In a unique manner, the Shanghai government has approved a city-owned investment company to buy non-performing loans from local banks. This venture is being termed as ‘bad loan bank’ and it follows similar moves by the wealthy eastern provinces of Jiangsu and Zhejiang. Analysts expect a rise in bad loans in the coming years as China’s economy slows, with loans to local governments and industries suffering from overcapacity a key source of concern. Unlike earlier bad loan banks, Shanghai has authorized an existing state-owned firm, Shanghai State-owned Assets Operation Co, to purchase non-performing loans and other assets from local financial institutions, rather than creating a new entity. Shanghai State-owned Assets already owns equity in local banks including Bank of Shanghai, Shanghai Rural Commercial Bank, and the brokerage Guotai Junan Securities. The first bad-loan purchase by Shanghai State-owned Assets may be bank loans to Shanghai Chaori Solar Energy Science and Technology Co, the loss-making solar equipment producer that is also poised to default on a bond interest payment, becoming China’s first-ever domestic bond default.
