Staff members of a bank in Changzhou, East China's Jiangsu Province, count yuan bills on June 24. Photo: CFP

China has started a pilot program for five local governments to approve and set up financial asset management companies (AMCs) to buy soured loans, as part of the nation's banking regulator's efforts to prevent the escalating local bad debts from crippling the economy.     

The trial program covers Shanghai, South China's Guangdong Province, East China's Zhejiang, Jiangsu and Anhui provinces, Reuters reported on Tuesday citing unnamed sources.

China Banking Regulatory Commission (CBRC) did not immediately reply to a faxed inquiry by the Global Times seeking comment on the trial program.

However, a statement posted on a local government website affirms the regulator's initiatives.

Anhui-based Guohou Asset Management Co has been given a green light to buy bad debts from banks, trust firms, financial corporations and financial leasing companies under the trial program, according to a statement posted on Anhui provincial government's website on Monday.

Currently, the nonperforming loans (NPLs) of financial institutions are dealt with by four national AMCs, which were launched by the Ministry of Finance in the late 1990s and early 2000s.

The centrally controlled AMCs are China Huarong Asset Management Co, China Cinda Asset Management Co, Orient Asset Management Co, and China Great Wall Asset Management Corporation.

Since 2012, China has been introducing new methods, such as a trading platform to help banks off-load loans to investors, to cope with its soured loans, which were created by a  massive credit splurge in 2009.

"Local government-endorsed AMCs will be a new channel for handling the distressed debts of the banks and prevent the regional financial risks from further building up," Feng Zishan, a financial analyst at Beijing Unbank Investment Consultant Ltd, told the Global Times on Tuesday.

The regulator picked the five local governments as they have been witnessing a significant surge of NPLs or have experience in asset management practices, in the cases of Shanghai, Guangdong and Zhejiang, Feng said.   

Banks' NPLs jumped by 102.4 billion yuan ($16.65 billion) in the January to June period, and bad loans accounted for 1.08 percent of total lending, the banking regulator's data showed Friday.

Hampered by underperforming industries including steel, textile, shipbuilding, and solar panel manufacturing that suffer from overcapacity, Guangdong and Zhejiang are the regions that had the fastest growing NPL ratios in the first quarter, up 0.08 percentage points from the end of 2013, according to data from the CBRC's local offices.

The banking sectors of Zhejiang, Guangdong and Jiangsu recorded NPL ratios at 1.91, 1.29 and 1.28 percent respectively in the three months through March, higher than the nation's average of 1.04 percent, the data showed.

Local AMCs will offer banks more options to negotiate for a better price for their bad debts than selling them to the Big Four national AMCs, Feng said.

As some regional and city-level banks are preparing to get listed, the local AMCs will help them get rid of soured loans and make their financial reports more appealing to investors, he noted.

The program enables local government endorsed asset management firms to take a chunk of the profitable bad debts business currently dominated by the four State-owned AMCs, Zhang Taowei, a finance professor at Tsinghua University, told the Global Times on Tuesday.

The strong financial performances of the Big Four AMCs in the first half of the year showed that bad debts disposal could be a lucrative business in China.

China Orient Asset Management Co, one of the Big Four AMCs, posted a 39 percent rise in profit growth, yet modest compared with the 57 percent year-on-year surge from China Huarong and 45 percent hike in profit from China Great Wall Asset Management Corp.

It also gives greater flexibility for local authorities to deal with rising local government debts, and more provinces and regions are expected to be covered by the program, Zhang said.