When the four large state-owned banks in China began to establish units to hold their non-performing loans in 1999, the new asset management agencies’ mandate was to try to sell or collect on as many of these troubled assets as they could. They themselves were given a ten-year life and then expected to quietly close up shop.

These units were meant to be a footnote, testimony to a time when the banks, including China Construction Bank, ICBC, Bank of China and Agricultural Bank of China, were arms of the state who served the state by making loans at the behest of the state and if those loans went wrong, that was the responsibility of the state rather than the banks themselves.

That may have been the original plan, but it hasn’t exactly worked out that way.

In the early days of the lives of these debt resolution units, (a group which includes China Cinda Asset Management, China Huarong Asset Management, China Great Wall Asset Management and China Orient Asset Management), foreign investors who converged on Beijing in the hope of buying troubled loans at a steep discount from these companies were disappointed at their apparent reluctance to sell.

“The faster they got rid of the loans, the faster they would dig their own grave,” says one Hong Kong-based banker with extensive dealings with these firms. “Why would they want to die?”

Now that reluctance to hold fire sales of loan portfolios looks prescient as many of the state-owned companies that borrowed the money are prospering, giving the units charged with collecting on the debts a new lease on life in turn.

Today, the cash the asset management companies have collected whether from loan sales, interest on the loans or the equity they received through debt-for-equity swaps helps support a wide range of financial activities.

Since their inauspicious beginnings, all four of these units have embarked on a path that has taken them far from their original mandate of debt resolution units to becoming quasi-boutique investment banks. They all have arms to help them diversify; arms that may include leasing, securities brokerage, real estate and trust operations.

Cinda, the arm of CCB, and Huarong, the platform of Industrial & Commercial Bank of China, are the furthest along in the process, according to people who have done business with them.

Cinda, set up over a decade ago to deal with CCB’s bad loans, is looking for at least one strategic investor as a prelude to going public in Hong Kong as early as next year, according to four people familiar with the matter.

For example, as of December, 2006, Huarong had disposal rights over Rmb400bn in the debt of 40,000 borrowers, including in a wide assortment of iron and steel companies, power equipment makers, materials companies, electronics manufacturers and car companies.

According to a memo to potential investors in October, 2005, it also “recovered real estate and other physical assets including land use rights, commercial property and buildings and equipment”, some of which it sold on both to state owned companies and private enterprises.

Huarong also took equity shares in 300 enterprises, according to information on its website. Some of these companies are now listed, which makes them better able to honour their obligations to their lenders.

Despite the size and expansion of the asset management companies – Cinda for example, has many branches and thousands of employees – they still aren’t very transparent. The government owns them and the money flows between the government and the banks from when the loans were taken off the banks’ balance sheet is still not totally clear, according to Carl Walter, co-author of Red Capitalism, who has tried to trace those flows.

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