Chinese Banks’ NPLs

Reform Progress

China has made some material progress in reforming its ailing banks. The year of 2004 have an important significance to most of all china banks. Since 1994, China's banking system has gone through some profound changes, though reform is far from complete.

In 1994, all policy operations or functions had been taken off from four state-owned banks. In 1995, China enacted new Commercial Bank Law, which was the first step toward financial liberalization and banking reform. The rising portion of non-performing loans (NPLs) in the commercial banks' total outstanding loans and the large household deposits in the commercial banks' total liabilities forced the banks to consider the quality of their assets and the liquidity risks involved. When the Asia financial crisis happened, the estimated ratio NPLs in China was 24-26 percent, higher than Korea and Malaysia.

In 1998, Ministry of Finance(MOF) issued 270 billions of special treasury(special national debt, or special-purpose bonds) to inject capitals of four state-owned banks and made their capital adequacy ratios up to 8% to satisfy the requirements stipulated by Basle Capital Accord/Basle Agreement. In 1999, according to Korean model and authorized by the State Council, four asset management companies (AMCs) is established, named: Huarong (CHAMC), Cinda, Great Wall (GWAMCC) and Orient (COAMC). It was estimated about RMB 1.5 trillion of NPLs had been transferred to four AMCs in 2000. Four AMCs only have one target, which is to dispose of the entire non-performing loan (NPL) from four stated-owned banks and resolve the NPL problem in banking system.

In 2002, more crucially, the China Banking Regulatory Commission (CBRC) was created as an independent bank regulator, focusing on cutting banks' NPLs and improving their operations. In 2004 and 2005, government injected more money to BOC, CCB and ICBC to boost their capital adequacy ratios and cut NPLs to less than 10%. It will take a few more years than many have expected for banking reform to be completed, despite the WTO requirements for China to fully open its banking sector to competition by the end of 2006.

By raising accounting and regulatory standards and making four AMCs to run more effective and reform under a legal framework, now，Non-performing loan (NPL) have fallen steadily, both as a share of total assets, GDP and new loans. Private analysts estimated that China's NPL were over 50% of GDP in the early-1990s. Official statistics is less than 10% now. It shows a sharp improvement.

NPL

Now, Chinese banks are busy disposing of their NPLs. Liu Mingkang, head of the China Banking Regulatory Commission once said in 2004: "Our fight against NPLs will be an arduous and long one. That's why we are trying very hard to foster a credit culture among our banking institutions. The risk is not only in the property area. We're also facing risks coming from auto loans and credit cards."

In fact, the target of reducing NPLs is preparing for their imminent listing in overseas stock markets. Another target of debt restructuring is supposed to assist distressed enterprises in turning into viable enterprises. Via the internet, now you can find many offer invitations of auction or sale of NPLs given by AMCs. In recent months, the China Construction Bank (CCB), Bank of China (BOC) and Bank of Communications have sold about billions of bad loans to domestic and foreign investors.

Foreign investors will spend about 15 billion USD on NPL of Chinese banks estimated by Pricewaterhouse. Nearly all global prestigious investment banks and fund management companies have shown strong interest in China's NPL. From a trivial $500 million cumulative foreign equity stakes in Chinese banks in 2003, overseas investors poured $18 billion into the Chinese banking system between late 2004 and 2005, with bulk of the investment coming in the second half of 2005. In 2006, more funds will flow in, as the 25% cumulative foreign ownership ceiling on individual Chinese banks will be lifted in several months.

NPLs in advanced economies create problems for credit markets in ways different from problems they present to the banking system. For foreign investors, the massive NPL involving various sectors bring extensive business possibilities. Part of NPLs is actually government subsidies for loss-making SOEs, disbursed in the form of bank loans. Part of NPL resulted from inadequate investment; however, generally the prospect of the investment is economically promising and profitable. Few of NPLs came from private debt. Ultimately unrecoverable NPLs have been estimated to be between one-third (by Chinese bank officials) and one-half (by rating agencies) of all outstanding NPLs.

However, in view of different circumstances, it is impossible that each NPL program can bring considerable profit to the foreign investors.

Regulations on disposing of China's NPL

Before foreign capital's participation into the disposal of the NPLs of China's financial sector , they had better to grasp laws, regulations and rules on NPL promulgated by China government.

Most of important laws relating to disposing of NPLs is following:
Contact Law of PRC, Auction Law of PRC, Accounting Law of PRC, Law of Land Administration of PRC, Company Law of PRC, Guarantee Law of PRC, Audit Law of PRC, Enterprise Bankruptcy Law of PRC, and so on. Some judicial interpretation relating to NPL questions issued by the Supreme People's Court have the same importance.

Other regulations and rules: Rules on the Evaluation and Management of State Assets, Rules on the Management of Property Right Registration of the State Assets of Enterprises, Regulations on Trust Investment Corporations, Procedures on the Administration of Issuance and Transfer of Enterprise Bonds, Interim Measures on the Management of Securities Investment Funds.