SHANGHAI, March 7 (Reuters) - The Shanghai government has approved a city-owned investment company to buy non-performing loans from local banks, state media reported on Friday, becoming the latest Chinese local government bracing for an expected rise in bad debt.
Shanghai's launch of a dedicated "bad loan bank" 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 authorised an existing state-owned firm, Shanghai State-owned Assets Operation Co Ltd, to purchase non-performing loans and other assets from local financial institutions, rather than creating a new entity, China Business News reported, citing a source close to the firm's parent company.
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 central government established four national-level asset management companies (AMCs) in 1999 to clear off bad loans from the biggest state-owned banks. They purchased about 2.38 trillion yuan in bad loans between 1999 and 2008.
In 2012 the Ministry of Finance authorized local governments to establish local AMCs to do the same for local banks.
The first bad-loan purchase by Shanghai State-owned Assets may be bank loans to Shanghai Chaori Solar Energy Science and Technology Co Ltd, the loss-making solar equipment producer that is also poised to default on a bond interest payment on Friday, becoming China's first-ever domestic bond default, the paper reported.
Bank of Shanghai is involved in a dispute with Chaori over 75 million yuan in outstanding loans outstanding, the paper reported. It also has 600 million yuan outstanding to Suntech Power Holdings Co Ltd, another struggling solar firm that has defaulted on its offshore bonds.