In a widely anticipated move, People's Bank of China (PBOC) and China Banking Regulatory Commission (CBRC) have given the green light to two nonperforming loan securitizations for the second phase of pilot deals in the People's Republic of China.

PBOC and CBRC - joint overseers of capital markets deals by financial institutions - announced to state media agencies that China Cinda Asset Management Co. and China Orient Asset Management Co. will respectively issue deals of RMB4.75 billion ($604 million) and RMB700 million via the Interbank market.

The Chinese government established Cinda and Orient - along with Huarong AMC and Great Wall AMC - in 1999 to tackle the huge NPL problem afflicting the country's financial system.

While approximately RMB2.6 trillion of NPLs have been resolved in the intervening years, analysts have estimated the amount of bad loans remaining to be around RMB5 trillion. With some economists predicting China's economic growth rate will slow down in the next few years, the NPL figure could rise further still without intervention.

The resolution effort - and finding new solutions to that end - has reached a critical point for a number of reasons. Firstly, China's financial system is due to be opened to foreign competition from the start of 2007 as a condition of the country's entry to the World Trade Organization.

Secondly, and perhaps more significantly, the market for selling distressed loans directly to foreign investors - including major investment banks - has dwindled to nothing in the past two years. These buyers are no longer willing to pay high prices for loan portfolios that have, for several reasons, proved difficult to recover money from.

This was highlighted last year with Cinda forced to abandon a planned sale of NPLs when the bids that came in were well below its minimum price target.

Consequently, the authorities have belatedly turned to securitization. If the upcoming deals - which could be launched before year-end - are successful, several NPL ABS offerings from AMCs and banks are likely to be seen in 2007.

Bankers believe, however, this is dependent on the first NPL deals being priced properly, enticing local investors with enough spread over straight debt issues.

Cinda's deal will be structured by China International Capital Corp. (ASR, 8/21/06). The five-year issue is backed by a pool of bad loans with a face value of RMB21 billion acquired from Bank of China. According to reports, Cinda will purchase RMB1 billion of the bonds.

Orient, meanwhile, is working with Yinhe Securities on its deal, backed by RMB9.2 billion of loans purchased from China Construction Bank. These are not the first examples of NPL securitization from the PRC. Huarong in June 2003 completed a deal backed by RMB13.25 billion worth of loans.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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