China Recapitalizes Two Major Banks
China has recapitalized two of the four leading state-owned
banks, the Bank of China and China Construction Bank,
by injecting them with US$45 billion from the nation's
foreign exchange reserves.
Bank of China and China Construction Bank will each receive
US$22.5 billion as part of the deal. The funds will be
used not to write off bad loans, but to boost their levels
of capital. The aim is to attract more income from an
expanded loan portfolio, and attract foreign strategic
investors prior to listing on the Hong Kong Stock Exchange
in 2005.
The next step will be their conversion from wholly state-owned
enterprises into joint-stock companies. The cash infusions,
which will carry interest, will boost the banks' capital
adequacy ratio from 7-8 percent to 16-17 percent.
Technically, China's four leading major banks, which
are all state-owned, are insolvent, having lended out
huge amounts of unrecoverable loans to state-owned enterprises.
The Chinese government's State Reform and Development
Commission (SRDC), headed by the country's leading economists,
have long been pushing for reform of the banking sector,
and this is the first major change in national policy.
Saddled down with a banking sector which is a leftover
from China's period of strict Marxist economics policy,
the country has been challenged when it comes to handling
the huge capital inflows into the country in the past
years.
All of these moves are in preparation for the entry of
foreign banks into commercial and retail banking services
in China in 2006, which are required under China's terms
of entry into the WTO. The terms of accession require
that non-Chinese banks get the same treatment as Chinese
banks after they enter the market.
Early signs in 2004 indicate that the administration
of President Hu Jintao and Premier Wen Jiabao feel confident
enough to tackle the problems and challenges posed by
China's financial sector, and their moves have been widely
welcomed not only by the Chinese domestic press, but also
among Chinese investors. As they move along, they will
need all the help they can get, because reform of the
sector has been daunting to all reformers, and even defeated
the hard-nosed reformer and predecessor to Wen, Zhu Rongji.
Most of the opposition has come from entrenched party
interests who are well-connected to the country's leadership,
and could slow down, or even stop, financial reform.
At the same time, the Chinese government hopes that the
use of the foreign exchange reserves will relieve some
pressure to revalue the yuan upwards against the dollar.
Over the past six months, pressure from the US administration
and politicians for a revaluation has been particularly
intense. With the US heading into an election year, this
pressure is expected to continue.
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