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Friday, October 03, 2003

Chinese Banking Reform Moves Forward, Slowly

There is some evidence that the process of sorting out the Chinese non-performing loan problem is moving forward: slowly. Six billion out of a possible total of anywhere up to 750 billion dollars doesn't seem like a revolution. Still it is a start.

Chinese financial institutions plan to put up for sale about $6bn in non-performing assets over the next few months, marking the biggest push since 1999 to clean up the bad debts of the country's huge but insolvent big four state banks, Chinese officials and financial industry executives said. The new level of activism in China's most pressing economic reform signals an increased willingness from the government of Wen Jiabao, the premier, to experiment with new and different forms of asset disposal. It also suggests a potential bonanza for foreign and domestic investment banks. The big four banks, which between them have problem loans estimated at between $375bn and $750bn, are in a race to clean up their balance sheets and win official approval for a stock market listing.

The two front-runners to be listed are the China Construction Bank and the Bank of China, followed by the Industrial and Commercial Bank of China and, in a distant fourth place, the Agricultural Bank. The first move is expected to be an auction by Huarong, the biggest of four asset management companies set up in 1999 to dispose of about Rmb1,400bn in non-performing loans transferred from the big four banks. The auction, expected to take place this year, would be for NPLs with a face value of about $2.2bn, executives said. Yang Kaisheng, Huarong's president, started a roadshow to promote the NPLs to financial institutions in the US and Japan over the weekend. If it materialises, the auction would be only the second to be held since 1999, when a consortium led by Morgan Stanley bought NPLs with a face value of Rmb10.8bn and a Goldman Sachs consortium bought assets with a face value of Rmb1.97bn.

The increased size of Huarong's second auction indicates Mr Yang's confidence that foreign banks have been able to profitably dispose of the NPLs they bought. Mr Yang is also hoping for higher returns than in the first auction, when NPLs were sold for 8-9 per cent of their face value, Huarong executives said. Later, the Wuhan branch of Huarong plans to package about $500m in bad assets for sale, Chinese officials said. This represents a new method of disposal - previously only the head offices of the asset management companies were allowed to court foreign clients. Wuhan is an industrial city in central China.

Another new form of asset disposal is planned by the Bank of China in Hong Kong, which hopes to offer to the market assets with a face value of about $1.2bn, executives said. Because Chinese banks are not allowed to sell NPLs directly, the Bank of China assets are being packaged and held by a Cayman Islands entity, said the executives, who declined to be identified. It was not clear if the Bank of China (Hong Kong) plans have received approval from Beijing. A spokesman at the People's Bank of China, the central bank, said he had not heard of the scheme.China's largest bank, the Industrial and Commercial Bank of China, is also trying to package about $2bn to $2.5bn in non-performing assets for sale in the more distant future. The timetable for this sale was not clear.
Source: Financial Times

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