China firm plans $1 billion distressed asset fund for foreigners

By Benjamin Kang Lim and Koh Gui Qing

BEIJING (Reuters) - A unit of one of China's biggest bad-debt banks plans to woo foreign investors with a $1 billion (595 million pounds) fund for soured property loans and distressed real-estate assets, reopening the sector to outsiders after a failed attempt last decade.

That the fund is being launched just as growth in the world's second-largest economy has slowed to an 18-month low and the housing market is losing strength is no coincidence.

China Orient Summit Capital, 80 percent owned by China Orient Asset Management Corp, will use its connections to help foreigners invest in an attractive but sometimes treacherous market for distressed assets, chief executive Lijian Chen said.

"We see the cycle coming," he said, referring to an expected cooling down in the housing market. "Especially since this is synchronised with the economy."

And China Orient Summit wants to be ready. Founded in February, it has sought regulatory approval for its new fund, which would target institutional investors and pension funds in the United States, the UK, and the Middle East.

"The best deal in any country, always, is going to be the off-market deal," Chen said in an interview at the firm's office in downtown Beijing. "You have to explore the relationship, you have to explore the off-market opportunity."

This was especially important as deals were often sealed behind the scenes, even at open auctions, he said. For instance, at a recent auction for a plot of land in the southern city of Ningbo, the winning bid went to a firm that promised the local government it would move its headquarters to the city, thereby lifting future employment and tax revenues.

"So if you just go there and say "OK, this is open price, so I'm going to put in my bid because I have capital", then you are just too naive."

LOCAL SENSITIVITIES

Direct foreign investment in property is strictly controlled by the government, which fears excessive speculation in the market. As such, although foreign investment in property is on the rise, it accounts for only a fraction of total spending.

China has always stood out among investors as a compelling market for buying bad loans and distressed assets, but never lived up to its potential. An attempt to launch a market for distressed assets quickly shrivelled after in the mid-2000s.

Foreign investors said the market died because auctions were rigged, laws were opaque, and governments resisted corporate bankruptcies. In response, Chinese authorities said foreigners were trying to buy assets at unreasonably low prices.

Chen said the market is now more transparent, but investors still need to be mindful of social and political sensitivities when negotiating with governments about company closures.

As a unit of China Orient Asset Management Corp, one of four bad-debt banks created by Beijing to clean up the biggest Chinese banks which were technically insolvent in the late 1990s, China Orient Summit has the advantage of state backing.

Beijing Wutong Summit Investment Managing Centre owns the remaining 20 percent of China Orient Summit.

China Orient Asset Management Corp can invest up to 20 percent of the new distressed fund.

FINANCIAL STRESS

As China's leaders slow growth rates down so they can overhaul the economy to make it more driven by consumption and less by investment, financial stress is clearly building.

Media reported on Wednesday that Nanjing Fudi Real Estate Development Co Ltd missed repayments on a 900 million yuan ($145 million) loan borrowed from a ship builder, becoming the latest in a string of corporate credit defaults.

Data on Friday showed China's home price inflation slowed to an eight-month low in March, and analysts expect the easing trend to continue.

Chen said some cities, including Wenzhou and Ordos, are burdened by an excess supply of homes and high prices, but declined to name other cities where distress levels are rising.

Wenzhou, a centre for private businesses, is the only city in China where official data shows house prices are falling. Ordos is a former boomtown for coal miners but now notorious for its empty apartment blocks.

Still, investors who believe China will suffer from a messy bursting of a property bubble are misguided, said Chen.

"I have never believed that there is a property bubble. This country is just way too big," he said. "Easily, if you go inland, if you go west, those cities are far from developed."