Foreign investors are eager to make multiple and sizable purchases of non-performing loans (NPLs) in China over the next three years, due partly to growing interest in investments in real estate and hotels, a report from PricewaterhouseCoopers (PwC) said yesterday.

"We estimate that foreign investors have approximately US$5 billion to US$10 billion earmarked for investment in China's distressed markets, including NPLs," said Ted Osborn, PwC advisory services partner.

The report, issued by one of the world's largest accounting firms, shows that around 57 per cent of interviewees expect to see increased opportunities in NPLs and other types of distressed investments over the next one to three years.

According to the China Banking Regulatory Commission, as of the end of the third quarter of 2006, the total number of NPLs in China's commercial banks was approximately 1.3 trillion yuan (US$160 billion). However, this amount did not include the NPLs that are presently held by asset management companies (AMCs).

Recent press reports indicate that as of the second quarter of 2006, AMCs have resolved approximately 1.17 trillion yuan (US$145 billion) of the 1999 transfer that totalled 1.4 trillion yuan (US$170 billion). This implies the AMCs still have a large number of NPLs on their books.

"The overwhelming majority of respondents (89 per cent) said they expected to invest in NPL portfolios from AMCs over the coming one to two years, indicating their clear optimism for the market," said Brian Cheung, another partner of the advisory services of PwC, adding investors are expecting returns ranging from 21 per cent to 30 per cent.

However, as there are other types of distressed or "under-valued" investments emerging in China, such as the making of high yield loans to cash-starved real estate projects and private equity investments, NPLs are no longer the only game in town for distressed investors.

When asked what types of investments organizations planned to make in China over the next two years, 56 per cent of respondents said they expected to invest in real estate, hotels and private equity.

"Foreign investors prefer NPLs to be secured by land or real property," Cheung said.

The survey shows that all of the interviewees desire investments of more than US$10 million, 44 per cent preferring investment between US$10 to US$25 million. Thirty one per cent would like to have investment between US$26 to US$50 million.

Consistent with PwC's 2004 survey on NPL investment, the top two locations for NPL portfolios were Guangdong and Beijing.

"These results are not surprising given Guangdong's close proximity to Hong Kong and its more developed economy and stressed market," Cheung explained.

But more investors are prepared to consider opportunities outside the traditional "hot" NPL markets, with priority going to Shandong, Tianjin, Liaoning and Zhejiang.

"This might be an indication that investors are now more mobile and flexible from a geographic standpoint," said Situ Xinmei, senior manager with PwC.

PwC's report, the China NPL Investor Survey 2006, is based on an investigation of 40 experienced investment banks and hedge funds.

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