Korean Firms Invest in China’s Debt

Since the Asian financial crisis, the Korean financial market had been in effect a “playground” of foreign capital.

Their strategy to generate money was simple. After having bought bonds of insolvent banks or solid companies at relatively cheap price, they waited and sold them when the entities turned around. Many of foreign investors made fortunes.

Recently, however, Korean financial companies and corporations have turned an eye to bad debts of Chinese companies. Korean companies learned the hard way since the financial crisis about how to sort out bad debts and earned world-class know-how about the issue.

According to Ernst and Young, an America-based accounting firm, Chinese financial companies have an estimated $840 billion in total bad debts. This is more than Korea’s GDP of $790 billion won last year.

Investing in Chinese Bad Debts-

Domestic commercial banks with a plan to go to the overseas market in mind are taking the lead. An official at Hana Bank said on August 9 said, “We brought in bond specialists. They visited China repeatedly over the last two months to find an adequate place to invest.” The bank is the first one in Korea to invest in Chinese bad debt.

Korea Asset Management Corporation (KAMCO) set investment in Chinese bad debt as its major business in the second half of this year.

Kim Woo-suk, Chairman of KAMCO, said “We will form a consortium with the banking industry and make investment within this year as a form of pilot project.” KAMCO is committed to leverage its know-how built for years since the financial crisis on bad debt overseas.

High Return, High Risk-

Insolvent bonds come as an attractive investment option in any country. Many investment banks in advanced countries make enormous cash by buying bad debts.

Yet, there is another reason why domestic financial companies have keen interest in China in particular.

According to the Financial Supervisory Service, the bad debt rate of local banks right after the financial crisis was over 10 percent, but it has dropped to one to two percent now. “Bad debts in Korea dried up,” say foreign investment banks.

Of course, there are risks.

An official of a commercial bank that did not buy bad debts said “Basically, this kind of investment is ‘high risk, high return’ but information on corporation and corporate bonds are limited in China, which is not fit for investment.”

jarrett@donga.com