China Huarong to establish up to five local bad debt managers this year

By Matthew Miller and Shu Zhang BEIJING (Reuters) - China Huarong Asset Management Co Ltd <2799.HK>, the country's biggest manager of distressed assets, plans to expand its bad debt business and establish up to five local government-backed asset management companies (AMCs) this year. Local AMCs are becoming an increasingly attractive investment for Huarong amid Beijing's campaign to reduce corporate debt risk and remove zombie firms from the market, Huarong Chairman Lai Xiaomin told Reuters in an interview late Tuesday. Lai estimated the market share of local AMCs will increase to as much as 20 percent in the future, largely due to their close ties with local governments and local enterprises. Currently, local AMCs, constrained by their smaller capital base, only take 5 percent of the bad debt market, while the Big Four AMCs control 95 percent, Lai said. Huarong is among the Big Four state-owned bad debt managers, created in 1999 to take over distressed assets from China's Big Four state-owned lenders. AMCs "will play an increasingly important role in reducing non-performing asset levels...and resolving systemic financial risks," said Lai, a delegate to the annual meeting of China's national parliament. China's banking regulator last October amended regulations, allowing each province to set up two local AMCs, from one previously, to handle rising bad debt nationwide. More than 30 local AMCs have registered and started operations. Chinese commercial banks sold 510 billion yuan (60.7 billion pounds) worth of bad loan packages last year, while Huarong alone bought 276 billion yuan, he added. Huarong also is increasing its participation in government-mandated debt-to-equity swaps, Lai said, with the plan to conduct 50 billion yuan such swaps within three years and 10 billion yuan in transactions by 2018. Lai said the company planned to issue additional 10 billion yuan ($1.45 billion) capital bonds later this year to boost capital strength. The Ministry of Finance has also approved the issuance of preferred shares. Huarong last year took a stake in local AMCs Huarong Kunlun Qinghai Asset Management and Huarong Jinshang Asset Management. Distressed asset management remains the core of Huarong's business, comprising a little more than half of the group's total income and 57 percent of pre-tax profit in the first half of 2016. The company, which releases its 2016 annual results later this month, reported a 33 percent net profit growth in the first half of last year to 11.12 billion yuan. ($1 = 6.9077 Chinese yuan renminbi) (Reporting By Matthew Miller and Zhang Shu; Editing by Randy Fabi)