The Bank of China (BOC) has recently revealed that levels of non-performing loans are higher than previously disclosed. At the end of 1999 it reported that impaired loans made up 14.9% of the total. But in the past Chinese banks classified loans as bad or non-performing if loans were overdue by certain periods, rather than if the borrower's ability to repay the loan was doubtful.

BOC has now changed its rules to reflect borrowers repayment ability and at year-end 1999 bad loans totalled 40% of performing loans. In 2000 some of these loans were sold to an asset management company (AMC), reducing bad loans to 28% of the total. The bank, however, has only got loan loss reserves to cover 8% of the problem loans.

Fitch comments in a recent report that BOC needs to consider more aggressive measures to set up adequate loan loss reserves, to raise more capital, and remove the loans from its balance sheet. But securitization is not yet an option.

"There are not likely to be true securitizations of non-performing loans in China in the near future," said Chris Chau, at Fitch in Hong Kong. "Only one AMC is seriously considering securitization."

There are four AMCs in China, each aligned to a bank, and they have each received government subsidies to purchase these loans.

Chau continues: "The securitization of NPLs would be much more difficult because China does not have an SPV act, and the concept of a true sale is not established. Furthermore, stamp duty, taxes, and a whole slew of other issues need to be resolved before there can be a securitization. The local capital markets are not very developed, as in South Korea."

And international issuance is not possible. Chau says: "There are no swaps with the Renmindi, in which the loans are denominated. To do an international deal the government would have to be involved all the way."

But he adds: "The AMCs will try to do something similar to Komoco in South Korea. Komoco is trying to do secured debt issues to get people to understand how mortgages work as an asset."

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