Struggling Chinese asset funds struggle to profit from housing sector slump

Struggling asset managers in China’s private sector are struggling to take advantage of the country’s slowing economy, with no bottom in sight for its collapsing property sector and lenders reluctant to write off bad debts.

Nearly a dozen distressed investment funds told the Financial Times they had not increased their exposure to residential and commercial properties, typically the most popular form of collateral in Chinese debt restructurings, despite the skyrocketing defaults in the real estate sector.

“Many of us don’t know where to spend our money,” said an executive at Qingdao Huba Asset Management Co, which specializes in bad debt trading.

China is suffering one of its worst economic downturns in decades after government efforts to reduce debt in the property sector, which accounts for around a third of economic output, led to a collapse in house prices.

This has combined with the negative impact of the government’s strict zero-Covid policy and a regulatory blitz against high-flying tech companies to depress domestic demand. Even real estate companies once considered financially sound, such as the country’s largest real estate group, Country Garden, are reporting declining profits.

Although Beijing announced interest rate cuts and some rescue initiatives for the real estate sector, it failed to stop the collapse: house prices fell for 11 consecutive months until July . This has made asset managers reluctant to enter the market for fear of not recovering their investments.

“[Distressed asset management] only works when you think there will be mark-to-market pricing and cyclical improvement,” said Andrew Collier, managing director of Orient Capital Partners in Hong Kong. “But if you don’t have an accurate price and you have a structural downturn that could last another decade, there’s no way to sell your assets.”

Banks are offloading existing bad debts, but mostly transferring them to large state-run asset managers, such as China Huarong Asset Management and Great Wall Asset Management. Official data shows the country’s banking system disposed of Rmb 1.4 billion ($204 billion) in non-performing loans in the first half of this year, up 18 percent from a year earlier.

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But rather than profit from the sell-offs, many struggling private sector asset managers posted losses. Shanghai Greencourt Investment Group, once an industry leader, reported an 86% drop in profits in the first quarter of this year from a year earlier before being delisted in May. Rival GI Technologies Group lost Rmb 113 million in the first quarter of this year, following bigger losses in 2021.

Consultancy PwC said in a report this month that China’s ‘bad banks’ – as its troubled asset management firms are called – are becoming less ‘active’ even though they are supposed to thrive in a recession. .

Local authorities want asset management companies to bail out hundreds of unfinished residential projects left behind by cash-strapped developers, especially in “underdeveloped” smaller towns.

But James Li, owner of a bad Beijing-based bank, said it took at least twice as long as normal to sell foreclosed apartments in underdeveloped cities, such as Zhengzhou in central Henan province. where there are many unfinished projects due to rising supply and lukewarm demand.

Official data shows the number of foreclosed homes in Zhengzhou nearly doubled in the six months to the end of March. The situation has shown few signs of improving in recent months, local officials said. Meanwhile, home sales in the city fell by more than a third in the first seven months of this year from a year earlier.

“I avoid economic turmoil as much as possible,” Li said. “That leaves a small number of cities that are still worth investing in.”

Even commercial real estate, ranging from shopping malls to office buildings, has lost its luster as Beijing’s tech sector crackdown and zero-Covid policy have pushed up vacancy rates and hurt rents.

Jackie Wang, a struggling asset manager based in Shenzhen, said he had stopped looking at office buildings in the southern city. Big tech groups were scaling back following a regulatory crackdown on education and internet platforms that wiped billions of renminbi off their market value.

“We don’t know when the worst days for tech platforms will be over,” Wang said. “This means their demand for office space, a key market driver, will continue to weaken.”

The problem is exacerbated by slow bad debt write-offs among Chinese lenders despite an increase in defaults. Official data shows the country’s banking system added Rmb 107 billion in new non-performing loans in the first half of this year – slightly more than the same period of 2021 but far less than the previous six years when the economy was weak. strong.

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A government adviser said the regulator, led by the China Banking and Insurance Regulatory Commission, had eased bad debt ratio requirements for lenders so they could support the economy. “You will not be punished for covering a few billion yuan of NPL as long as you provide liquidity to cash-strapped small businesses,” the person said.

As a result, many lenders had deferred writing down bad debt even though their asset quality had deteriorated rapidly along with the broader economy, officials at two state-owned banks said.

“We cannot accurately assess bad debts when the market is rigged by the state,” said Li, the Beijing-based troubled asset manager.

Creditors avoiding write-offs means there are fewer bankruptcy proceedings, which troubled asset managers need to price toxic loans. Shanghai-based bad bank 01 Asset Management Co estimated that less than 10% of struggling property developers had undergone bankruptcy restructuring because it would force lenders to write off their loans.

For struggling asset managers, the upshot is that they will likely have to wait for the government to find the political will to launch a comprehensive bailout for the property sector, industry operators said.

“We become valuable when the government wants to solve the problem of bad loans once and for all,” said the head of a struggling asset management company in Qingdao. “[But] they or they [always] end up trying to delay the day of reckoning.

Are we headed for a global recession? Our economics editor Chris Giles and US economics editor Colby Smith discussed this and how different countries are likely to react in our latest IG Live. look at this here.

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Struggling Chinese asset funds struggle to profit from housing sector slump

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