Ready for Chinese bank IPOs?
Bankers said that 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 current mania in which investors ask few questions and Chinese initial public offerings are oversubscribed by as much as 700 to 1.
"Why do you want to buy Chinese banks ? what makes you think these guys will do anything any differently in the next four years?" asked a banker in Beijing.
nytimes.com
China Announces $45 Billion Bailout of 2 State-Owned Banks
By KEITH BRADSHER
Published: January 6, 2004
ONG KONG, Jan. 6 ? The Chinese government announced today a complex transfer of $45 billion from the country's soaring foreign exchange reserves to two of the country's four big state-owned banks, the third large Chinese banking system bailout in less than six years.
The transaction is intended to help shore up the two banks, the Bank of China and the China Construction Bank, so they can sell stock for the first time, China's central bank said in a statement. The central bank admonished the 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 People's Bank of China 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 journalists for mass media publications read by many depositors. But with their promises of tough action against errant bank officers, the statements issued today 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 industry bailout a decade ago ? $123.8 billion in government money and $29.1 billion in supplemental deposit insurance premiums from banks ? drew considerable complaints from politicians and the public in the United States, and China has been eager to prevent a similar controversy at home. The latest Chinese bailout, while costly, covers less than half the non-performing loans at just two of the four troubled Chinese banks, and in an economy that is only one-eighth the size of the American economy.
Tao Dong, an economist at Credit Suisse First Boston, said: "$45 billion is probably not sufficient, but a very decent number to start with."
Mr. Tao said that while the latest bailout showed the Chinese government's interest in cleaning up the banking sector, what Chinese banks really need is to reform their loan-making decision processes so they can avoid issuing more bad loans. "Most important is having new credit risk management established ? without that, any new money will be lost," he said.
The need for another bailout underlines the problems that have plagued China's financial system even through two decades of rapid economic growth. The big four Chinese banks ? Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China ? say that 20 percent of their loans are non-performing.
But Western analysts say that as much as 45 percent of borrowers do not repay loans, although this percentage may be falling lately. By contrast, loans that were more than 90 days past due or in non-accrual status represented just 1.24 percent of all outstanding loans during the third quarter at American commercial banks insured by the Federal Deposit Insurance Corporation.
Bankers said that 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 current mania in which investors ask few questions and Chinese initial public offerings are oversubscribed by as much as 700 to 1.
"Why do you want to buy Chinese banks ? what makes you think these guys will do anything any differently in the next four years?" asked a banker in Beijing.
The Chinese government doubled the capital base of the big four banks in August 1998, by effectively giving them $32.5 billion through two complex swaps agreements. In 2000 and 2001, the government set up four asset management companies that bought $169 billion worth of non-performing loans from the big four banks at face value. The asset management companies, owned by the finance ministry and indirectly by the People's Bank of China, have been struggling ever since to sell these loans for pennies on the dollar.
After each of the two previous bailouts, further loan losses quickly eroded the banks' capital bases again.
Provincial and municipal governments put heavy pressure on local bank branches to approve loans to politically connected individuals and to money-losing state-owned enterprises that employ large numbers of people. The big four banks are trying to address this problem by centralizing their decisions on large loans and by installing computer systems to monitor lending patterns.
The State Administration of Foreign Exchange said in a statement that it was transferring the money for the latest bailout to a new, specially created management company, the Central Huijin Investment Company Ltd., which will then invest the money in the banks. The investment company's directors and supervisors will come from the State Administration of Foreign Exchange, the finance ministry and the People's Bank of China, giving these agencies an ongoing role in the two banks' ownership and financial management even after they sell stock to the public.
China's use of foreign exchange reserves caught the attention of traders in currency markets, who have been looking for any sign that Beijing might allow the Chinese yuan to appreciate in value, as demanded by American, European and Japanese officials.
But a financial expert who insisted on anonymity said that the two banks were required to keep the money in dollars, which will make it easier for the central bank to continue preventing traders from bidding up the value of the Chinese yuan against the dollar in currency markets.
The central bank has been printing yuan on a massive scale to buy dollars and prevent the yuan's appreciation. The central bank has then taken some of the extra yuan out of the financial system by selling bonds and withdrawing from circulation the money that is used to pay for them.
Enough yuan have nonetheless been issued to allow banks to lend more money in the first seven months of 2003 than in all of 2002. This has prompted fears that the banks may have engaged in another round of reckless lending that will produce a fresh wave of defaults in the next several years.
The financial expert said that the Chinese government had promised the two banks that they could exchange the dollars for yuan later if necessary at an exchange rate of 8 yuan to the dollar. This would act as a hedge for the bank against losses if the yuan does appreciate. It could also suggest an acknowledgement by Beijing of an eventual appreciation of the yuan, which currently trades at 8.28 to the dollar.
Ryan Tsang, the director of greater China financial services ratings at Standard & Poor's, the credit-rating agency, said that accounting rules would let the banks count dollars as capital for purposes of meeting international capital adequacy standards, without converting them to yuan.
Desmond Supple, an economist at Barclays Capital, wrote in a research report today that the banks would be able to write off loans as uncollectible and make corresponding accounting entries against their equity without converting the dollars into yuan.
The State Administration of Foreign Exchange said the transfer to the banks was actually accomplished at the end of last year, which will allow the banks to show the extra capital in their year-end accounts. Several bankers said this would make it easier for the banks to pursue initial public offerings of stock by the end of this year, although they cautioned that each banks' books were so complex and loss-ridden that such a tight schedule might not be feasible.
The State Administration of Foreign Exchange said that even after deducting $45 billion, China's foreign reserves leaped $116.84 billion last year, to $403.25 billion.
Standard & Poor's and Moody's, the two big credit-rating agencies, each welcomed the latest bailout as a sign that Beijing was addressing difficult problems in the banking sector instead of letting the problems continue to accumulate. "It's a very good development ? it really demonstrates the government's commitment," said Yen Wei, the vice president for Chinese banking at Moody's. |
