For years Eric Zhang, a senior partner at Shanghai law firm SG&Co, helped China's biggest bad loan companies arrange settlements with delinquent borrowers. Now he is buying such loans himself, and spinning a tidy profit.

Zhang, whose legal expertise gives him an edge, is currently looking at a loan secured against property near the site for Shanghai Disneyland, joining a growing army of thick-skinned investors piling into China's booming secondary market for bad debt.

"I know the ins and outs of property," said Zhang, who aims to make money on the loan within three to six months by selling the real estate after clearing legal issues.

As China's economy registers its slowest growth in a quarter century, more borrowers are in default, swamping banks in a rising tide of non-performing loans (NPLs).

A range of players are wading into the market for these assets, including local asset managers, trust companies, foreign investors and even ex-regulators, which frees banks' balance sheets for more economically useful lending, which has been a key goal of Beijing policymakers.

The growing trade spreads these high-risk, high-reward assets more broadly over China's financial landscape, while reducing the risk to the big lenders.

"Ideally, if this risk can be spread over to a wider range of investors, especially foreign investors, that would help diversify risks away from China's financial system," said Hong Kong-based Grace Wu, Fitch's banking analyst.

It requires buyers to be on their mettle, however, in a country where transparency can be poor and investors have on occasion found shortcomings in the collateral backing a loan.

Distressed debt investors in China buy the loans from state-backed agencies known as asset management companies (AMCs), at a heavy discount, and aim to turn a profit by selling collateral on the loans at a higher price or getting the bankrupt borrower back on its feet.

"Banks are under increased pressure from regulators to lower their NPL ratios," said Ted Osborn, a senior partner at PwC in Hong Kong, who started advising on Chinese NPL transactions 14 years ago. "More loans are being offloaded to state-owned asset management companies and other players in the market."

China's commercial banks saw their total NPLs rise to 1.8 trillion yuan ($280 billion) in the first half of 2015, the 15th straight quarterly rise, according to China's banking regulator.

These bank NPLs could double during the second half, says Liao Qiang, senior director of financial institutions ratings at Standard & Poor's.

That means booming business for China's Big Four managers of distressed debt - China Cinda Asset Management Co, Huarong AMC, Great Wall AMC, and Orient AMC - and for other investors with the stomach for such risk.

GROWING MARKET

The AMCs, set up in 1999 to digest bad loans from China's four largest state banks, have since taken on more than 4 trillion yuan in bad loans.

The AMCs buy the loans at a discount and make money either by working with the lenders to get the cash back, or by selling them on.

At Huarong AMC, which saw its first-quarter net profit jump 42 percent to 4.88 billion yuan, reselling rather than managing the NPLs is increasingly the preferred route.

Although reselling means a smaller profit, it's quicker and easier than recovery, especially for more complex loans.

Huarong sold 14.5 percent of the bad debt it owned in 2014, twice what it sold two years earlier, evidence the secondary market is booming.

The primary market is also growing, and China has set up 10 local AMCs over the last two years in provinces like Zhejiang and Guangdong.

Trust companies, a major source of shadow lending, with assets of around 14 trillion yuan at the end of last year, are also sensing the opportunity.

A source with direct knowledge of the matter said China's second-largest trust company by assets, Zhongrong International Trust, is starting a distressed debt department to buy bad loans and repackage them into asset-backed securities.

A spokeswoman for the trust said: "Zhongrong has a plan (to establish this department), but it has not been finally decided."

Even former regulators have entered the fray, including a Zhejiang banking official who started a small AMC that buys NPLs and improves underlying companies and factories.

"Prices can be as cheap as dirt," he said.

Foreign investment banks and private equity firms are testing the market, including Goldman Sachs Group and Oaktree Capital Management, which attended a Cinda AMC promotion in May for $7 billion of NPLs.

"You can expect the involvement of foreign buyers will increase tremendously, because the market itself is increasing tremendously," said Liao Qiang, the Standard & Poor's analyst.