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China may relax capital controls to make it easier for foreign investors to participate in the asset restructuring of troubled companies as it anticipates more failures among its biggest and most indebted conglomerates, but the lack of transparency over asset ownership poses a barrier, economists and policy advisors told MNI.

Assets worth trillions of yuan may need to be disposed of following the long-expected bankruptcy of HNA Group, which has hundreds of affiliates, together with the restructuring by China Fortune Land Development, the country's 12th biggest developer, and by conglomerates Founder Group and Yurun Group. All four announced restructuring plans end January.

The round of asset disposals, involving both companies and local government funding vehicles, would be too big for the four state-owned asset management companies to absorb, said Zhao Jian, the head of Atlantis Financial Research Institute, suggesting that special quotas for capital inflows could be offered to overseas investors.

Foreign buyers could invest in mutual funds which are specially set up for the assets in China, Zhao said. This would allow them to sidestep transparency concerns over ownership and product standards as well as other challenges, including the time required for restructuring transactions in the country. They could also concentrate on international assets held by the failing companies, he said.

Authorities may also approve operations by more foreign companies specialising in illiquid "special" assets, after allowing alternative investor Oaktree Capital Management to establish subsidiaries in Beijing last year, said Liu Wei, deputy-director of the Center for Special Assets Research under the National Institution for Finance & Development.


There is consensus among policy advisors and economists in Beijing that China's special asset market would flourish with supporting policies, but officials' focus now is on how to unwind the complicated tangle of ownership linked to the failed conglomerates. Special assets are defined as those whose market prices have fallen below book value due to economic or financial circumstances.

Attracting bigger, savvier foreign investors will require changes, including upgrades to Chinese credit rating systems, an official at a policy bank which deals in the debt of government-related firms told MNI. While companies such as HNA, which grew via leveraged acquisitions, are suffering as China's economic and credit growth slows, some of their assets are still attractive, the official said.

As companies come under strain, authorities will concentrate on preventing systemic risk and on limiting the impact on growth and employment. Some key companies could be bailed out, and national or local governments could also take strategic stakes in some troubled firms in order to encourage private investors to participate, the official said.


In addition to deploying fiscal resources to seed asset disposals, the People's Bank of China could also assist the process with the targeted liquidity support, said Zhao, adding that while official bodies should take a leading role in restructuring, these must be market-led to be successful. One restructuring model, though, that of debt-for-equity swaps, may be unattractive to creditors, he added.

But officials should move quickly, as PBOC policy begins to normalise after pandemic easing and the economy still enjoys a minor export boom due to disruption to production abroad caused by Covid-19, said Zhao. Liu agreed, noting that tighter banking regulation would also contribute to pushing troubled companies to the brink.

A less dynamic economy will also depress demand for special assets, noted Yang Shuiqing, researcher at the CSAR, adding that increasing supply from big- and medium-sized companies could challenge the market's capacity for absorption.

MNI Singapore Bureau | +65 9 632 1991 |
MNI Singapore Bureau | +65 9 632 1991 |

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