Experts ponder ways to deal with NPLs
By Hu Yuanyuan (China Daily)
Updated: 2004-12-20 09:09

A long-term war or a sped-up campaign? This is a question haunting experts on the disposal of China's huge number of non-performing loans (NPLs).

Most foreign investors argue that the process of NPLs disposal is not satisfactory. Domestic experts, however, tell a different story.

Wang Haijun, executive director of the investment banking department with China Cinda Asset Management Corp, says he believes traditional Chinese medical treatment rather than surgical therapy is a better choice for dealing with NPLs.

According to Wang, enterprises plagued by NPLs can be divided into two categories.

The first type is compared with middle-aged people who are suffering from curable diseases. "For this type, Chinese traditional medical treatment works efficiently if they are given enough time to get well," Wang said.

Another type looks like patients beyond cure, and surgical therapy has to be adopted. But euthanasia or direct killing is another problem. "We have to take their enduring capabilities into consideration when making the choice," Wang said.

As for the factors underlying the process of NPLs disposal, Wang cited the following reasons in an interview with China Daily.

"Foreign investors cite examples in Malaysia and Thailand to complain that the disposal of NPLs in China is too slow, but they overlook the fact that China still boasts a fast-growing economy while Malaysia and Thailand were plagued by the Asian financial crisis at that time," Wang said.

Moreover, the "ice-cream theory" which implies the residual value of NPLs will diminish with the passing of time cannot be applied to all NPLs.

"When we took over NPLs topping 50 billion yuan (US$6 billion) to 60 billion yuan (US$7.2 billion) in coal mine enterprises, we can't sell one of them even at a pretty low price. But presently, because of the soaring coal price, we can sell them for a good price," Wang said.

Friedrich Weigel, a financial adviser on distressed asset management, echoed Wang's view.

"The famous 'ice cream' example is a nice allegory, but industry experts know from worldwide experience this only describes part of the situation," Weigel said. "Of course, there are such 'quick melting' assets and it is the task of every asset manager to identify those and tackle them accordingly. However, there are also many other assets that follow different rules, for example, those which require deeper restructuring."

Currently, Cinda has disposed of 65 per cent of policy-related NPLs and Huarong has completed 60 per cent.

Moreover, as the primary concern of China's AMCs is to achieve a satisfactory recovery rate in line with an established schedule, time is at a premium.

"If our aim is to sell the NPLs we took over in 1999 as quickly as possible, we will definitely adopt another strategy," Wang said.

According to Weigel, the final and decisive step in NPLs disposal is the ultimate workout or recovery of the NPLs.

"This is a complex process, involving a wide variety of recovery methods and techniques, which is often time consuming, not only in China, but in any other countries as well," Weigel said. "The time required depends on legal, financial, economic, social and political parameters on each case."

Besides, China's under-developed social security system also prevents China's AMCs from quick disposal, which may lead to the closure of borrowers and many of them are State-owned enterprises (SOEs). The re-employment of thousands of workers who lose their jobs as a result is also a major concern.

"If those SOEs are shut down overnight, how can the workers find a proper job to support them as we don't have a sound social security system yet?" Wang asked.

Some foreign investors are puzzled when they are forbidden to enter certain factories.

"Just imagine, a large-scale SOE in some areas can provide most of the jobs for local people, and sometimes a whole family is working in that factory. How can workers accept the fact that they are jobless overnight and can not support their family? Those middle aged workers contribute a lot to the development of China but may suffer from poverty in their old age," Wang said, "It is not them who should be responsible for the huge amount of NPLs."

China's slow legal system also contributes to the rate of NPLs disposal.

"NPLs overseas are backed up by assets as mortgages which are not available in China, thus making the disposal more difficult for us," Wang said. "The lack of credit culture in China makes it even worse, and we do need quite a long period to change people's mindset. To our joy, this change in occurring."

Zhao Haikuan, deputy director of China Society for Finance and Banking, said he believes improving the credit culture in China calls for urgent attention.

As for the comparatively low participation of international investment banks, Weigel has his explanation.

"Inadequate risk perceptions on the part of the investment banks and, partly as a consequence of the former, unrealistically high return expectations lead to abnormally high transaction discounts and thus to uncompetitively low bid prices on their part," Weigel said.

He offered three recommendations to improve the rate of participation of international investment banks in the Chinese NPLs market:

First, recognize fully that there is a functioning NPLs market in China with established market parameters.

Second, review inadequate risk perceptions to bring them in line with market and country reality.

Third, revise unrealistic return expectations to bring bid prices in accordance with market valuations.

"The result could be a win-win situation for all participants," Weigel said.

Meanwhile both Weigel and Zhao Haikuan believe the process of China's NPLs' disposal is not disappointing.

"The pace of NPLs disposal is satisfactory, with the NPLs ratio of the Bank of China (BOC) and the China Construction Bank (CCB) dropping to some 5 per cent and 3 per cent," Zhao said, "Besides, the total amount of NPLs in China is so big, it makes the disposal a time-consuming process."

The four AMCs took over NPLs valued at 1.4 trillion yuan (US$169 billion) in 1999.

"More importantly, stopping the increase of newly added NPLs is a pressing matter," Zhao added, "Thus, we should step up our efforts in banking reform and improve the supporting legal system."

Great progress has been achieved in the past five years.

According to the latest figures published earlier this month by the China Banking Regulatory Commission (CBRC), the total NPLs of major Chinese commercial banks are valued at 1.7 trillion yuan (US$204.7 billion), representing about 13 per cent of their combined loan assets. The NPL ratio, it said, was 4.39 percentage points lower than that at the beginning of the year.



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