Taking the four major asset management companies as an example, their initial targets were also different. Orient Asset was established in October 1999 to take over the non-performing assets of the Bank of China. China Cinda was established in April 1999 to take over the non-performing assets of China Construction Bank and China Development Bank. China Huarong was also established in November 1999 to take over the non-performing assets of the Agricultural Bank of China. Careful students should be able to notice that these four major asset management companies correspond precisely to the four major state-owned banks. In essence, it means removing non-performing assets from state-owned banks, allowing them to go into battle lightly. This is indeed the case. At the China 500 Forum in 2023, three of the four major state-owned banks ranked in the top 10 of China’s top 500 enterprises, with the remaining Bank of China ranking 14th.

So, how can we understand the business of asset management companies? Let’s take an example: Suppose a company owes the bank 1 million. Now, it doesn’t have the money to repay. For the bank, this becomes a bad debt. So, the bank discounts the 1 million bad debt, say at a rate of 30% or 50% and then packages it to sell to an asset management company. This way, the bank’s bad debt is removed. The debt relationship shifts from being between the company and the bank to being between the company and the asset management company.

Astute students might wonder: if the bank can discount and sell the debt to an asset management company, why can’t it do it itself? From what I understand, it’s about liability issues—who signs off, who takes responsibility. Banks are very strict about compliance; nobody wants to be the scapegoat. From a market perspective, the bank deals with bad assets in a legal and compliant manner, and the asset management company also operates legally and compliantly. The bank gets out of the mud, the pressure on the debtor to repay decreases, and the asset management company makes money.

So you see, what you might think of as bad debt can be profitable. The logic behind it is as described above. Of course, the example given is just one aspect, for the sake of understanding. In reality, there are many forms of dealing with bad assets, such as reselling companies through restructuring or converting debt into equity. Financial and insurance institutions classify loans into four types: normal, overdue, doubtful, and bad debts, with the latter three collectively referred to as non-performing loans (NPLs). In China, overdue loans are those not repaid on time, while doubtful loans are those overdue for over two years or whose projects have been abandoned with no hope of recovery, requiring the write-off of bad debt provisions. Non-performing assets are a relatively special industry, usually booming due to economic downturns and high bank non-performing loan rates.

From a timeline perspective, the period from 1999 to 2004 was characterized by policy-driven operations. The establishment of the four major asset management companies was aimed at handling and digesting non-performing loans from the four major state-owned banks. Starting from 2004, there was a shift towards commercialization. Non-performing asset management companies began to address the needs of joint-stock commercial banks and city commercial banks. By 2010, it entered a comprehensive commercialization stage, expanding its business into non-financial enterprises and branching out into areas such as futures, public funds, financial leasing, and others.

In terms of classification, besides the four major asset management companies, there are also local asset management companies, consisting of provincial and municipal-level entities. They can only handle non-performing assets within their respective regions. Additionally, there are private asset management companies, with well-known ones including Dingyi Jiuyin Xindongcheng’an and Xiangshu Capital.

Now, let’s focus on local asset management companies. It’s commonly said that various industries are facing tough times, which is true. However, strong entities never complain about their environment. Local asset management companies are dealing with large-scale non-performing assets in corporate accounts, usually backed by collateral. Therefore, they are mainly acquired and handled by the four major asset management companies.

Reports from the 21st Century Business Herald reveal that there are fewer non-performing assets exposed in the primary market, and their prices have been consistently rising. Data from shows that in the third quarter of last year, the average discount rate for large corporate accounts was 77%, a 24.2% increase from the previous quarter. To seize non-performing corporate assets, some regions first acquire non-performing assets worth tens of billions of yuan through their government platforms and then proceed with further operations, such as discounted acquisitions or packaging for resale. Understandably, they would prefer to keep the benefits within their jurisdiction.

Another highlight of local asset management companies nowadays is their focus on non-performing individual loans. In January 2021, the China Banking and Insurance Regulatory Commission issued a notice regarding the pilot work of transferring non-performing loans. Batch transfers of personal non-performing loans were allowed. Data from UnionPay Network shows that non-performing loan transfers started from scratch in 2021, with only 50 million yuan in transactions in the first quarter. By the third quarter of 2023, the cumulative volume of listed non-performing loans exceeded 40 billion yuan, with consumer loans accounting for 206 billion yuan or 50.43%. Now, local asset management companies have become the main force in disposing of batch personal non-performing loans. However, compared to non-performing corporate loans, personal loans carry higher risks, higher costs, and lower profits. Some journalists have reported that although local asset management companies handle a significant amount, it’s not as profitable as it may seem.

Finally, returning to the main topic, the merging of the four major asset management companies reveals a very clear message: strengthening financial supervision. At their inception, three of them are now merged into China Investment Corporation (CIC), and one merged into CITIC Group. As I previously explained during the interpretation of the once-in-five-years financial conference, it also emphasized the need to improve and strengthen state-owned financial institutions. So, from this perspective, it aligns with the policy direction. Moreover, it’s also a measure to guard against financial risks.

Take China Huarong for example, it expanded rapidly over the past years, achieving a net profit of 22 billion yuan in 2017. However, in both 2020 and 2022, it suffered losses. One significant reason for this is the excessively high proportion of non-performing real estate assets. By the end of 2020, the four major asset management companies’ parent companies had purchased debtor companies in the restructuring business, with the balance of non-performing real estate debt reaching nearly 450 billion yuan.

In a report by CITIC Securities at the end of 2021, the restructuring of non-performing loans of human real estate companies amounted to approximately 88.675 billion yuan, 192.372 billion yuan, 99.43 billion yuan, and 65.402 billion yuan respectively, accounting for about 50% each. Now, with the merger into CITIC, leveraging a larger platform would make it easier to implement reforms and mitigate risks.

Previously, you might have seen this market as fragmented, focusing on vertical segments. But now, with time passing, things have come full circle. It seems we couldn’t escape the fate of “unification after division and division after unification”. Looking at it this way, we can expect more re-mergers of financial institutions in the future. After all, this enhances stability and reduces systemic risks.