Investment Strategies
Economic Woes Put Spotlight On China's Growing Distressed Debt - Report
Distressed debt investors and other specialists may soon have a chance to buy assets at a fraction of their face value in China, given the levels of non-performing loans and the worsening economic position for the country, aggravated by the virus outbreak.
Investors may now be focused on China's coronavirus crisis but the state of its debt market is also a key discussion point, and there are opportunities amidst some of the problems, according to a new report.
PricewaterhouseCoopers has reportedly stated that non-performing loans and other "stressed assets" will continue to grow after hitting $1.5 trillion in 2019 (source: Bloomberg, 5 February). But on the flipside, China has loosened market access to foreign players, and US firms can apply for licences to buy non-performing loans directly from banks.
The story sheds light on how China's debt markets, sometimes shrouded by opaque reporting rules in the Communist-run country, are nevertheless prompting interest in unexpected ways. The market for distressed assets is well established in the West. As China has developed, so has the potential for some borrowings to turn sour.
The newswire noted that the virus outbreak in China may add to strains on China's financial system.
“The size of the distressed market is huge,” James Dilley, Hong Kong-based partner at PwC, was quoted by Bloomberg in an interview. “If you’re a distressed debt fund sitting in Boston, sitting in New York, sitting in London, the market is just so big it’s difficult to justify to LPs [limited partners] why you’re not looking at China.”
As WealthBriefingAsia has noted for some time, a concern for some economists and strategists is whether a significant slowdown in China's economy will expose the true state of the country's debt markets and levels of leverage. To some extent, such concerns preceded the US-China tariff conflicts that ratched up after the election of US President Donald Trump in 2016.
Distressed debt funds and other types of investor, sometimes dubbed "vulture funds", typically buy distressed assets and sell them after restructuring a business or other entity, hoping to sell assets at a profit.
