China's Finance Ministry To Write Off Stake
In Two Major Banks
In a move to boost their financial health, China's Ministry
of Finance, a major stakeholder in the Bank of China and
China Construction Bank, has agreed to write off a US$41.1
billion equity stake in the two banks.
The planned write-off has not yet been formally announced
in China.
Some speculate that the move may have been speeded up
by inflation figures announced in China on Tuesday by
the People's Bank of China, China's central bank. According
to the announcement, Chinese inflation is up 6.3 per cent
over the same period a year ago. This suggests that the
economy is overheating, and the Chinese government is
taking action to slow down the economy.
The issue of dealing with China's bad loans is a politically
sensitive one, since all of the bad loans have been made
by the state-owned banks to other state-owned enterprises.
The solution put forward by the Chinese government seems
more palatable than using China's Treasury bonds and bills
to cover the losses. Most of these bad loans were "policy
loans", meaning that they were made as part of China's
cradle-to-grave employment and healthcare system during
the late 80s and early 90s. Many more recent loans were
made by corrupt local officials, who often pocketed the
loans, and in some cases, disappeared with the money.
The size of the non-performing loans varies, with Chinese
official figures from the government putting it at US$250
billion, while independent analysts put the figure at
closer to US$500 billion or above. To expedite removal
of the bad loans on their books, most of the bad loans
will be written off against the former Ministry of Finance
stakes in the two banks.
Combined with the Chinese government's announcement
last week of a US$45 billion recapitalization agreement,
this marks another major move to improve the health of
China's financial sector. Under that agreement, US$45
was moved into a management concern, Central Huijin Investment,
which is owned by the People's Bank of China. The Chinese
government has stressed that the move is not a bailout,
as Bank of China and China Construction Bank will have
to pay interest on the money they receive. To prevent
the yuan appreciating against the dollar, there are restrictions
against converting the currency into Chinese yuan. Removing
the MOF's stake also makes it easier to add four investors
to Central Huijin, as is required by Chinese law.
Unlike US tax laws, Chinese tax laws do not allow for
loan-loss provisions to reduce taxable profits.
China's current deadline for getting the banking sector
into shape is 2007, when the doors will be open to foreign
competition under the terms of accession to the World
Trade Organization (WTO).
The moves in the banking sector in the past two weeks
have come hard and fast, far outpacing any moves made
by the Chinese government in the past two years. Significantly,
the Chinese government has acted with more swiftness and
decisiveness in cleaning up bad loans in the Chinese financial
sector in two weeks than the Japanese have in the past
14 years, since the Japanese real estate and stock market
bubble popped in 1990.
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