CHINA’S asset management companies (AMCs) are facing liquidity risks and pose a threat to the central bank, a Bank for International Settlements (BIS) report said Friday. The AMCs faced combined annual interest obligations of more than 30 billion yuan (US$3.6 billion) on an estimated 1.168 trillion yuan in bonds issued to State banks and at least 192 billion yuan in loans from the central bank, the report said. “The risk is already evident as lagging recoveries is putting cash flow pressure on the AMCs, despite low interest rates,” it said. China set up the companies — Huarong, Orient, Cinda and Great Wall — in 1999 to tackle 1.4 trillion yuan in bad loans, mainly at Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China. “The Chinese AMCs should be expected to run up substantial losses, which ultimately represent a part of China’s quasi-fiscal deficits,” said the report by the BIS, a forum and bank for the world’s central banks.. The AMCs, each with registered capital of 10 billion yuan from the Finance Ministry, have issued long-term bonds to State banks to finance the debt takeover. The bonds were to be paid off by selling off the assets the companies assumed, but finding buyers has proved difficult, the report said. The companies had recovered 45.5 billion yuan in cash by the end of June after disposing of 210.4 billion yuan in bad assets, the central bank has said. That represented a cash recovery ratio of 21.6 percent. “It appears that asset liquidation has not kept pace with accruing interest,” the report said. The government has told the asset management firms to speed up debt resolution through collection, restructuring, auction and securitization while maintaining solid recovery rates. But a murky structure of oversight by the central bank, Finance Ministry and securities regulatory body has sown confusion as to the mission of the asset management firms, the report said. “The Chinese AMCs are supervized by multiple government agencies and could face overlapping objectives,” it said. “The AMCs are burdened with multiple tasks of quick asset disposition and medium-term corporate restructuring.” One example was that the AMCs had been ordered to convert 400 billion yuan in bad loans into shares in State firms through debt-for-equity swaps, thus lowering the debt burden of those State firms. The AMCs have been trying to sell bad assets to foreign investors, but analysts say their efforts have been marred by an opaque legal framework and China’s curbs on capital flows. In addition, the report said the People’s Bank of China, the central bank, could face potential risks as a lender to the asset management companies. “The PBOC’s exposure to the AMCs represents no small risk to the institution and its further development as a modern central bank,” the report said. The report estimated that bad loans in China’s State banks, including those already taken over by asset management companies, amounted to 3.4 trillion yuan, or 42 percent of all loans at the end of last year. That was higher than the 30 percent average bad loan figure given by central bank governor Dai Xianglong earlier this year. State banks piled up bad loans due to decades of reckless lending to State firms, some of which have gone bankrupt. (SD-Agencies)