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NPL peel-off plan to pave way for IPOs
( 2003-12-05 10:33) (China Daily HK Edition)

China is likely to peel off some non-performing loans (NPLs) from the Big Four State-owned banks for the second time to pave the way for their impending public listing.

Insiders said that given the tight schedule of the banks to complete restructuring and meet requirements to go public, it seems unavoidable that the authorities would have to again unload some of the NPLs from the banks and transfer them to professional institutions for faster disposal.

"Such action is very likely. But the exact method and timing of the transfer are still to be decided," said Wang Haijun, director of the investment banking department of China Cinda Asset Management Corporation (AMC), one of the four AMCs in China that took over 1.4 trillion yuan (US$169 billion) of NPLs from the State-owned banks in 1999 and 2000.

He told China Daily that issues to be discussed include whether the assets to be transferred would be calculated according to their book-value or at a discount, and when and how much of the NPLs would be sliced off.

China aims to list the Big Four in the next few years.

Hua Qingshan, executive vice-president of Bank of China (BOC), said on Wednesday that the bank is aiming for a domestic listing in 2005.

"That is a very tight schedule," he admitted, "we will need more policy support."

The bank will have to catch up with international standards in capital adequacy and further lower the NPL ratio.

Zhang Yanling, also executive vice-president of BOC, said a day earlier that the bank's NPL ratio had dropped to 17.98 per cent by the end of October according to the five-category measurement of loans, but that is still high compared to listed banks, which is normally below 5 per cent.

"So I think the authorities may have to help relieve the banks' burden, which was largely because of policy loans arranged in the planned economy," said Wei Yen, vice-president and senior credit officer of Moody's Asia Pacific Ltd.

But neither the listing target nor NPL disposal should be just talk - concrete moves are needed from the authorities, such as new incentives to the AMCs and potential buyers; and faster approval of asset transactions, he said.

Institutions that are interested in purchasing asset packages from the Chinese banks and AMCs have long been calling for a faster pace of NPL disposal as well as more transparency and innovations, though the Chinese sellers claim the disposal process has not been slow, given the practical situation in China.

The government needs to make parallel changes in other economic sectors, said Jonathan Weld, partner of Shearman & Sterling LLP.

The major concerns include SOE reform, accounting standards, corporate governance, credit rating and legislation in the areas of property and bankruptcy, experts said.

Chinese AMCs have been pacing up innovation and alliances with experienced foreign institutions.

Cinda, for example, is now preparing securitization projects of the NPLs it manages, which is still not practiced in China yet.

The projects would cover hydro power and sectors that have good cash flow. They are still to be approved, but there are no major obstacles ahead, said Wang Haijun.

Meanwhile, Huarong, another AMC, has just sold US$214 million of asset packages to a group led by Morgan Stanley and is preparing for another auction this month.

Great Wall AMC is also in talks with Citigroup on similar deals, according to Li Zhanchen, vice-president of the company.

Some experts suggest that the AMC tie up with trust companies and equity exchanges to dispose the assets.

China's four AMCs had disposed of 498 billion yuan (US$60 billion) of NPLs by the end of October, with a cash recovery ratio of 17.3 per cent, according to Li.

That is in addition to another 400 billion yuan (US$48 billion) of debt-equity swaps, which transferred part of the bad debt to equities the AMC holds in the debtors.

It has been forecast that the disposal of all the existing NPLs at the AMCs would take 10 years.

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