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Strong competition for Chinese bad loans
( 2003-12-15 16:25) (Agencies)

Banks bidding in this week's landmark auction of $3bn of Chinese bad loans have warned that many of the assets are among the worst ever sold by the Beijing authorities.

However, bankers say strong competition among some 20 bidders - which include all the major Wall Street investment banks - to win in the biggest sale of bad loans to date, could push the prices above those of previous auctions.

The problems range from NPLs secured against rusty, disused factories and machinery, to land that has been mortgaged multiple times, making it hard to determine who has first rights to the property.

Wednesday's sale of non-performing loans by Huarong Asset Management, one of the four companies charged with cleaning up the balance sheet of state-owned banks, is crucial to China's efforts to repair its financial system.

The Chinese authorities have been criticised by credit rating agencies and foreign investors for being slow in selling off NPLs, which are estimated to total $350bn-$750bn.

Banks bidding for the 22 portfolios of NPLs paid $50,000 each to take part in the auction. They include leading US firms Goldman Sachs, Morgan Stanley, CSFB, Merrill Lynch and JP Morgan, as well as big private equity funds and distressed debt houses.

Bankers said the quality of many of the assets and the information received about the borrowers were poor, even by the low standards of distressed debt sales.

"Many of the assets are just of very bad quality," said one banker involved in the auction who declined to be named. "The information is so dated and limited that it is very difficult to quote a price."

Independent analysts agreed. "They are not good assets," said David Mahon, chief representative of Mahon China Investment Management, a Beijing-based investor that manages $170m for institutional investors in a dozen projects in China.

One problem is that since these NPLs were transferred from the banks to the asset management companies since 2000, little has been done to improve them.

Much of the machinery and factories used to secure the original loans have been left to decay while parcels of land used as collateral are the subject of competing claims from creditors.

The sale of the NPLs comes as Beijing prepares to list its biggest four banks, a process also aimed at helping clean up its financial system. China Construction Bank is in the running to be first, with expectations it will choose financial advisers for its listing before the end of the year.

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