Bank bailouts to end: Regulator
(Shenzhen Daily/Agencies)
Updated: 2005-12-27 09:15

The country’s State-owned banks will receive no more government cash bailouts for business losses after they absorb new private investment, top banking regulator told the 21st Century Business Herald, a Chinese-language newspaper.

Liu Mingkang, director of the China Banking Regulatory Commission, said China’s large commercial banks can expect no more State rescue payouts as they recruit outside strategic investors and issue stock.

“After their investment and beneficiary entities have diversified, it will be impossible for State finances to again bury debts from commercial banks’ business losses; otherwise, that would fly in the face of principles of fair market competition,” he said.

But Liu said China’s banks should be looking to outside investors for their expertise, not their money.

“The policy design and objectives for attracting strategic investors are directed at attracting expertise, not capital. That means banks shouldn’t rush to attract investors to meet capital adequacy targets,” he added in an interview with the paper.

Liu’s comments come as another leading economic official warned Sunday of excessive borrowing by some of China’s biggest State-owned companies, who are still Chinese banks’ dominant customers.

Li Rongrong, chairman of the State-owned Assets Supervision and Administration Commission, said many of China’s 169 centrally-controlled State enterprises recorded brisk sales growth in 2005.

These State-owned conglomerates include business flagships such as Baogang Steel Group and China Petrochemical Corporation.

But Li said too many State-owned conglomerates are doing poorly even as China booms, according to Xinhua.

Forty-five of the companies recorded falling profits in the second half of the year, and 80 recorded costs rising faster than sales income, Li said. And many of these companies are turning to loans from State banks, he added.

“Some enterprises are relying on using new loans to pay off old ones in order to maintain daily operations, and a few are facing crisis,” Li said.

He called for faster internal reform of these companies.

Since 1997 the Chinese Government has poured recapitalization funds of over US$100 billion into the top four State-owned banks to help prepare them for commercial competition. The government has taken off their hands nonperforming assets with a book value worth even more.

Officially, these four banks — Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China — have nonperforming loans worth about 1,016 billion yuan (US$125 billion), or 10 percent of their total loans.

In October, China Construction Bank issued stock in Hong Kong, but investors’ reaction was tepid.

By late October, 19 foreign institutions had bought stakes totalling US$16.5 billion in 16 Chinese banks — about 15 percent of their total capital. They include, Morgan Stanley, HSBC Holdings and Deutsche Bank.

Agricultural Bank of China, which carries many bad loans from unprofitable agricultural and local government projects, is the only State-owned bank that has not attracted outside partners.

Liu said Agricultural Bank of China needs major reorganization before it is ready to offer equity to outside investors.

“First, it must undergo financial reorganization and absorb its historic burdens, and then it must undergo corporate governance reform,” he said.

“Producing the specific plan may take some time,” Liu added.