China puts on a garage sale
Those foreign investors prepared to pick their way through the rubbish on offer from China in the form of distressed loans may be able to uncover a few fantastic investment opportunities. They've done it before in other markets, but China offers its own unique challenges in seizing assets. It's certainly not for the faint-hearted. But those prepared to buy NPLs may benefit in other ways from the gratitude of the Chinese authorities.
"I have travelled all over China to see what they are trying to sell. And to be honest, I have seen some real garbage," says the banker. He looks out from his office in Hong Kong across to the mainland and continues: "But there must be some diamonds. The problem is we can't pay for those because we don't know where they are."
For the first time the Chinese are permitting foreign investors to buy cheap assets through participation in auctions of non-performing loans. Selling the NPLs is crucial to cleaning up the banking system. Foreign investors have made huge fortunes elsewhere profiting from the pain of others - notably in the US savings and loans crisis in the early 1990s - by buying bad loans and seizing the underlying assets and collateral.
Can they repeat their successes and make big money in China's nascent distressed loan market? Base returns of 25% are bandied around but with so many unknowns the figure is almost meaningless. Pricing the assets is extraordinarily difficult and the government doesn't want to be seen to be selling China on the cheap. Yet the bad debt problem is massive and urgently requires new capital.