Cinda Asset Management Corp., China's first bad debt agency, has begun taking the first steps on the long march towards resolving the nation's non-performing loan problem.

Cinda (formerly known as Xinda) was set up in April in order to acquire and dispose of the NPLs of China Construction Bank (CCB), one of the country's four largest state-owned commercial banks (ASRI, 5/31/99, p. 2). It has 25 branches across the country.

In September, Cinda completed its fourth debt-for-equity swap with a CCB debtor, a state-owned enterprise called Guixi Fertilizer Plant.

Under the arrangement, Cinda purchased Rmb894 million ($108 million) of Guixi's overdue debts in exchange for an equal amount of equity. A separate company will manage most of the performing assets, production facilities and property, whose profits will be used to settle the obligor's debts with CCB. After Guixi improves its financial position, Cinda may sell its shares back to the company or list them on a local exchange.

"For major industrial concerns with good prospects, we will consider debt-for-equity swaps as a way to reduce their indebtedness," Cinda executive associate director Lin Shuo-kang told the local media. Besides debt-for-equity swaps, other recovery methods include auctioning off assets and issuing NPL-backed securitizations, he added.

The creation of Cinda and three other asset management companies to resolve the NPL burden of China's "big four" banks show that the government is serious about bank reform, after decades of central planning. But ultimately the government, and not investors, will have to fund most of the cost of bank reform, since any Chinese NPL-backed issue would find few takers, said sources.

"While setting up AMCs for the disposal of bad loans is an extremely important step, a weak legal system constitutes a major barrier to disposing of NPLs. And China's nascent capital markets poses considerable difficulties to securitization of bank loans in the secondary market," said Fred Hu, in a Goldman Sachs research report.

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