While Japan's recession and its wobbly banks distract much of the world, the banking sector in China is in much worse shape. The Xinhua News Agency has reported that the central bank's governor, Dai Xianglong (戴相龍), admits that non-performing loans (NPLs) account for 26.6 percent of total lending by China's top four state-owned commercial banks. As of the end of September last year, NPLs held by these financial institutions totaled 1.8 trillion yuan (US$217 billion).
One estimate puts China's NPLs at between US$500 billion and US$600 billion. Of this amount, four asset management companies (AMCs), Huarong, Great Wall Asset Management, China Orient Asset Management and Cinda Asset Management, are holding US$20.5 billion. Now the AMCs, each holding non-performing assets of the four major banks, are beginning to seek foreign investors to buy some of the NPLs.
For its part, Huarong auctioned off 16.6 billion yuan of the NPLs it held for ICBC. Of this amount, 10.8 billion yuan was sold to a consortium led by Morgan Stanley that included Lehman Brothers.
Great Wall Asset Management was also expected to auction about 15 billion yuan of NPLs to international investors this year. Xinhua news agency reported that Orient Asset Management will sell between 15 and 20 percent of its 267 billion yuan of non-performing assets to foreign investors for the Bank of China.
Instead of an auction, Cinda Asset Management signed an agreement with Goldman Sachs, Deutsche Bank and Lonestar Capital to dispose of its bad assets from China Construction Bank. Things may be worse than they sound because China substantially understates its NPLs relative to international accounting standards. State-owned banks classify a loan as non-performing only if interest payments have not been paid for two years.
By contrast, the international standard classifies bad loans as those that have not been serviced after three months. According to Ernst & Young, nearly half of all loans made by Chinese banks may never be repaid.
Despite various steps to recapitalize the largest banks and remove NPLs from their balance sheets, their overall health has not really improved. Instead of privatizing state-owned banks, China has chosen to recapitalize them.
According to People's Bank of China (PBOC) estimates, restructuring costs of China's financial sector have so far been about 2.5 trillion yuan (just under US$302 billion), about 31 percent of GDP. This puts them in the upper range of previous estimates that NPLs were 30 to 50 percent of total loans, with restructuring costs of 25 to 30 percent of GDP.
These serious problems in the banking sector persist despite the fact that 1.4 trillion yuan (US$169 billion) in bad debt was transferred to asset-management companies in 1999, less than half of the US$250 billion-US$400 billion total of bad loans. Beijing estimated that the NPL ratio fell by 2.6 percentage points year-on-year by September last year.
With such enormous sums, it is not surprising that Beijing is hoping for some help from outside investors. The hope is that international financial houses that made profits from buying non-performing loans in other Asian economies will be tempted to bid.
However, it appears that Beijing's expectations on sale prices are unrealistic. Whereas the international average for recuperation is 20 percent of face value of NPLs, Chinese officials have stated they expect the assets to sell for up to 30 percent. By contrast, distressed assets in Thailand and South Korea sold for as little as US$0.10 on the dollar.
Even so, it remains unclear how foreign investors can realistically expect to collect on any kind of debt when state banks are unable to collect on loans made to state enterprises. As it is, Huarong has filed lawsuits against more than 100 enterprises to reclaim around 107 billion yuan with little success. Lacking auditors, courts and laws relating to insolvency, as well as the lack of secured creditors, makes it almost impossible to force an enterprise into receivership. In 1996 there were only 540 bankruptcies in China, with even fewer in 1997.
Investors seeking to cash in on China's fire sale are in for a difficult ride since transferring ownership to outsiders raises a number of sticky issues. Foreigners might expect to bring in management expertise and force enterprises to restructure so they could become profitable and repay their debts.
But none of this can happen unless they can gain a controlling interest to be able to force restructuring. As it is, state-owned enterprises face difficulties in letting workers go, replacing managers or undertaking technological upgrades. To make matters worse, land remains in the ownership of the state so that valuations of real estate will make no sense and property rights will be ambiguous.
There is considerable evidence that foreign investors have been overly sanguine about China plays in the past, often to appease Beijing. Such dishonesty does no one any good. Hopefully, bids in future rounds of asset sales will be more realistic and less opportunistic. Otherwise, it might be wise for shareholders and depositors in the foreign institutions to sell out quick.
Christopher Lingle is professor of economics at Universidad Francisco Marroquin in Guatemala and global strategist for eConoLytics.com.
As the Chinese Communist Party (CCP) and its People’s Liberation Army (PLA) reach the point of confidence that they can start and win a war to destroy the democratic culture on Taiwan, any future decision to do so may likely be directly affected by the CCP’s ability to promote wars on the Korean Peninsula, in Europe, or, as most recently, on the Indian subcontinent. It stands to reason that the Trump Administration’s success early on May 10 to convince India and Pakistan to deescalate their four-day conventional military conflict, assessed to be close to a nuclear weapons exchange, also served to
The recent aerial clash between Pakistan and India offers a glimpse of how China is narrowing the gap in military airpower with the US. It is a warning not just for Washington, but for Taipei, too. Claims from both sides remain contested, but a broader picture is emerging among experts who track China’s air force and fighter jet development: Beijing’s defense systems are growing increasingly credible. Pakistan said its deployment of Chinese-manufactured J-10C fighters downed multiple Indian aircraft, although New Delhi denies this. There are caveats: Even if Islamabad’s claims are accurate, Beijing’s equipment does not offer a direct comparison
After India’s punitive precision strikes targeting what New Delhi called nine terrorist sites inside Pakistan, reactions poured in from governments around the world. The Ministry of Foreign Affairs (MOFA) issued a statement on May 10, opposing terrorism and expressing concern about the growing tensions between India and Pakistan. The statement noticeably expressed support for the Indian government’s right to maintain its national security and act against terrorists. The ministry said that it “works closely with democratic partners worldwide in staunch opposition to international terrorism” and expressed “firm support for all legitimate and necessary actions taken by the government of India
Taiwan aims to elevate its strategic position in supply chains by becoming an artificial intelligence (AI) hub for Nvidia Corp, providing everything from advanced chips and components to servers, in an attempt to edge out its closest rival in the region, South Korea. Taiwan’s importance in the AI ecosystem was clearly reflected in three major announcements Nvidia made during this year’s Computex trade show in Taipei. First, the US company’s number of partners in Taiwan would surge to 122 this year, from 34 last year, according to a slide shown during CEO Jensen Huang’s (黃仁勳) keynote speech on Monday last week.
RSS