New Delhi: China’s bad-debt managers, who were seen as potential white knights for the country’s collapsing real estate sector just six months ago, have turned out to be part of the problem.

According to people familiar with the situation, Beijing has been forced to consider a preliminary plan to restructure the industry due to aggressive lending to troubled developers during the sector’s boom years that has plagued the $730 billion funds with significant credit losses and sent their bonds falling.

The troubles at China’s four main managers of bad loans have gotten worse as the real estate crisis has deteriorated this year, making it doubtful that they will be able to save the industry until they get their own finances in order.

The asset management companies, or AMCs, were created to play the saviour role as Chinese banks teetered on the verge of failure in the wake of the Asian financial crisis. When China Huarong Asset Management Co. was forced to accept a 42 billion yuan ($6.1 billion) bailout last year and its chairman was executed for crimes including bribery, it represented the rot that later set in.

The funds “can’t go on rescuing China’s property market this time,” said Victor Shih, author of “Factions and Finance in China: Elite Conflict and Inflation.” “Their own balance sheets are already so saddled with bad debt, they simply don’t have the ability to digest more.”

Regulators were seeking to AMCs as recently as February to help resolve the issue, asking Huarong and China Cinda Asset Management Co. to assist in restructuring weak developers, acquiring stalled real estate projects, and purchasing defaulted loans.

Two decades earlier, these same funds removed trillions of yuan’s worth of subprime loans from the balance sheets of the four largest banks. After the situation stabilised, the funds, which had total assets of more over 5 trillion yuan, expanded into new industries, including brokerages, insurance, and increasingly real estate.

Most of the top 50 developers in the nation have received loans from the four biggest managers over the years: Huarong, Cinda, China Great Wall Asset Management Co., and China Orient Asset Management Co. According to their papers, Cinda and Huarong alone have exposure of more than 200 billion yuan, and property accounts for around to 50% of their acquisition and restructuring companies.

“Instead of fulfilling their mandate to clean up bad loans and fade away, they just became progressively more adventurous in their funding and structuring, exacerbating the non-performing loans they were set up to dispose of,” said George Magnus, author of “Red Flags: Why Xi’s China is in Jeopardy.”

Indirect lending to real estate firms was one of the most profitable opportunities. According to a person acquainted with the deals, the money managers would assume loan and bond liabilities with the assumption that the builders would purchase them back at a premium of 10% to12%. The developers utilised the funds to purchase additional land and generate income by selling flats whose value rose, and this resulted in an upward cycle.

The AMCs became shadow banks more and more as the focus shifted to real estate. According to a June filing, Huarong recently provided funding to struggling developer Citychamp Dartong Co. while demanding 11% interest. That creates a sizable margin because it is significantly higher than Huarong’s own borrowing costs of around 4.5 percent.

“The AMCs essentially were loan sharks,” said Hao Guanghui, president of Suiyong Rongxin Asset Management Co., a Shanghai-based private bad-debt manager. “They were giving out loans in the name of asset acquisition and restructuring, that’s why they are called shadow banks.”

The song ended when China put strict controls in place to reduce developer debt, depriving them of their main source of expansion at the same time that Covid lockdowns reduced home sales and prices and undermined consumer confidence.

The AMCs are currently being penalised for their real estate wagers. The largest fund, Huarong, is anticipating a loss of 18.9 billion yuan for the first half of the year as a result of credit impairments, which prompted Moody’s Investors Service to consider a potential downgrade for Huarong. On Monday, Huarong and Cinda are expected to release their complete results.

Due to the loss, some of Huarong’s dollar bonds now trade for less than 80 cents on the dollar, down from par earlier this year. Meanwhile, its Hong Kong stock has decreased by 70% this year. Huarong obtained a state rescue with an equity injection led by Citic Group Corp. barely nine months before to the bankruptcy.

Greater Wall reported a net loss of 8.56 billion yuan for 2021 on Friday after missing a deadline to declare results in June. Smaller rival Cinda had previously warned that net income could decline by 30% to 35% in the first half. Cinda, Orient, and Great Wall’s sold bonds had dropped to about 80 cents on the dollar.