Banks Unload Bad Loans

The establishment of China Orient Asset Management Co (COAMC) last month, has brought to four the State-owned national asset management firms since last April, when China Xinda Asset Management Co, the first national asset management firm, made its business debut in Beijing, according to China Daily.

So far, all the four asset management firms, including Xinda, Huarong, Orient and Changcheng (Great Wall) have established their presence in China, including Shanghai, as an urgent step initiated by the central government to relieve the country's bad-loan-strapped banking sector and improve the performance of its State-owned-enterprises.

In an recent exclusive interview before the firm's inauguration, Su Dechang, general manager of COAMC Shanghai office, shared in detail with Shanghai Star his viewpoints on the necessity of establishing such firms, the role they will play in reshuffling China's economy and their future prospects.

Timely establishment

In many ways, in Su Dechang's eyes, the establishment of four AMCs as bridges between China's banking and enterprise sectors to resolve the deeply-rooted bad-loan problem, is far from surprising.

It is a very natural and rational decision when the central government determined in the late 1990s to accomplish its rocky ongoing economic reform, which is beset by a large number of money-losing State-owned enterprises (SOEs) and a low-efficiency commercial banking system.

Statistics indicate almost a quarter of the loans made by the four major commercial banks in China have turned out to be bad loans, of which, 6 to 7 per cent, or hundreds of millions of dollars in loans, can never be paid back.

Under the former planned economy, making loans to the State-owned companies was often viewed as an administrative order rather than a commercial activity, just like shifting assets from the right hand to the left, Su said.

And sometimes, nobody cared whether these loans could be repaid or not.

Accumulated bad loans in the past several decades have turned out to be the most potentially dangerous threat to the healthy growth of the Chinese financial sector.

On the other hand, growth of the State-owned enterprises was sometimes deeply hampered by the heavy interest on the loans that they needed to pay back to the banking sector.

The break-out of the Asian financial turmoil, which resulted in the bankruptcy of several nations' economies further clouded the future of those non-performing-asset-strapped firms in the domestic banking sector and the country's SOEs that are financially burdened by heavy debts.

Tough challenges

Su depicts his major responsibilities as head of COAMC as:

. Purchase and management of the non-performing assets stripped off from the Bank of China Shanghai Branch;

. Debt collection, asset exchange, lease, transfer and sale;

. Debt and enterprise restructuring;

. Debt-to-equity swap, temporary equity holding and asset securitization;

. Sponsoring stock listings and underwriting bonds and shares;

. Direct investment;

. Bond insurance and commercial borrowing;

. Interbank borrowing from financial institutions and short-term borrowing from the People's Bank of China;

. Provision of investment, financial and legal advisory services;

. Asset and project evaluation, audit, bankruptcy and liquidation.

So far, the company is busy preparing to accept the 13 billion yuan ($1.57 billion) in non-performing assets from the Bank of China Shanghai Branch, compared with the 270 billion yuan ($32.60 billion) in total for the BOC in the China market.

Su said that his primary objective is to help BOC ward off its financial risks and support local SOEs?drive to improve their performance.

Rocky road ahead

Immediately after the inauguration ceremony of COAMC Shanghai Branch, the four AMCs sealed contracts with four local industrial groups for a 12.5 billion yuan ($1.51 billion) debt-to-equity swap. However, there are still some 50 billion yuan ($6.04 billion) non-performing assets in the city waiting for the swap treatment, of which Su and COAMC is expected to get over 10 billion($1.20 billion).

Su said the heavy burden that was previously on the shoulders of the SOEs and the banks now is shifting to him.

Facing the tough challenges, Su said he is not very sure how he will handle these huge amounts of bad-loans and strive for better returns.

And the infant stage of the capital market in China would further handicap the successful operations of the firms.

Meanwhile, the government's "intangible hand" - administrative interface - has also served as a barrier that would prevent the AMCs from successful operations.

"There is no successful model solution in front of us, but I will adhere to a market-oriented principle to handle all the problems," Su said, who also vowed he would strengthen co-operation with foreign partners.



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