CHINA WATCH: Biggest China Lender Ready For New Capital
By James T. Areddy
A Dow Jones Newswires Column
SHANGHAI (Dow Jones)--On the last day of 2003, China's government brought some festive cheer to two of the country's biggest banks in the form of a $45 billion capital injection.
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Could China's largest lender wind up receiving a similar present this holiday season?
The government and Industrial & Commercial Bank of China have sent broad hints a capital injection might be in the works. No timetable for an ICBC bailout has been announced, and in theory, it could take place any time.
For accounting reasons, recapitalizing ICBC in the closing days of this year would have the most bang. Any new funds now would show up on the balance sheet of ICBC - which boasts nearly one-fifth of the nation's total banking assets - for 2004, and put the bank in a stronger position to initiate the same kind of changes throughout next year that have won high praise for China Construction Bank and Bank of China, the two banks that benefited from the government's $45 billion largesse last New Year's Eve.
"The recapitalization should be done before year-end so that it could be reflected in the bank's year-end financial statements," said Wei Yen, a Moody's Investors Service Inc. analyst in Hong Kong.
Ryan Tsang, an analyst at Standard & Poor's, notes the balance sheets of China Construction Bank and Bank of China at the end of 2003 were in "a lot better" shape because the recapitalization happened before 2003 books were closed.
Crunch Time For Banking Sector
Crunch time is coming for China's banking sector. Under World Trade Organization rules, foreign banks will get full access to China's market in less than two years, forcing the country's large but weak banks to battle head-to-head with global leaders like Citigroup for the first time. A capital injection would help gird ICBC for the fight by allowing it to wipe bad loans off its balance sheet. It would also clear the way for a stock-market listing.
Making use of China's rich pool of foreign-exchange reserves, the central bank last Dec. 31 pumped Bank of China and China Construction Bank, the country's second- and third-largest banks respectively, each with $22.5 billion. The banks were then told to accelerate reduction of bad debt, which has happened at a rapid clip. They were also instructed to prepare for international stock-market listings, which analysts say could proceed in 2005 and be among the biggest equity offerings anywhere.
China's central bank has enough cash to put the total it spread between the two other banks, $45 billion, into one big shot for the massive ICBC. The People's Bank of China was sitting on at least $540 billion in reserves at the end of October. Thanks to a trade surplus and booming foreign investment in China, reserves have increased by $137 billion from the end of 2003, not counting the funds poured into China Construction Bank and Bank of China.
ICBC is a giant. Last year it reported around 100 million depositors and 24,000 branches, plus $638 billion in assets, or 19% of the Chinese banking system total. At the end of September, 19.5% of ICBC's total loans were nonperforming, down from 22%, valued at $19 billion, at the end of 2003.
Injecting reserves allowed ICBC's main rivals to repair balance sheets. At the end of September, Bank of China's level of bad loans had shrunk to about 5.2% from 16% at the end of last year, helped by the government cash, write-offs, new debt offerings and accelerated lending. For the same reasons, China Construction Bank NPLs were down to just 3.7% from about 9.3%.
ICBC Expects Capital Injection
Hints abound that recapitalization of the biggest of the so-called Big Four is in the works.
China Banking Regulatory Commission Chairman Liu Mingkang said in a November speech made public this month that "Next year, we will continue to promote the reforms in Bank of China and China Construction Bank. And in the meantime, we will launch the reforms in Industrial & Commercial Bank of China and Agricultural Bank of China in time."
Despite mention of Agricultural Bank, it is less certain that the time is ripe to spend money on the weakest and smallest of the Big Four.
ICBC Executive Vice President Zhang Furong told Dow Jones Newswires this month that the bank expects a capital injection and possibly other support, although he said it is up to the government to set the timing. "I think recapitalization from China's foreign exchange reserves will be one of the options. But whether it is the only form, or whether it will be in more than one method, [the government] hasn't sent us a concrete signal yet," he said.
The way Bank of China and China Construction Bank received their capital boosts last year offered perks that could easily benefit ICBC, too. Money injected into the banks came from the State Administration of Foreign Exchange, which manages the country's massive foreign-currency reserves. By using those, the government provided the banks with capital without worsening its budget deficit.
At the same time, the money was injected through a newly created holding company called Central Huijin Investment (Huijin roughly translates as "remit gold") that allowed the government to remove itself from direct ownership of the banks. That in turn eases the way for initial public offerings that will further strengthen capital levels.
China Construction Bank and Bank of China are permitted to manage their $22.5 billion in trading accounts that invest in securities such as U.S. Treasurys. The money can also be held in investments denominated in yen and euros, but the money can't be converted into Chinese yuan, according to Moody's.
Other steps took place throughout the year, including the sale by the banks of NPLs. The banks also restructured into shareholding corporations, with China Construction Bank seen as making more progress toward an IPO.
"The Chinese banking system is in the midst of revolutionary change," Moody's said in a recent progress report. S&P said, "the outlook on China's banking system is positive."
-James T. Areddy; Dow Jones Newswires; (86) 1370 1700 594; james.areddydowjones.com
(James T. Areddy, senior correspondent in Shanghai specializing in debt markets, has covered finance and economics in Asia for Dow Jones
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