The government has assigned two asset management companies
(AMCs) to dispose of nearly 200 billion yuan (US$24 billion) in bad
loans written off by the Bank of
China (BOC) and China
Construction Bank (CCB), for "maximum recovery," sources
said.
Larger amounts of non-performing loans (NPLs), classified as
"doubtful" under the international five-category loan
classification system, are also likely to be transferred from the
two banks to the two AMCs as the banks prepare for initial public
offerings (IPOs), they said.
But the method of removing the doubtful loans from the banks'
books is yet to be settled, and they may instead be sold at
auctions open also to international investors.
The decision is part of the government's broader plans to reform
the nation's four biggest state-owned banks, which also include the
Industrial and
Commercial Bank of China and the Agricultural Bank of
China.
It is a follow-up measure after a US$45 billion capital
injection into the BOC and CCB at the end of last year to prepare
them for a pilot joint-stock restructuring and public share
offerings.
The two pilot banks reportedly used their original capital to
write off part of their huge NPLs.
Sources said the two AMCs--China Orient Asset Management and
China Cinda Asset Management--are required to give a minimum amount
of cash that they recover from the bad assets to the government,
and may keep the remainder.
Sources declined to disclose the minimum recoveries, which they
said were negotiated by the AMCs with the two banks and approved by
the government.
"It is certainly a good thing," said Wang Haijun, director of
China Cinda's investment banking department. "It not only pushes
ahead China's banking reform, but also it will help the asset
management companies to play their specialized role in the
resolution of China's non-performing loans."
The sources said the Ministry of Finance sent a circular to the
four AMCs in early March. It notified them of the ministry's
selection of China Orient and China Cinda to "take over and dispose
of" the bad loans that the two banks wrote off in 2003 and "all the
loans categorized as loss" that were written off during the
restructuring of the banks, which they said largely refers to the
recapitalization scheme.
Under the five-category loan classification system that China's
banking regulator is promoting, the three lowest
categories--substandard, doubtful and loss--are typically seen as
non-performing loans.
China Orient is entrusted with the BOC's 140 billion yuan
(US$16.9 billion) in bad loans, while China Cinda will take over
the CCB's 56.9 billion yuan (US$6.9 billion). The amounts exclude
interest payments.
The assets are currently being transferred to the AMCs'
books.
In the agreements, the finance ministry requires the AMCs to
establish risk-control mechanisms, try to achieve maximum
recoveries and separate the entrusted assets from their own.
The BOC and the CCB are the healthiest of China's Big Four.
However, their NPL ratios are still high, standing at 14.8 percent
and 8.8 percent, respectively, at the end of March.
The China Banking
Regulatory Commission said last week that the combined total in
NPLs for the Big Four stood at 1.9 trillion yuan (US$228 billion)
as of March 31.
The BOC and the CCB are required to adopt the stricter
five-category loan classification system this year and to keep
their NPL ratios below 5 percent.
The government's decision to give the business of disposing of
the pilot banks' written-off assets to the AMCs instead of letting
the banks handle it themselves is good news for the AMCs as they
await new business opportunities.
However, the deal itself may not be lucrative, say analysts.
China Cinda's Wang says it will become the trend for NPL
business to be left to AMCs, which are more experienced, efficient
and free of the accounting confusion that could arise if the task
were left to the banks.
(China Daily May 17, 2004)