The Chinese government is considering its second bailout of Industrial & Commercial Bank of China and its rivals in four years, as bad loans equal to at least a quarter of credits block their fundraising plans.
Policy makers have discussed transferring capital to banks, said Li Fu-an, deputy head of the People's Bank of China's bank management department. The government's annual financial conference last week also debated a plan to set up a special agency to oversee banks.
The central bank has told banks to reduce non-performing loans by 2006, when they'll be exposed to unfettered competition from overseas banks such as HSBC Holdings Plc and Citigroup Inc.
Goldman Sachs Group Inc estimates that for banks to become competitive and to attract investors, it could cost 2.4 trillion yuan (US$290 billion) in new capital and bad-loan transfers.
"We'd like the banks to have a big capital injection and then privatize next year," said Jonathan Anderson, head of Asia-Pacific economic research at Goldman and former China representative for the International Monetary Fund. "If you want to go the whole hog, it could cost 3 trillion" yuan for banks to meet international standards.
The government says about a quarter of advances at the top four lenders are non-performing. Moody's Investors Service says as much as 45 percent of the top four banks' 7.9 trillion yuan of loans may go bad, or US$430 billion. That's almost as much as the ?52.4 trillion (US$442 billion) of Japanese loans that were certified non-performing last March. Many more borrowers have stopped paying debt since then.
In Japan, the region's biggest economy, bad loans have stifled growth for the past decade. China needs to clean up dud credits if they're not to also choke the No. 2 Asian economy, which expanded 8 percent last year.
To meet the government's target of reducing loans by 2006 "it is likely that some form of government intervention will be necessary," Standard & Poor's said last week. That "could possibly be through injections of fresh capital or through further transfers of NPLs."
Like Japan's banks, China's top four lenders were bailed out in 1999, receiving 270 billion yuan as they shifted 1.4 trillion yuan of loans to asset management firms.
The lenders, including Bank of China, Agricultural Bank of China and China Construction Bank, have since seen more loans go bad as the government cuts support for state-owned companies.
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