Why China's banks are hunting for fortunes stashed abroad

Business Times

4 days ago

BEHIND the gates of an opulent mansion in Vancouver, San Francisco, or Sydney, a wealthy Chinese individual lives a life of quiet opulence, his wealth secured in offshore accounts and real estate. Meanwhile, back in China, his business empire has collapsed and has defaulted on its debts, leaving creditors nursing heavy losses as they try to recover their capital.
In the past, Chinese banks and other financial institutions would write off the debts owed by failed companies and their wealthy founders who absconded overseas. That's because they lacked the financial means or the ability to track down the individuals and the assets they stashed away in secretive investments abroad.
But that's changing as a growing number of large debtors flee overseas and take their assets with them. Many financial institutions, faced with growing mountains of bad debt, are fighting to recover as much as they can, even if that means embarking on an international hunt for hidden assets. Cross-border debt collection is gaining momentum, helped by the willingness of external agencies to take on such work on a no-win, no-fee basis.
The pressure on China's financial system and the balance sheets of lenders is immense. In 2024 alone, China's financial sector disposed of a record 3.8 trillion yuan (S$679 billion) in non-performing assets, 27 per cent more than the previous year, according to data from the National Financial Regulatory Administration. The market for soured debt is booming, with transfers of non-performing loans on the country's official exchange platform surging around 80 per cent last year.
The bad debt crisis stems partly from the multi-year slump in the property sector, which has had a domino effect on industries up and down the supply chain, from construction to finance. Banks, which had fuelled the boom not only with traditional on-balance-sheet loans but also through off-balance-sheet wealth management products, are now seeing their financial strength and asset quality weaken. Recovering some of those bad debts is better than nothing.
'China has emphasised defusing real-estate risks for years, but financial institutions still face challenges such as declining asset values and prolonged disposal cycles,' said Du Guodong, a partner at Beijing-based Hylands Law Firm, which co-authored a report on the topic that was published in July. 'When the value of collateral, such as land or buildings under construction, is insufficient to cover the principal and interest on the debt, and the debtor's domestic assets have been depleted with key assets hidden overseas, domestic collection efforts become futile. This is what creates the need for global recovery.'
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Evading justice
In the bankruptcy restructuring of HNA Group, a once high-flying airlines-to-property conglomerate, the recovery rate for ordinary creditors of its core aviation unit was projected to be a mere 4.45 per cent and for one of its subsidiaries, the rate was zero, according to the company's restructuring plan. A 2023 analysis by Deloitte Advisory (Hong Kong) estimated recovery rates of just 2 to 9.5 per cent for offshore creditors of China Evergrande Group, once the country's biggest property developer that collapsed under more than US$300 billion of debt and is now being liquidated.
Financial creditors in China face twin challenges when trying to recover bad debts – the lack of assets held by debtors inside the country that can be seized and sold, and intense competition among creditors for a share of what's left, which results in low recovery rates, according to Du's report – The 2025 Report on International Asset Recovery for PRC Financial Creditors released on Jul 4.
Debtors often secretly transfer their wealth overseas, hiding assets abroad and exploiting cross-border legal barriers to evade repayment obligations, according to the report, published jointly by Hylands Law Firm, Omni Bridgeway, an international legal finance and risk management service provider, and Global Yudu, a Hong Kong-based company that offers cross-border debt collection and offshore asset recovery services.
The phenomenon of business owners transferring assets offshore before their companies' collapse is a well-worn path. For years, a cottage industry of middlemen in China specialised in helping entrepreneurs move wealth out of the country through unofficial channels such as underground banks, cryptocurrency transactions, and networks of overseas shell corporations.
'In some Chinese private companies, you have a classic 'poor temple, rich monk' situation', said one veteran bad-loan manager at a major Chinese bank. 'The company has been completely hollowed out, but the actual controller is very rich, and he long ago moved his own assets, and sometimes even the loan proceeds, overseas. When the company collapses, he claims to be a pauper.'
The most infamous recent case involves Hui Ka Yan, founder of China Evergrande Group, whose family assets are now the subject of a worldwide search by liquidators appointed in Hong Kong.
However, pursuing personal assets to repay debts is not always appropriate because many companies take on debt that is not guaranteed by their actual controllers, Du said, which means those individuals are not directly liable for the debt owed.
Global asset hunt
Chinese companies typically hold relatively few assets overseas, and they have limited liability legal status, which means that if they collapse, they likely have a relatively small amount of executable assets, property, or resources that can be legally seized and sold to repay debts through court orders or debt recovery processes. That does not make it cost-effective for creditors to pursue repayment overseas, Du told Caixin.
However, in China, many corporate financing deals require the company's founder or actual controller to provide a personal guarantee, which means creditors can go after that individual's global personal assets, including luxury homes and yachts, bank accounts, and investments. In some jurisdictions, creditors can even claim family assets.
Chinese court judgments against debtors are enforceable in at least 47 countries and regions, according to the asset recovery report, covering destinations that are popular among high-net-worth individuals, such as the US and Canada. Among those, 35 jurisdictions have signed bilateral judicial assistance treaties with China that explicitly support the recognition and enforcement of Chinese judgments. Twelve countries have proactively enforced Chinese judgments based on their domestic laws, providing a solid legal foundation for global debt recovery.
So as long as basic procedural fairness requirements are met, creditors can apply for compulsory enforcement orders in these jurisdictions, the report said. That said, legal proceedings to recover money overseas are complicated, often time-consuming, and extremely costly.
Even before they begin their overseas hunt for assets, creditors face obstacles. In many cases, debtors flee and relocate overseas or deliberately evade litigation, making it almost impossible for Chinese courts dealing with domestic lawsuits or arbitration to effectively serve summonses or ensure that debtors are substantively aware of court proceedings, Luo Ting, a lawyer at Hylands Law Firm, told Caixin.
That makes it difficult to prove that the debtor was substantively aware of the litigation, which may lead foreign courts, when reviewing Chinese judgments or arbitration awards, to conclude that the debtor's right to respond was not adequately protected and to refuse recognition and enforcement, Luo said. 'Australia has, in fact, declined to recognise and enforce Chinese judgments in multiple cases on these grounds,' she said.
No free lunch
Another issue is the cost of collecting debts overseas, which could run to millions of US dollars, according to sources interviewed by Caixin. Cross-border debt recovery requires a high level of professional expertise, the report said. The process requires not only a comprehensive understanding of legal proceedings in different countries, but also good knowledge of capital market operations and cryptocurrency trading in order to investigate debtors' often sophisticated cross-border asset transfers, it noted.
'The first concern for creditors is whether they even have enough money to start global recovery efforts,' one legal expert told Caixin. 'The second is, if they spend so much and end up recovering nothing or only a small amount, then they still lose money.'
In one case, Chinese creditors spent nearly US$20 million to pursue debtors who fled overseas, which shows that the costs can be significant and should not be underestimated, the source said.
Some industry insiders suggest that instructing a third-party debt collection agency might help. Omni Bridgeway, which is seeking to tap into the Chinese market, says it will pay all the recovery costs in advance. If successful, both parties share the recovered funds; if unsuccessful, it absorbs the loss.
But such a service does not come cheap. Agencies such as Omni Bridgeway usually demand a high share of the assets they manage to secure, ranging from 35 to 55 per cent, reflecting the high risks involved in trying to track and recover assets that could span several countries, the legal expert told Caixin.
Chinese banks, accustomed to the lower contingency fees charged by domestic lawyers, often baulk at giving away such a large share, seeing fees of 20 to 30 per cent as more acceptable. Yet funders argue they are creating value from an asset the bank had essentially written off.