China to close state-run banks to slash bad loans

China will choose one or two state-run banks to spearhead reforms to cut bad loans and raise capital levels in the banking sector, the country's top banking regulator said Monday.

The comments by Liu Mingkang (劉明康), head of the China Banking Regulatory Commission, suggest that instead of attempting a mass bailout of all banks as has been tried in the past, the government is adopting a more focused approach.

However, Liu said the reforms will eventually be carried out at all four of China's big state-run commercial banks, which are beset by chronic bad debt.

Liu's remarks followed weeks of speculation that the government was preparing for another big bailout following earlier efforts to trim nonperforming loans and improve bank management.

The communist government is under pressure to clean up its banks as it prepares to open the market to foreign competitors under commitments made to the WTO.

Under the pilot reform program, regulators will "adopt all possible forms and means" to cut debts, Liu said. "Second, we will increase their capitalization through multiple channels."

The third stage calls for a "full and complete internal restructuring" of the chosen banks, Liu said.

By limiting the bailout initially to one or two banks, the government can reduce the burden on public finances and also fast-track one or two institutions for stock listings.

Official statistics put the size of nonperforming loans carried by China's "Big Four" state-run banks -- China Construction Bank, Bank of China, Industrial & Commercial Bank of China and the Agricultural Bank of China -- at 2 trillion yuan (US$242 billion), or more than 20 percent of total lending.

International credit ratings agency Standard & Poor's last week estimated that nonperforming assets could account for up to 45 percent of the overall balance sheets of China's banks.

China set up asset management companies to shift bad loans off the banks' books, but a failure to improve risk management at most institutions has meant that nonperforming loans continue to pile up.

Five years ago, the Ministry of Finance spent 270 billion yuan (US$32.7 billion) bailing out the banks. That recapitalization was followed by a massive transfer of nonperforming loans to four asset management companies.