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China Orient releases Survey Report of China’s Financial Non-performing Asset Market (2020)

Survey Report of China’s Financial Non-performing Asset (NPA) Market is an annual market survey report organized, researched, and developed by China Orient Asset Management Co., Ltd. (China Orient), and Wu Yue, Secretary of CPC China Orient Committee and Chairman, serves as the project head. A research method combining questionnaire survey and data analysis is adopted in the report, and the views and judgments on the developments and changes in macroeconomic situation, policy hotspots, and financial NPA market from NPA market’s participants and researchers are collected via questionnaires. Based on data mining, and mode analysis, the investigation conclusion is reached, and the NPA market’s development trend is predicted. Since the first release of this report in 2008, the report has been released for 13 consecutive years, generating an important brand effect in the research field of NPA market in China as well as a positive social impact.

The 2020 questionnaire version is designed with multiple choice questions and subjective questions added, and the sample size is also greatly expanded. Besides staff from traditional asset management companies and commercial banks, and external experts and scholars, staff of another two types from trust companies and intermediaries are also added as those surveyed, thus the main participants in the NPA market are covered aiming to focus on current market hotspots and industry difficulties, and pragmatically serve the high-quality development of the NPA industry.

According to the questionnaire survey result, some structural, institutional, and cyclical problems still exist in China's economic and financial system. There’s still a great pressure in resolving stock risks, and high risks in some key areas still exist. Credit risks of private enterprises, local financing platforms, real-estate enterprises, small and medium-sized banks deserve special attention. The current inactive secondary market transactions and asset price decline are the main reasons for the difficulty in NPA disposal and in the long run, bulk transfer, mergers and acquisitions (M&A) and reorganization, and NPA securitization will be the most effective ways for NPA disposal.

Most interviewees from commercial banks believe that the financial industry’s wider opening will help promote Chinese-funded banks’ establishment of a modern banking system and improve the quality of commercial banks' credit assets. The manufacturing industry will be the industry with the fastest growth of bank credit expansion and the greatest concentration of newly added credit risk in 2020. It’s poor internal risk control and corporate governance defect that mostly lead to the successive occurrence of risk events in small and medium-sized banks in 2019. It is expected that the interbank business scale will continue to decline slightly in 2020, and there will be a stronger urgency for commercial banks’ disposal of NPA in 2020.

Most interviewees from asset management companies expect that the city commercial banks' launch of NPA packages will see a significant scale expansion in 2020. A downward trend still creeps in the price of NPA packages of financial institutions. Asset management companies are currently in the digestive phase of stock assets, and they pay more attention to risk control in acquisition of asset packages, and pay less attention to the market share considerations. A multi-level and diversified competitive landscape are presented in the NPA market, and the future enhancement of core strengths like resource integration capability and asset management capability and so on will act as the keys for gaining a competitive advantage.

Most interviewees from trust companies predict that in 2020, the transformation, upgrade and development of trust industry will be accelerated constantly; the stock business scale will continue to be declined slightly; and the risk asset scale will continue to be enlarged slightly. The period when stock trust business risks collectively explode may appear in the next 1 to 2 years. Trust companies in 2020 will have greater urgency to deal with risk assets, and internal control compliance requirements will become stricter. Trust companies will continue to enhance their demands for more diversified disposal measures of risk assets, and their demands and opportunities for cooperating with asset management companies in dealing with risk assets will be enlarged in the future.

Interviewees from the third-party institutions like law firms, appraisal firms, and service providers (investors included) generally believe that 2020 will see a relative increase in their business opportunities to serve NPA market. Asset management companies should pay full attention to due diligence, carefully select reorganization targets, cautiously select cooperative partners, and rationally design reorganization plans when conducting substantial reorganization businesses. Service providers (investors included), based on their practical experience, believe that the current secondary market investment institutions mostly invest in NPA for the purpose of seeking short-term gains. Market price and expectation are the biggest factors affecting the scale of fund allocation, and the operational focus of investment institutions in 2020 tends to be the self-disposal of NPA.

It should be particularly noted that the questionnaire survey sees an end in mid-December 2019. However, when the survey report is going to be completed for publishment, it still has great subsequent uncertainties after being suddenly hit by the new coronavirus pneumonia pandemic. Based on the objectivity and authenticity of the survey data, the research team basically did not refer to the impact of this pandemic in the investigation and analysis. The pandemic will significantly increase the risks of the financial system, and the NPA’s acquisition and disposal will face a more serious situation, and also a significantly enhanced difficulty in risk resolution. Therefore, the basic nature and trend characteristics of the investigation conclusion will probably not be changed, but will see a greater severity and notability in extent. In the future, it’s more necessary for all parties involved in the NPA market to work together to overcome difficulties.