Chinese banks are aggressively disposing of their non-performing loans (NPLs), in preparation for their imminent listing in overseas stock markets. In recent months, the China Construction Bank (CCB), Bank of China and Bank of Communications have sold about Rmb323bn ($38.9bn) of bad loans to domestic and foreign investors.

Industry sources say more such deals will occur soon, as Beijing needs to reduce the NPL ratio of banks to the internationally acceptable 3%-4% from the current double-digit figures before investors will buy their shares.

China created four asset management companies (AMCs) in 1999 and 2000 to dispose of Rmb1,400bn of bad loans transferred from the major state banks. But an estimated Rmb2,000bn of them have remained on the books of the banks, despite a falling overall NPL ratio. At the end of March 2004, the NPL ratio of the four major state banks and 11 joint-stock banks was 16.61%, down from 17.76% three months earlier.

By themselves, the banks would take years to digest the bad loans before they could meet the standards of a public flotation. To speed up the process, the central bank recently approved the transfer of more bad assets from the banks to the AMCs.

In June, CCB and the Bank of China transferred Rmb128.9bn and Rmb149.8bn of doubtful loans respectively to Cinda Asset Management Company, the largest AMC. Cinda beat other bidders in an auction arranged by the Ministry of Finance and had the assets at half their face value. A month later, Cinda purchased a further Rmb41.4bn of bad assets from Bank of Communications, another bank scheduled to go public soon.

Cinda and the other AMCs have been criticised for being too slow in doing their job. They have managed to dispose of only half of their original Rmb1,400bn bad-debt portfolio in four years.

The AMCs have been unwilling to sell their assets at a discount steep enough to attract investors.

In a sign of the banks’ growing impatience, CCB auctioned Rmb4bn of bad property assets to international bidders directly in May this year, bypassing the AMCs. Morgan Stanley and Deutsche Bank bought the three packages at 34.75% of their face value.

In response to criticism, Cinda recently changed tack. It is close to structuring Rmb2bn of NPLs into securities, assigning Deutsche Bank as manager for the disposal of the problematic assets involved in power generation, transport, machinery and hotels. Other AMCs are expected to pursue securitisation as well, with the hope of generating more asset sales.

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