Bad-debt investment products present new risks in China
As asset managers securitise more bad debt, risk in the financial system gets harder to spot
No matter how you bundle it, structure it or sell it off, bad debt is bad debt.
That argument might be lost on China’s state banking sector, which is having a go at making bad loans fade into opaque financial products that the banks themselves eventually buy back.
Collateralised loan obligations (CLOs) have a bad rap after malpractice in the industry helped bring on the financial crisis in the United States in 2008. So much so that China froze issuance that year.
Issuance of CLOs, or pooled loans that are resold as structured products, has picked up pace this year and is set to rage on with financial institutions as a driving force.
Data from Moody’s showed that CLO issuance was the main force in China’s securitisation industry in 2014 and 2015, with the volume of products issued in the first nine months of the year nearly outpacing the more than 250 billion yuan sold during all of last year. Bank of Beijing and China Development Bank sold about 38 billion yuan in CLOs in September.
READ MORE: China’s banks work overtime to soften bad-debt rates
The majority of the underlying assets in these products are not bad loans. Banks still don’t have regulatory clearance to issue CLOs backed exclusively by bad debt.
