China’s Non-Performing Loans Revisited

Almost two years ago, Kaulkin Ginsberg wrote that there were potentially sizable, albeit risky, collection opportunities in China. Since that blog, China’s non-performing loan (NPL) market has grown substantially and caught the eyes of notable investors – such as Wilbur Ross, chairman of private-equity firm WL Ross & Co. – and reporters in the U.S.

It cannot be overlooked any longer: there are sizable bad debt collection opportunities within China’s credit economy.

According to Bloomberg News, data compiled by the China Banking Regulatory Commission indicates there was about 1.39 trillion yuan – or $211 billion – in NPLs in March 2016. When Kaulkin Ginsberg highlighted this topic in 2014, the total was around 700 billion yuan – or $100 billion. Less than two years later, this amount has nearly doubled.

In fact, MarketWatch stated that the current Chinese debt bubble is even larger than the U.S.’ 2007 subprime bubble, which led to financial institutions charging off massive amounts of delinquent consumer debt, driving U.S. ARM industry growth in subsequent years, as we noted in our recent market intelligence series on the financial services industry. Through a broad comparison, the revenue potential in China’s debt market is staggering.

Additionally, China recently took steps to ease foreign access to its interbank bond market, most notably by removing requirement quotas for many types of oversea financial institutions. This announcement has been considered a major step for foreign access to various parts of the China’s economy, and it may be a catalyst for future investment and collection opportunities for the U.S. ARM industry.

When it comes down to it, a member of the ARM industry must decide if the potential rewards of entering the Chinese debt market outweigh the risks and costs – both in terms of the compliance and regulatory differences between the U.S. and China, but also in understanding how to effectively recover worthwhile amounts of NPLs from a significantly different population and culture. Considering the substantial growth of China’s NPLs over the past two years, members of the ARM industry should monitor the development of China’s credit economy and NPL market.