China Bank Bailout Could Need US$290 Bln: Report

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Last updated at: (Beijing Time) Monday, January 27, 2003

China Bank Bailout Could Need US$290 Bln: Report

China must bail out its ailing state banks soon and may need a staggering $290 billion or more to do the job properly, a Goldman Sachs economist said in a report on Monday.

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China must bail out its ailing state banks soon and may need a staggering $290 billion or more to do the job properly, a Goldman Sachs economist said in a report on Monday.

That dwarfs figures floated in Chinese media in recent days, such as a $40 billion injection of funds said by the Business Post to be under discussion.

Goldman economist Jonathan Anderson said China's banks needed one last huge bailout to pretty themselves up for foreign investors by cleaning up their balance sheets.

"Our findings show China's state banks desperately need a comprehensive restructuring package involving significant further injection of financial resources and the rapid subsequent sale of strategic banking system shares to institutional investors at home and abroad," Anderson wrote.

Anderson's mathematics show a big bang reform would carry a hefty price tag.

First, the Big Four would need to cut their bad loan ratios to less than 10 percent. Then, they would need to maintain a capital adequacy ratio of three to four percent.

If bad assets could be resold at a highly optimistic 40 to 50 percent of their face value, the cost of a bailout would be at least 800 billion yuan ($97 billion), Anderson said.

$290 BILLION SEEN AS 'BARE-BONES'

But figuring in a more realistic bad loan ratio of 40 percent and a 25 percent recovery ratio for such non-performing assets, Beijing would need to put up 2.4 trillion yuan ($290 billion).

"This is a 'bare bones minimum' estimate, aimed at getting banks just to the point where outside strategic investors could come in, providing additional capital to finish the job," Anderson said.

Beijing is expected to unveil fresh reforms for the financial sector either during or after an annual session of parliament that begins in early March.

The centerpiece could be a new blueprint for transforming state banks into modern financial houses that could attract foreign investors.

Anderson's suggestion would eat up more than 20 percent of China's annual gross domestic product, and a full-scale clean-up that included boosting capital adequacy to eight percent would eat up 30 percent of GDP, Anderson said.

The price would be worth it, Anderson argued.

"The bottom line is that a cautious approach, justified as it may seem, will not solve banks' problems and could even make matters worse by forestalling future efforts," Anderson said.

GROWTH ALONE NOT THE ANSWER

But debate about the direction of reform has raged in recent weeks. Many economists insist the banks need fresh funds to wipe bad loans from their books and boost capital adequacy ratios, a key measure of financial health.

But critics say that will only encourage the banks to rely on government handouts and do little to bring about better lending practices.

Bailout measures taken several years ago have fallen short.

In 1997, China pumped funds worth $33 billion into its Big Four state banks -- Bank of China, Industrial and Commercial Bank, Construction Bank, and Agricultural Bank.

But only Bank of China has maintained the international standard capital adequacy ratio of eight percent.

Two years later, Beijing set up asset management firms to take over nearly 1.4 trillion yuan in bad loans from the banks, but a huge pile of bad loans still cast a long shadow.

In separate reports this month, Andy Xie, a Morgan Stanley economist in Hong Kong, said China's bad loan problem could trigger a full-scale financial crisis within five years.

"There is no prospect to grow out of China's financial sector problem, as many insiders argue," Xie wrote last week. "Unless the government makes a conscientious decision to loosen its control over capital, the change will only come with a financial crisis."

Source: agencies

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