Warning: China's Bad Debt Crisis Is Getting Even More Alarming

Companies that the Chinese government has tasked with defusing the ‘bomb’ of bad debt in the banking system are now facing a similar crisis themselves. This phenomenon is triggering fresh concerns about how much distressed credit is actually hidden behind China’s official data.

At the end of July 2026, a court in Anhui Province, eastern China, approved an unusual restructuring proposal for Guohou Asset Management, a financial company originally established to defuse the debt bomb by taking over bad loans from troubled banks. Guohou became the first member of China’s giant ‘debt bomb disposal squad’ to require defusing itself, and it is unlikely to be the last.

Chinese financial regulators have for years tasked such companies with clearing the minefield of corporate debt. The first four asset-management companies (AMCs) were established in 1999 under the Ministry of Finance, with the task of rescuing the four largest state-owned commercial banks. Each bank transferred its most troubled loans to its respective AMC, with the plan that these AMCs would restructure and liquidate the bad debt, then gradually wind themselves down.

But instead of shrinking, these four ‘bad banks’ grew in both size and number. By 2018, the combined assets of the four companies reached around 5 trillion yuan (equivalent to US$755 billion at the time), making them among the largest financial institutions in China. As bad debt swelled in the early 2010s, regulators also approved dozens of ‘local AMCs’ typically restricted to operating in a single province. There are now more than 60 local AMC entities, most owned by local governments, with a handful, including Guohou, privately owned.

Rather than using their capital to clean bad loans off bank balance sheets, these AMCs began borrowing from banks at low interest rates similar to other state-owned enterprises, then channelling the funds back at much higher interest rates to troubled companies, including property developers that once boomed but have now largely collapsed along with China’s property market.

Even more worryingly, these AMCs also built ‘side businesses’ helping banks hide bad loans from regulators. Academic estimates suggest the practice became so widespread that by 2020, at least half, and possibly far more, of China’s total bad debt was successfully concealed from official records.

The most famous case occurred in 2020, when Huarong, the largest and most aggressive AMC, blew up and required a state bailout worth US$6.6 billion. Huarong’s chairman at the time, Lai Xiaomin, was later executed for various crimes. Yet this severe punishment apparently did not deter other AMCs from continuing similar dubious tactics.

Restructuring documents and internal analyses of Guohou show the company replicated many similar patterns. Besides taking over distressed assets, Guohou also began channelling high-interest loans deliberately structured to look like equity investments, so as not to trigger suspicion from regulators who typically monitor debt risk concentration. Guohou even signed ‘drawer agreements’ with banks, under which Guohou bought banks’ bad loans just before they had to be reported to regulators, then sold them back shortly afterwards while pocketing a commission. Investigations found Guohou had recorded operational losses for years and was unable to repay its debts amounting to 13 billion yuan.

Various practices of this kind have raised suspicions that China’s banking bad debt is actually far larger than official figures suggest. In terms of data, bad loans at Chinese commercial banks did rise from 3 trillion yuan in 2022 to nearly 3.7 trillion yuan in the first quarter of this year, though that is still relatively small, at only around 1.5% of total assets. However, more bad debt and more troubled AMCs are likely to be revealed as China’s property crisis continues to depress the value of real estate, an asset often used as collateral by many corporate borrowers.

Cinda, one of the large central government-owned AMCs, even announced this month that its net profit in the first half of this year is expected to plunge by up to 70%, reflecting the declining value of assets underlying its bad debt portfolio.

Other smaller AMCs risk following Guohou’s path towards bankruptcy. One AMC in China’s northeastern industrial belt was abruptly dissolved in 2020 after being caught providing dubious loans to a football club. Several other AMCs have been downgraded by local credit rating agencies and are on the brink of bankruptcy.

Guohou itself was ultimately chosen for restructuring rather than dissolution, purely because of investor interest in its AMC licence, given that regulators have stopped issuing new licences since last year. The identities of those investors have not yet been disclosed to the public. Whoever they are, it will take the nerve of a real bomb disposal squad to enter this business.