Asset Management Companies in China

Table of Content

1 Introduction

2 Description of Asset Management Companies in China
2.1 General overview
2.2 China Great Wall Asset Management Corporation (CGWAMC)
2.3 China Orient Asset Management Corporation (COAMC)
2.4 Cinda Asset Management Corporation (CAMC)
2.5 Huarong Asset Management Corporation (HAMC)

1 Introduction

The idea of using asset management companies to handle non-performing loans was first introduced in the United States in the 1980s right after the saving and loans debacle. It has also been used in other countries like Sweden, Mexico, Korea and Malaysia, with not always positive results. After the recession in the late 1990s, Chinese “big four” state-owned bank were saddled with bad loans estimated to be about $430 billion or as much as 42% of all loans (Gamble, 2009). Hence, China’s government has decided to implement the same securitization strategy in the late 1990s.

Securitization is a one of the measures to solve the non-performing loans problem. In theory, the way securitization works, is having an entity that generates receivables in the form of predictable cash flows, which sells the receivables to a bankruptcy remote Special Purpose Vehicle (SPV). The SPV issues securities and the funds from the sale of such securities are used to pay for the acquisition of the receivables. The idea behind the securitization is to separate the credit risk of getting receivables from the entity. Through over-collateralization and monoline insurance, the securities may achieve a higher rating than that of the Originator and thus lower the financing cost (Hickman & Chen, 1999).

2 Description of Asset Management Companies in China

In this chapter, the four Chinese AMCs will be presented. First, the general overview of the asset management companies in China will be provided, including their roles, financing, funding etc. Then, in the following subchapters, the focus will be put on presenting more specific information about each of the for AMCs. However, with the limited information about the companies available in English, some descriptions will be less detailed than others.

2.1 General overview

China's four major financial assets management companies (AMC) were set up in 1999 to manage, purchase and dispose non-performing loans (NPLs) of the “big four” state-owned commercial Chinese banks. The four AMC, with the corresponding banks, are:

- China Great Wall Asset Management Co. - Agriculture Bank of China (ABC)
- China Orient Asset Management Co. - Bank of China (BOC)
- China Cinda Asset Management Co. - China Construction Bank (CCB)
- China Huarong Asset Management Co. - Industrial and Commercial Bank of China (ICBC)

All four companies are wholly state-owned financial management companies and were established with the approval of the State Council of the People’s Republic of China. The registered (initial) capital of each of the four AMC was RMB 10 billion, fully funded by the Ministry of Finance (China Great Wall Asset Management Corporation, 2011; China Great Wall Asset Management Corporation, 2011; Hickman & Chen, 1999 & China Huarong Asset Management Corporation, 2007).

The idea of setting up the AMCs was to remove NLPs from the state banks, or in other words cleaning up the balance sheets of the banks. The large volume of bad loans in China was the result of decades of government lending to unprofitable and poor performing state enterprises, property speculation in the early 1990s, and a lax internal risk control system. That was a part of a medium-term bank restructuring plan (Fung, George, Hohl, & Ma, 2004). The four companies, which got a combined 1.4 trillion yuan (US$184 billion) of non-performing loans at inception, were required to finish the disposal by the end of 2006 (China Daily, 2007).

Table 1 (below) shows the main characteristics of AMCs. Actually, when we take a closer look at the table, there are no major differences between the four companies. They all have the same legal basis, official mandate, and a original sunset date (life time) of 10-year (because the AMC bond have a maturity of 10 years). Hence, the companies should have stopped functioning in 2009, but the reality is different and they are still operating (Fung, George, Hohl, & Ma, 2004).

Table 1. Main characteristics of AMCs

Abbildung in dieser Leseprobe nicht enthalten

Source: Fung, George, Hohl, & Ma, 2004

At the beginning, the four AMCs were reporting on a monthly basis to the Ministry of Finance and The People’s Bank of China (PBOC). The PBOC also conducted regular inspections of the AMCs. However, after establishing the China Banking Regulatory Commission (CBRC) in 2003, it took over the supervisory responsibilities over AMCs from the PBOC. Moreover, since the AMCs are also licensed securities dealers, they are supervised by the China Securities Regulatory Commission (CSRC) as well (Ma & Fung, 2002; Fung, George, Hohl, & Ma, 2004).

Compared to some other East Asian countries, e.g. Taiwan, Korea, Malaysia, (Fung, George, Hohl, & Ma, 2004), were the centralized AMC system was established, China decided to set up separate AMCs to resolve the NPL problems for each of the big four state-owned banks. The reason for such approach was the fact, that the big four Chinese banks held nearly 70% of the market share in China. Moreover, they specialized in different areas. The Agricultural Bank of China, for instance, had a large share of debtors with a relatively small amount of outstanding balances in it’s portfolio. Obviously, to deal with such loans an AMC need different approach and set of skills than the one dealing with banks that concentrate on industrial loans to large state-owned companies. In addition, having four different AMCs encourages competition among them.

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