Foreign investors are eager to make multiple and sizable purchases of
non-performing loans (NPLs) in China over the next three years, due partly to
growing interest in investments in real estate and hotels, a report from
PricewaterhouseCoopers (PwC) said yesterday.
"We estimate that foreign
investors have approximately US$5 billion to US$10 billion earmarked for
investment in China's distressed markets, including NPLs," said Ted Osborn, PwC
advisory services partner.
The report, issued by one of the world's
largest accounting firms, shows that around 57 per cent of interviewees expect
to see increased opportunities in NPLs and other types of distressed investments
over the next one to three years.
According to the China Banking Regulatory Commission, as of the end of the
third quarter of 2006, the total number of NPLs in China's commercial banks was
approximately 1.3 trillion yuan (US$160 billion). However, this amount did not
include the NPLs that are presently held by asset management companies
(AMCs).
Recent press reports indicate that as of the second quarter of
2006, AMCs have resolved approximately 1.17 trillion yuan (US$145 billion) of
the 1999 transfer that totalled 1.4 trillion yuan (US$170 billion). This implies
the AMCs still have a large number of NPLs on their books.
"The
overwhelming majority of respondents (89 per cent) said they expected to invest
in NPL portfolios from AMCs over the coming one to two years, indicating their
clear optimism for the market," said Brian Cheung, another partner of the
advisory services of PwC, adding investors are expecting returns ranging from 21
per cent to 30 per cent.
However, as there are other types of distressed
or "under-valued" investments emerging in China, such as the making of high
yield loans to cash-starved real estate projects and private equity investments, NPLs are no longer the only game
in town for distressed investors.
When asked what types of investments
organizations planned to make in China over the next two years, 56 per cent of
respondents said they expected to invest in real estate, hotels and private
equity.
"Foreign investors prefer NPLs to be secured by land or real
property," Cheung said.
The survey shows that all of the interviewees
desire investments of more than US$10 million, 44 per cent preferring investment
between US$10 to US$25 million. Thirty one per cent would like to have
investment between US$26 to US$50 million.
Consistent with PwC's 2004
survey on NPL investment, the top two locations for NPL portfolios were Guangdong and Beijing.
"These results are not surprising given
Guangdong's close proximity to Hong
Kong and its more developed economy and stressed market," Cheung
explained.
But more investors are prepared to consider opportunities
outside the traditional "hot" NPL markets, with priority going to Shandong, Tianjin, Liaoning and Zhejiang.
"This might be an indication that investors
are now more mobile and flexible from a geographic standpoint," said Situ
Xinmei, senior manager with PwC.
PwC's report, the China NPL Investor
Survey 2006, is based on an investigation of 40 experienced investment banks and
hedge funds.
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