The recent years has witnessed the development of asset management companies in China. There are four asset management companies in China. The main purpose of asset management companies is to deal with the non-performing assets created by state-owned banks and enterprises. More importantly, they also focus on how to maximize the value of assets by capital operation. Capital operation place emphasis on how to realize profit maximization and capital operation, moreover, capital operation offer enterprise suitable method to allocate their asset which can encourage and motive state-owned enterprise to expand and develop positively.
Owing to the banking crisis, state-owned banks have large deal of non-performing loans which can exert negative effect on financial markets. Therefore, there should be some asset management companies which are able to lowering the financial risks and cope with the non-performing assets. These days, asset management companies have experienced transformation in order to augment the efficiency and maximize profit. Asset management companies are confronted with both opportunities and challenges when china became a member of WTO. Then the asset management companies are in urgent need of modifying and evolving. If the asset management companies are able to deal with the non-performing asset effectively and can augment their efficiency of operation, then it will promote the development of state-owned enterprises and banks which can directly affect the economic environment.
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This project mainly discusses two questions. First of all, how the asset management companies deal with the non-performing assets. This survey will explore the various ways in coping with bad debts and discuss the problems existed in this process. Secondly, what is the future tendency of development for asset management companies? To be more specific, which trend of development would serve as the most suitable one for asset management companies? And do these changes are able to promote the development of asset management companies.
Relevant economic theory
In this project, there will be some related study areas: financial economics and investment strategy.
In relation to investment strategy, it will focus on how to maximize the value of asset for asset management companies. As asset management companies will gradually serve as investment banks, this strategy become increasingly important then the Modern Portfolio Theory which intend to augment the portfolio profit or reduce the investment risks can help asset management companies to make a appropriate and suitable investment portfolio.
In financial economics, leverage theory is relevant especially the debt-equity ratio. Debt-equity swap, as an essential method to deal with non-performing problems, play an crucial role. If the asset management companies will be able to use this theory effectively, then it will benefit the debt-equity scheme which can place effective impact upon the NPL problems, development and reorganization of state-owned enterprises.
The related model in this survey is Temasek Model. As a result of imperfect board system and lack of efficiency regime in the asset management companies then according to the Temasek Model and former experience the asset management companies are in urgent of become more market-oriented and possessing the directors who own strong powers.
The two selected articles both analyze the establishment and development of chinese asset management companies.
The first article, 'China's asset management corporations', written by Guonan Ma and Ben S C Fung, was a BIS working paper written by members of the Monetary and Economic Department of the Bank for International Settlements and published on August 2002.
In this article, the authors focus on how to deal with non-performing loans(NPLs). How to finance asset management companies(AMCs) and problems faced by AMCs during their operation and management.
The second article, 'the main problems of chinese financial industry and asset management companies', written by Guifen Pei and Sayuri Shirai, and published on 5th February 2004. As its title revealed, the two authors analyzed the problems of operation in AMCs and the development trend of AMCs.
Both articles pointed out that there existed large amount of non-performing loans in the four stated-owned chinese banks(SOCBs), in order to solve this thorny issue, chinese government set up four AMCs in 1999, which mainly to arrange these bad debts created by SOCB and state-owned enterprises. In both articles,the authors utilized statistics to described the scope of NPL detailedly. Then in the two articles, the authors stated the first step to deal with the NPLs was that the bad debts had been transferred from SOCBs to AMCs. In addition , the authors indicated that the asset transfer were mainly for policy purpose from 1999 to 2000, and it might increase the complexity of management in AMCs for the two articles pointed that various chinese government agencies would supervise and control the operation and management of AMCs which could negatively affect the operation of AMCs. When it comes to how to finance the AMCs , the two articles both revealed the main method was to issue AMC bonds from People's bank of China(PBC). In the first article the authors claimed there were other sources of financing: like borrowing money from financial institutions, equity from Ministry of Finance (MoF). Additionally, in the second article the authors said the quality of NPL transferred to AMCs were inferior, which were created by state-owed enterprises by purchasing new equipment. In the two articles , authors pointed that debt-equity swaps served as the main method to cope with the NPLs, in both articles , the authors stated firstly, AMCs need to choose the objective state-owned enterprises and help SOEs to augment the effectiveness of their management . The prime purpose of this scheme, pointed out in the first article was to improve SOEs profit during a short time. Moreover, the dividends from reorganized SOEs can acted as a source of AMC cash flows .Nevertheless, the second article revealed this scheme failed to reach its original expectations for AMCs could not totally supervise these enterprises and the swap might lead some moral risks.
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In the first article, the authors indicated the main source of financing of AMCs (banking financing) was unable to achieve its target. In addition, the two authors also revealed that the AMCs financing suffered loss and it is difficult to identify which one (PBOC, MoF) could share the loss. Moreover, cash flow would largely affect the stability of AMCs and the efficiency of asset arrangement and recovery can place profound effect on cash recovery. As government pay more attention on this issue, there were increasing pressure in AMCs to accelerate the speed of NPL disposition and the cash recovery.
In the second article, the two authors revealed there were other methods to arrange NPLs and bidding, auction package selling of debts served as the essential methods ,they also claimed that AMCs were in urgent need of improving their cash recovery.
The two articles both analyzed the future development trend of AMCs. In the first article , the two authors pointed that investment from foreign countries and private sectors need to be attracted to the NPL arrangements and government would encourage AMCs to be more responsible for NPL problems and management. Nevertheless, in the second article, the two authors stated that chinese government was disappointed by the performance of AMCs, then it encouraged SOCBs to deal with the NPL problems independently. Additionally, AMCs still was in urgent need of coping with the existing NPLs and AMCs need to transform their business mode into more market-oriented. More importantly,the coming years will witness the dramatic change of AMCs more specifically. AMCs would not only manage and handle asset debts for SOCBs and other financial institutions but also AMCs will become more comprehensive and undertake some business of investment bank.
To be concluded, the two articles both use detailed data to analyze the financing sources of AMCs and the methods to cope with NPLs, and the problems faced by AMCs, moreover, AMCs are evolving gradually then the two articles both described the trend of development of AMCs in the future.
This project will study , analyze, describe the main methods used by asset management companies to cope with non-performing loans and compare these methods and search which one would be the most suitable and effective one by using data analysis and calculation. In addition, this project also will discuss the future development of asset management companies by analyzing the successful experience in other countries in order to increase their competence to seize chances and meet the challenges.
There are wide range of statistics and other useful information and documents both online and in printed forms, and particularly from People's bank of china annual report, website of asset management companies, annual report of state-owned chinese commercial banks.