The continuing problem loan sale by Guangdong Development Bank could mark the first time state-owned asset managers have been forced to raise funds in the market to finance distressed assets purchases.

According to sources, some of the state-owned asset management companies have contacted foreign investors about putting up capital for the acquisitions and are even considering bank loans.

The bank is involved in a sweeping financial restructuring that involves the sale of a more than 80 per cent stake to a consortium of domestic and foreign investors, the first time the state has relinquished control of a previously government-backed lender.

The Guangdong bank hopes to sell about 35 billion yuan of doubtful and sub-standard loans - two of the better of three categories of non-performing loans. Up to three asset managers are said to be competing for the loans, with Huarong the most likely winner.

Previously, the People's Bank of China and the Ministry of Finance helped fund all asset management company acquisitions of distressed assets from the Big Four state-owned commercial banks, policy lenders, and the Shanghai-based Bank of Communications, China's fifth-largest commercial lender that is also controlled by the state.

However, the government now says it wants the asset managers to run like profit-seeking enterprises and so far the central bank has not stepped forward to help fund the sale of non-performing loans from Guangdong Development Bank.

Cash recovered from non-performing loan disposals is insufficient for the asset managers to repay loans from the central bank or service the principals of bills issued to pay for the assets acquired previously, let alone financing further acquisitions.

Therefore, some of the asset managers are appealing for funds from international distressed assets investors, in exchange for eventually reselling the bank's problem loans to them.

"We may raise funds from investors who will buy Guangdong Development Bank's non-performing loans from us," said a senior official at an asset manager.

However, such an arrangement may have problems getting past state regulators.

In the meantime, some investors are said to be concerned about the quality of the bank's problem loans and the pricing. "Some of the assets should have been classified `loss' (the worst category of non-performing loan)," a source said.

The sale will cut Guangdong Development Bank's overall ratio of problem lending to loans by more than half to 5 per cent. The bank would have loan assets of about 170 billion yuan after the sale.

It is understood that Guangdong Development Bank is looking to recover about 30 cents on the dollar through the sale, or about 10 billion yuan. Any shortfall will mean the Guangdong government will have to inject more than the current estimated 30 billion yuan to revive the bank.