The Next Great China Gold Rush - Dodgy Debt

It didn’t make banner headlines, yet Citigroup Inc.’s investment in a Hong Kong-listed real estate outfit portends one of the big stories of 2005: Chinese debt.

The world’s biggest financial services company is grabbing a 16.4 percent stake in Silver Grant International Industries Ltd., an affiliate of China’s biggest buyer of distressed assets. The idea is to compete with Goldman Sachs Group Inc. and Morgan Stanley in the second-largest bad-loan market after Japan.

China doesn’t have liquid bond markets, yet investors are scrambling to get in on the next Chinese gold rush: More than $450 billion of bad loans held by China’s four-biggest commercial banks and their asset management companies. The hope is to buy dodgy loans at a fraction of their face value and sell the assets at a profit as the world’s fastest-growing major economy expands.

It’s as much an economic opportunity as an investment one. China is growing 9 percent and benefiting from a gold-run mentality that’s attracting most of the world’s foreign direct investment. Yet its dysfunctional banking system is raising questions about the economic outlook.

China’s major banks aren’t banks so much as financing arms of the government. That has led to an institutionalized misallocation of capital with little regard for international norms of risk management and the extension of credit. The result is a Japan-like bad loan situation that’s limiting the amount of credit flowing to worthy borrowers and economic inefficiencies galore.

For this complete story, please visit The Next Great China Gold Rush – Dodgy Debt.