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No Fear Needed of Debt Burden
No need to worry about a government debt crisis caused by non-performing asset operators, said Chinese officials and experts.
"The establishment of asset management corporations (AMC) is not wire walking, but a must for deepening the economic and financial system reform,'' said Yang Kaisheng, president of Huarong AMC, created to deal with non-performing loans of the Industrial and Commercial Bank of China.
China's four AMCs were kick-started last year in a bid to revitalize the mounting non-performing loans of the country's big four State-owned commercial banks and to activate the vast number of debt-ridden State enterprises.
The initial 10 billion yuan (US$1.2 billion) in capital assets of each AMC was allocated from the State treasury. The funds were used to purchase non-performing assets raised by issuing bonds to corresponding banks.
By the end of June, the four AMCs had purchased over 1.1 trillion yuan (US$132.5 billion) of non-performing loans from the big four, and have entered the second phase of their work -- to recover the loans by igniting the enterprises, according to statements from the four AMCs.
Overseas media have doubted how the Chinese Government, who will pay the bill for the AMCs, will digest the remaining assets if the AMCs can only revive a small part -- believed to be 10 per cent-- of the non-performing assets. Some Western researchers even predict that China's government debt will increase drastically in the next few years because of it.
"It's too pessimistic for some to predict AMCs can only recover 10 per cent of the non-performing assets,'' said Wang Guogang, vice-director of the finance research centre under the Chinese Academy of Social Sciences.
"Sample investigation to existing non-performing assets cases show that at least 30 to 40 per cent of the 1.1 trillion yuan (US$132.5 billion) assets can be restored,'' Wang said.
In some cases loans can not be recovered at all, but a majority can be regained, he added.
"The AMCs' task is to recover as many loans as possible,'' Yang said. "Therefore, the liquidation method which will not revive much assets, will not be frequently resorted to.''
Yang said the most favoured methods of retrieval are auctions, assets and enterprise restructuring, creditor's rights, stakes transfer and assets leasing.
"According to our study, the revitalization rate of assets leasing can reach as high as 80 to 90 per cent,'' said Wang.
He admits that the remaining assets which can not the recovered will add to the government burden.
"But, the Chinese Government has enough capacity to shoulder it even if this potential debt burden turns true.''
One way to deal with the debt would be to privatize State-controlled economic entities which are irrelevant to State safety and retrieving a huge amount of money to settle the financial burden.
Compared to other countries, China has very strong State-owned economic entities which make up the majority of the economy.
Another method would be selling the utilization rights of State lands.
"There is no need to settle the burden with the fiscal income of the year. Therefore there will not be a sharp rise in government debts,'' Wang said.
There is no need for implementing new taxes either, as it would add more burdens to enterprises and average people, he said.
In regard to banks, Wang said China's domestic banks have achieved great achievements in reducing the proportion of bad debts and slowing the pace of new bad debts in recent years.
All major banks have set up strict credit rating systems to prevent lending to low quality clients.
The government can not assert influence on banks' loan grant procedures any longer, said Wang.
"As long as banks keep stringent control and operate in a commercial way, the emergence of large amounts of new loans is impossible.''
Critics have also asked if China's State enterprises can come to life by shrugging off the debt burden with the help of assets management companies.
Yang said the focal point would be introducing advanced management structures and operational mechanisms into the enterprises.
As each AMC holds stakes in at least several dozen thousand enterprises of various regions and industries, Yang said it is impossible for the AMC to participate in the management directly.
"What we can do is to spur the establishment of modern enterprise systems in these enterprises with our position as a major shareholder,'' Yang said.
There are many enterprise leaders who understand the market economy but cannot play their due role as oppressed by the planned economy, said Wang.
The transformation of enterprise management systems will help bring out their enthusiasm, he said.
"There is no set example and we are groping the way forward," Yang said. "But I believe it will be fruitful.''
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