CHINA’S banking regulator is allowing governments in five regions to create asset management companies (AMCs) to buy bad debt from domestic financial institutions, sources with direct knowledge of the matter said.

    The move follows a surge in nonperforming loans (NPLs) in recent months, most notably in export-focused regions like the Yangtze River Delta and Guandong, where firms are battling rising costs and weak domestic demand.

    To help bear the strain, the country’s banking regulator has authorized the city of Shanghai and the provinces of Zhejiang, Guangdong, Jiangsu and Anhui to establish and manage their own AMCs, the sources said.

    The initiative could potentially open doors for some private sector involvement and the AMCs can buy local soured loans from banks, trust and finance companies and leasing firms, the sources said.

    “AMCs are a very profitable business, so many companies, even foreign venture capital funds, are interested in getting licensed,” said a Hong Kong-based hedge fund manager.

    “The Central Government has said only wholly State-owned entities can do the business, but provincial governments can still hire private enterprises or [joint stock] banks for their service and expertise.”

    Since 2012, China has steadily upgraded methods to cope with bad loans resulting from a massive credit splurge in 2009, including the development of a trading platform to facilitate banks offloading loans to investors.

    China’s apparent readiness to let private companies default on bonds has led to an increase in borrowing costs, as lenders price in more risk, putting more firms under stress.

    China’s economic slowdown is adding to pressure on the nation’s lenders. Domestic banks’ nonperforming loans jumped by 54 billion yuan (US$8.7 billion) in the three months through March, the biggest quarterly increase since 2005, according to China Banking Regulatory Commission data. Bad loans accounted for 1.04 percent of total lending, up from 1 percent three months earlier.

    China already has four centrally controlled AMCs, including the recently listed China Cinda Asset Management Co., along with an array of smaller private AMCs and debt-recovery specialists buying and selling bad debt for profit. (SD-Agencies)