Skip to comments.China Announces New Bailout of Big Banks
Posted on 01/07/2004 6:37:24 AM PST by woermEdited on 01/07/2004 6:50:46 AM PST by Sidebar Moderator. [history]
HONG KONG, Jan. 6 - China announced a complex transfer on Tuesday of $45 billion from its soaring foreign exchange reserves to two of the four big government-owned banks, the third large bailout in the banking system in less than six years.
The transaction is intended to help shore up the financial institutions, the Bank of China and the China Construction Bank, so they can sell stock for the first time, the Chinese central bank said in a statement. The central bank admonished the commercial banks to do a better job of controlling fraud and limiting bad loans.
When dealing with bad assets, they have to strictly investigate the responsibility of the related officials, the statement said. They have to fight fiercely against those who have tried to run away from bank loans through illegal behavior.
Beijing bars Chinese journalists from reporting on the full extent of the banks troubles, especially writers for mass-media publications read by many depositors. But with their promises of tough action against errant bank officers, the statements issued on Tuesday by the central bank and other agencies hinted at a concern about public perceptions of the bailout.
The costs of the American savings and loan bailout more than a decade ago - $123.8 billion in public funds and $29.1 billion in supplemental deposit insurance premiums from financial institutions - drew considerable complaints from politicians and the public in the United States. China has been eager to prevent a similar controversy. Its latest bailout, while costly, covers less than half of the nonperforming loans at two of the four troubled banks, and in an economy that is one-eighth the size of Americas.
Tao Dong, an economist at Credit Suisse First Boston, said that $45 billion is probably not sufficient, but a very decent number to start with. Mr. Tao said that while the latest bailout, split equally between the two banks, showed the governments interest in cleaning up the industry, what Chinese banks really need is to reform their lending practices so they stop making more bad loans. Most important is having new credit-risk management established, he said. Without that, any new money will be lost.
The need for another bailout underlines the problems that have vexed Chinas financial system even through two decades of rapid economic growth. The big four banks - the others are the Industrial and Commercial Bank of China and the Agricultural Bank of China - say that 20 percent of their loans are nonperforming. But Western analysts say that up to 45 percent of borrowers do not repay loans, although this share may be falling. By contrast, in the third quarter, loans at American commercial banks insured by the Federal Deposit Insurance Corporation that were more than 90 days past due or were nonperforming represented 1.24 percent of all outstanding loans.
Bankers said the Chinese banks best chance of selling stock would be to list their shares on Western markets as quickly as possible - to take advantage of the mania lately with investors asking few questions and Chinese initial public offerings oversubscribed as much as 700 to 1.
Why do you want to buy Chinese banks? a Beijing banker asked. What makes you think these guys will do anything any differently in the next four years?
China doubled the capital base of the four big banks in August 1998, by effectively giving them $32.5 billion through two complex swap agreements. In 2000 and 2001, it set up four asset management companies that bought $169 billion worth of nonperforming loans from the four banks at face value. The asset managers, owned by the finance ministry and indirectly by the central bank, have been struggling ever since to sell these loans for pennies on the dollar.
After each of those bailout actions, further loan losses quickly eroded the banks capital bases.
Provincial and municipal governments put pressure on local bank branches to approve loans to politically connected individuals and to money-losing government-owned enterprises that employ large numbers of people. The four big banks are trying to address this problem by centralizing in Beijing their decisions on loans and by installing computer systems to monitor lending patterns.
This may have profound/negative effect on China's plans to float the Rimbi(?)
$45 Billion as I understand it is only a drop in the bucket relative to the actual bad load portfolios involved.
that a lot of Yaun, Juan.
this is going to draw a bunch of flack from the folks that want free market to liqidate the bad banks.
but the croynism in the communist party that runs china can't really afford to write off all this stuff or close the banks
since the chinese can now buy gold they may further disdain what passes for the banking system on mainland China as a media for stashing their loot, preferring instead a more established and reliable storage media, gold.
net effect gold is going up and probably a bunch, soon. r