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China Construction Bank inviting foreign buyers for bad assets
( 2002-08-05 10:15 ) (1 )

The China Construction Bank, which is one of the four large State-owned commercial banks, is trying to get foreign investors interested in some of its non-performing assets.

Yang Xiaoyang, general manager of its Special Asset Resolution Department, explained, "We are now talking with the United States' Morgan Stanley to sell 4 billion yuan (US$481 million) worth of non-performing assets."

"If we succeed, it will help us move faster in disposing of non-performing loans," Yang said.

The bank turned 250 billion yuan (US$30.2 billion) worth of non-performing assets over to the China Cinda Asset Management Corp in 1999 and had about 260 billion yuan worth of non-performing assets at the end of June.

At that time, its non-performing loans had fallen 13.1 billion yuan , or 1.71 percentage points from the start of the year, to 13.21 per cent.

"If we don't speed up the disposing of the non-performing assets, our bank can't get listed very soon," Yang said.

Zhang Enzhao, the bank's head, said they wanted to be the country's first State-owned bank to be listed.

His timetable for listing would mean its gradual break-up within four to five years, allowing parts of its assets to be listed on the market.

"Following a successful restructuring, other assets will be gradually transferred to the listed branches as part of a move towards complete listing."

He added that the final goal is a modern commercial bank with good corporate governance and sound performance that will be competitive in the global financial market .

To do so, the bank will have to drop its non-performing ratio by 2 to 3 percentage points a year over the next three to five years .

By 2005, that ratio should be less than 10 per cent, Zhang said.

The China Construction Bank held its first auction of mortgaged assets in June, 4 billion yuan worth.

There will be a new round of auctions of bad assets this autumn.

"To speed up disposing of non-performing assets, the bank will have to explore new ways," said Huang Jinlao, of the Bank of China's International Financial Research Institute .

"Selling them to foreign and domestic investors would provide more efficient treatment of the bad loans at a lower cost."

But according to the law, State-owned banks can not sell rights directly to foreign investors, Huang said.

Only the four asset management companies can do this, according to a special ruling of last year.

Also, it will be difficult to decide their market price since the gap between the book price and market price is large, Huang said.

State-owned banks should get the same treatment, because they were facing greater pressure to dispose of the non-performing assets to brace themselves for competition from foreign banks, according to Yang of the bank.

"In this sense, the China Construction Bank's deal with Morgan Stanley should help push the central government to allow State-owned banks to sell rights to foreign investors," Yang said.

The talks with Morgan Stanley are expected to be completed in August or September .

Then it will go to the central government for approval .

If it is approved, bigger deals with foreign investors are expected to follow, Yang said.

The big-four State-owned banks have already submitted a plan to the State Council for disposing of non-performing loans .

It also includes a proposal to reduce taxes and provide exemptions to lower the cost of double taxation in handling mortgaged assets," Yang said.

The plan has support from the People's Bank of China, the central bank, which is working with tax , finance and planning authorities on it .

The final approval is likely to come this year, Yang said.

"The China Construction Bank is also trying to co-operate with foreign asset management companies to explore new ways to deal with them ,"he said.

In July, the bank signed an agreement with the Asset Management Corp of the Republic of Korea to increase information exchanges, personnel training, and assets marketing.

The South Korean company has a lot of experience in dealing with non-performing assets, Yang said.

By the end of May, 2000, the company had successfully dealt with about US$45 billion worth of non-performing loans.

Niu Li, a senior economist at the State Information Centre, said that dealing with non-performing assets quicker suggests that Chinese commercial banks are reforming themselves to compete with foreign rivals as the country honours its commitments to the World Trade Organization.

The major task facing the "big four" is to improve corporate governance, lower the rate of non-performing loans, get rid of financial burdens of the past, and raise the amount of capital to international standards, Niu said.

The banking reforms of the past few years have focused on the after effects of the planned economy, while future reforms will be crucial to pushing banks into the market, he added.

Dai Xianglong, the People's Bank of China governor, said the "big four" would be transformed into more modern and competitive commercial banks in five or so years.

Some State-owned commercial banks will be restructured to become State-controlled shareholding commercial banks, he said.