China’s Central Bank is planning to sell its non-performing loans to reduce the ratio of its bad debts. This is a new initiative, as China’s four state banks prepare for competition on an open market.

Preparation Work To Go On The Market

Zhu Min, Assistant of the Director of the Bank of China, said that Bank of China is, “confident that it will reduce the ratio of its bad debts to below six percent and increase the capital adequacy ratio to above eight percent by the end of this year. They are working aggressively to put the loans on the market.

Zhu said that, “[they] will not need the government to rescue the banks again to reach their target. Instead, they will follow the formats done in the markets to sell the bank’s non-performing loans.”

One day prior to Zhu's announcement, The China Construction Bank, the nation’s third-largest lender opened up for public competition at the national level for the first time to sell its non-performing loans, including collateral assets, with an estimated face value of 4.2 billion yuan (US$500 Million).

New Initiative to Eliminate Non-Performing Loans

For the past few weeks, many of the bank officials had expressed that the authorities were preparing to take new moves to clear the non-performing loans of the four state banks. The movement of the Bank of China and China Construction Bank may symbolize the beginning of the new moves.

The massive bad debts from the four Chinese state banks has become a major worry to the Chinese government. The Chinese officials admitted that the ratio of the bad debts in the four state banks is eight percent. Many U.S. Experts expect the figures to be much higher.

The four state banks have bad debts of $800 billion dollars (US$96 billion).

William Gamble, Chief Executive Officer of the Emerging Market Strategies Company headquartered in Rhode Island, said during his interview with VOA that, “the bad debt figure released by the Chinese government is 8 percent compared to that of the U.S. banks at 0.75 percent. That is a big contrast. However, other Western economists estimated that the percentage of the bad debt from the four Chinese state banks is between 30-40 percent.” Gamble estimates the number to be higher and says it could be up to 50 percent.

Gamble explained the two bases for his estimation. The first is that China never had a legal system that ensures the recovery of the loans. The second is that bad debts have grown exponentially in the past few years. Since 2000, the amount of bad debt are growing at the rate of US$150 billion dollars per year and has accumulated to up to US$800 billion dollars so far. The official number from China represents only half of this.

China Must Open Up Its Financial Market By 2006

According to the World Trade Organization (WTO), China must open up its financial market by 2006. If the four state banks can not finish the infrastructural reform by then and catch up with the international system, they will not only fail to live up to the promise China made to the WTO, but could also trigger a financial crisis. Inadequate planning prior to opening up the market will be a threat to the growth of China’s economy.

Preparation for an initial public offering of shares for the Bank of China has begun. The Chinese government has already given the state banks a large amount of foreign exchange reserves to reduce the ratio of the bad debts. From 1999 to 2000, the Chinese government again shifted a face value of 1.4 trillion yuan (US$170 billion) of non-performing loans from the four state banks to other state-own asset management company.

The Bank of China Accelerates The Reform

Zhu Min from the Bank of China stressed that, “This time it’s not just a simple shift of bad debts. There are two parts in this action; one is to use the capital of the Bank of China to wash off part of the bad debt and view it as a loss. This loss is about $175 billion yuan (US$33.2 billion). The other thing to do is what other countries usually do, sell the asset that might not be performing.”
The Bank of China is consulting with the relative departments to see if it can issue government bonds and have the government to acquire a portion of the bad debt.

Zhu said that the Bank of China is accelerating its reforms. The next step is to reform the shareholding system, and then be listed on the stock market. They have not yet decided which action to take.