Public RelationsIf in doubt, rub it out
Chinese banks: Economic crisis or not, China’s lenders are in good shape. The country’s big listed banks – Industrial Commercial Bank of China (ICBC), Bank of China and China Construction Bank (CCB), all unveiled mid-year balance sheets enviously light on bad debts. Thank China’s rapid growth – and an astonishing $300 billion vanishing act.
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That figure is the amount of bad debt the top three banks offloaded in the early 2000s. Back then, the People’s Bank created four asset management companies to scrub away the dirt from two decades of policy-driven lending. But the resulting losses still lurk, out of sight, and are getting harder to ignore.
The plan was that the AMCs would suck out poisoned loans from the big banks, and recover what they could over the following ten years. In return, the AMCs issued bonds, whose interest would be paid from what the AMCs could salvage. Hey presto: the banks were free to lend again.
There was a big catch. The AMCs bought the loans for up to 100 per cent of face value, while recoveries were in the 20-30 per cent range. That means the top three lenders" Rmb1.2 trillion of AMC bonds, which start to mature this year, are likely to be almost worthless. In theory, the Ministry of Finance is ultimately on the hook, but it is unlikely to make good for the banks. The amount due to all three is roughly one-sixth of China’s fiscal revenues for 2008.
Fortunately, two very Chinese alternatives present themselves. One is to reinvent the AMCs as securities firms, giving them an extra income stream, a process that"s already underway. ICBC and CCB have even talked about taking stakes in the AMCs, suggesting some kind of debt-for-equity swap – though it’s hard to see how the equity value of these entities could approach the amount owed.
The other is simply to roll over the bonds indefinitely. The amounts at stake aren’t small, though. Besides, the banks are once again lending rapidly at the state’s behest. If new loans too are eventually “evergreened”, banks’ balance sheets could become truly sclerotic - and require further surgery.
Still, China’s rapid development might ease the pain. The country’s GDP has, at current prices, almost tripled since the turn of the century. So long as China keeps growing, and deferring repayment, the off-balance sheet problem will get relatively smaller and smaller. The peculiar $300 billion magic trick might just work after all.