China Orient Asset Management Corporation said yesterday it had signed an agreement with China Cinda Asset Management Corporation to purchase a massive batch of bad loans.

The 130 billion yuan (US$15.6 billion) of non-performing loans were bought by Cinda earlier this year from the China Construction Bank (CCB), one of the nation's four State-owned commercial banks that is planning an initial public offering.

"China Orient Asset Management Corporation won the competition for the non-performing loan sales by China Cinda Asset Management Corporation, in what is an experimental move by asset management companies to dispose of bad loans on a large scale basis in a market-based way," Orient said in a statement.

The company will "effectively resolve the non-performing loans in accordance with related regulations, and pursue maximal recovery," it said, without giving other details of the transaction.

China's four State-owned asset management companies (AMCs) China Huarong, China Cinda, China Orient and China Great Wall were set up in 1999 and took over a total of 1.4 trillion yuan (US$168 billion) in non-performing loans (NPLs) from the nation's four State-owned commercial banks.

Their establishments were a major step by the Chinese Government to reform the NPL-ridden banking sector, and followed a 270 billion yuan (US$33 billion) of capital injection into the four banks.

In June, Cinda beat the other three AMCs and purchased a combined 280 billion yuan (US$34 billion) of distressed assets, categorized as "doubtful" under the internationally-accepted five-category loan classification system, in a widely-watched auction from the Bank of China (BOC) and CCB.

The two banks were chosen for a pilot joint-stock restructuring and received a combined US$45 billion capital injection at the end of last year.

Cinda said earlier it will start resolving the "doubtful" loans it bought from the two pilot banks next year, and will sell them in auctions to both domestic and foreign investors.

Analysts say Orient's purchase of the massive NPLs will help lay a solid basis for its planned commercialization.

Earlier this year, the four AMCs were given permission to accept new deals as a trustee and purchase bad assets on a commercial basis, a long-awaited reform move that extends their life expectancy beyond an original 10-year period.

The reform also sets specific targets on how much cash the AMCs should recover from the distressed assets transferred to them upon their establishment, and total expenditures allowed in their work, sources said.

AMCs who recover more cash than the targets will be rewarded, or will have a reduction in their bonuses if they fail to meet them.

Many investors expect the flow of distressed asset transactions to grow in the coming years as Chinese commercial banks clean their balance sheets in preparation for initial public offerings.

Non-performing loans (NPLs) at China's four State-owned commercial banks BOC, CCB, Industrial and Commercial Bank of China and Agricultural Bank of China still totalled 1.5 trillion yuan (US$180 billion) at the end of June, although that was 400 billion yuan (US$48 billion) less than half a year earlier.

But accounting firm Ernst & Young, which was the financial advisor for a few major Chinese NPL auctions, has warned that some foreign investors are losing their interest due to inadequate transactions.

Only five such international deals have been approved or completed in the past few years, out of a dozen or so signed so far, which is slow compared to many other markets, it said.

(China Daily December 1, 2004)