Grandstand. Chinese financial regulators have announced that a subsidiary of Citic Group, a giant holding company ultimately controlled by the finance ministry, is to be turned into a bad bank, responsible for buying bad debts from Chinese banks. Beijing commits to managing the financial impact of the Covid-19 crisis – according to a proven recipe, but which further distances the possibility of structural reform of the “socialist market economy”.
As the Chinese economy recovers, Chinese authorities must deal with the aftermath of almost two months of business disruption. Bankruptcies will be inevitable, but the goal will be to avoid those that are large enough to have a systemic effect (by triggering a chain reaction). The management of the case of HNA Group, a conglomerate focused on air transport, and subject to restructuring under public control, provides a first example.
In this management, the banks will, as always in the Chinese system, play a central role. Only refinancing or rescheduling of reimbursements will prevent the fall of economic players too large to disappear. And these banks, as always in the Chinese system, will need help to be able to continue operating, while the amount of their bad debts will explode.
“Clean up” the balance sheets of major banks
It was in this context that the announcement of the creation of the first national-scale defeasance structure came about since the Asian crisis of 1998. It will be responsible for “cleaning up” the balance sheets of the big banks, under the control of the Ministry of Finance.
The future China Galaxy AMC will have a national vocation, and on a whole new scale
This creation is not an emergency measure, but a structural measure; Jiantou Citic AMC (Asset Management Co), the subsidiary concerned, has six months to prepare for its new role, while changing its name to become China Galaxy AMC. Galaxy will join four other entities of a comparable nature – China GreatWall AMC, China Orient AMC, Cinda AMC and Huarong AMC – created in 1999. These precursors were established in the aftermath of the Asian financial crisis, which China had wiped out at the cost of a profound deterioration in the balance sheets of its major banks. They had cleaned up their assets by buying back most of their bad debts. These four “original” AMCs then bought $ 170 billion in non-performing loans from the country’s four largest banks – a staggering sum equivalent to more than 15% of China’s GDP at the time.