China considers moving stakes in bad banks to sovereign wealth fund

BEIJING – China is considering transferring government ownership in the nation’s biggest bad debt managers to a unit of its sovereign wealth fund as part of a financial regulatory regime overhaul, according to people familiar with the matter.

Under the current proposal, the Ministry of Finance will move its stakes in China Cinda Asset Management, China Great Wall Asset Management and China Orient Asset Management to Central Huijin Investment, said the people, asking not to be identified. China Investment Corp (CIC), the parent company of Huijin, will also assume the rights from the banking regulator to nominate key executives of the asset managers as their major shareholder, said one of the people.

Meanwhile, some other state firms currently affiliated with Chinese financial regulators will also be transferred to Huijin, said the people. That includes China Securities Finance, which was entrusted with trillions of renminbi of funding to support the stock market during its 2015 rout, they added.

The move demonstrates Beijing’s commitment to separating the government’s roles as a regulator and shareholder, streamlining oversight and instilling more discipline at some of its state-owned entities. It will also allow the watchdogs to focus on curbing risks in the nation’s US$60 trillion (S$81 trillion) financial industry, at a time when the economic recovery is waning.

Yet, one risk is that the transfers could raise questions among creditors over the strength of government support during times of stress. While the bad-debt managers would remain state-owned under the proposal in much the same way as the nation’s biggest banks, the government’s shareholdings would be less direct.

Beijing’s stakes in these firms would be worth about US$33 billion, according to Bloomberg calculations based on their shareholders’ equity value.

The plan has yet to be finalised and could change, said the people.

Huijin, a unit of CIC with US$1.35 trillion under management, has long been the government’s proxy for holding stakes in state banks, insurers and brokerages. It has direct ownership in 18 financial institutions as of end-2022, according to its website.

China Huarong Asset Management, once the biggest among so-called asset management companies, will be excluded from the latest reform after a government-orchestrated bailout in 2021 saw Citic Group overtake the Finance Ministry as its largest shareholder, said the people. Huarong roiled Asian credit markets in 2021 as it failed to release its annual report on time, eventually revealing a massive loss for 2020.

China created Cinda, Great Wall, Orient and Huarong to buy bad loans from banks in the aftermath of the late-1990s Asian financial crisis, when decades of government-directed lending to state companies had left China’s biggest lenders on the brink of insolvency. The firms later expanded beyond their original mandate, creating a labyrinth of subsidiaries to engage in other financial businesses, including shadow lending. BLOOMBERG

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