China will set up an asset management company for each of its four biggest commercial banks by the middle of this year to relieve them of their non-performing loans, according to a central bank official. The news follows the launch of a pilot asset management company set up for one of the four banks, China Construction Bank, or CCB (ASRI 1/25/99, p.6).
"The four state-owned commercial banks will establish their own asset management companies in the style of the U.S. Resolution Trust Corporation," Liu Mingkang, deputy governor of the People's Bank of China (PBOC) said in a recent speech. "They are going to take over their historic burdens, recover them through auctions, debt equity swaps and securitization, under a mandate given by the central bank."
The other three banks are Agricultural Bank of China, Industrial and Commercial Bank of China, and Bank of China.
Setting up the asset management companies is the first step in what will be a long and difficult process of bank restructuring in China, where non-performing loans account for an estimated 40%-70% of total loans in the domestic banking sector. PBOC officials are reportedly keen on using the asset management companies to clean up the four banks and turn them into profitable enterprises. Various investment banks, including Lehman Brothers and Goldman Sachs, have been invited to Beijing in recent months to recommend ways to resolve the bad loan problem.
Yet any auction or securitization of non-performing loans is unlikely to attract much investor interest. Most of the bad loans represent government-directed loans to thousands of state-owned enterprises, an increasing number of which are going bankrupt as the country becomes more market-oriented.
"Unlike Korea and Thailand, it would be very hard to repackage these kinds of non-performing loans from government-controlled banks to government-controlled businesses, in a way that would be attractive to foreign investors," said Neil Campbell, partner at Brown & Wood in Hong Kong.
Ultimately, funding for the new asset management companies will have to come from the government and not from outside investors. In April, Xinda Asset Management Company was officially launched with a capital base of RMB10 billion ($1.2 billion) and plans to acquire $36 billion of CCB's bad loans at book value. That purchase will likely be funded by a future bond issue from Xinda, sources said. - VC