China mulls multi-bln-dlr bailout plan on state bank

The Chinese government is anticipated to inject hefty funds into the country's biggest bank, the debt-loaded Industrial and Commercial Bank of China (ICBC), in another aggressive bailout package to reform the vital banking system.

Given the bank's huge size and its bad loan ratio of nearly 20 percent, the amount of capital infusion would be phenomenal -- probably to hit 30-50 billion US dollars in views of different industry watchers.

"I would expect the ICBC needs 300-400 billion yuan (36.1-48.2 billion dollars) in capital infusion based on the bank's 2003 annual report," said Zhong Wei, director of the International Finance Research Center at Beijing Normal University.

If it follows the example of the Bank of China (BOC) and China Construction Bank (CCB) who received 22.5 billion US dollars each at the end of 2003, the ICBC would treat the external money as its new capital, while using its own, accumulated capital to cover loan losses.

The government helping hand will bring the ICBC's capital adequacy ratio (CAR), being a measure of its available capital in proportion to its outstanding loans, closer to the 8 percent minimum level set under the Basel Accord for commercial banks that has been accepted in principle by China's banking regulators.

A high enough CAR, a low bad loan ratio and corporate governance combine to fill investors with confidence on the ICBC, especially when it is seeking a stock market debut in 2006, following the BOC and CCB whose initial public offerings (IPOs) are scheduled for this year.

Chinese banks hope to streamline their operation and upgrade their images by resorting to public listings. The country is midst of overhauling its banks, largely including the Big Four -- the ICBC, BOC, CCB and Agricultural Bank of China (ABC) -- ahead of the World Trade Organization-mandated opening of the financial market to overseas rivals by the end of 2006.

"We will initiate the ICBC's financial readjustment at an appropriate time," said central banker Zhou Xiaochuan at the 2004 annual conference of the International Monetary Fund.

His remark was echoed by Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC). "We will launch the reforms of ICBC and ABC at the right time, while going on pushing forward the reforms of BOC and CCB," said the top banking regulator.

Vice-Minister of Finance Lou Jiwei put it more outrightly, saying: "For the reform of ICBC, generally speaking, the state should earmark money into it and cut off some of its NPLs."

Experts' views differ on where the money would come from.

Qiu Zhaoxiang, director of the Financial Research Institute of the prestigious University of International Business and Economics (UIBE) in Beijing, noted that the government would still pick up to inject part of its massive foreign exchange reserves, which had already rocketed to more than 600 billion dollars by the end of last year, into the ICBC, similar to the scenarios of BOC and CCB.

He told Xinhua that the amazing amount of foreign exchange reserves bear certain risks since China used a major part of that to buy US bonds -- and the dollar has stayed on a depreciating track.

"It is not a good thing apparently to hold so much forex reserves," he said.

Qiu holds that the Ministry of Finance (MOF) could not set aside so much money for renovation of a bank when the country in an urgenty need of capital for development of agriculture and rural areas, western regions and key industries among others.

But Wei Yen, Moody's managing director in Asia-Pacific, believes that the MOF is likely to undertake this huge infusion project.

"As foreign exchange reserves are denominated in foreign currencies, this option may not work well with the ICBC as most of the bank's business is conducted in Renminbi," he said.

At present, the ICBC is poised to deal with mountains of non-performing loans (NPLs) and build a share-holding company with the government controlling the lion's share.

A bank source revealed that the ICBC had already submitted its plan on joint-stock reform to the regulators. But the China Securities News reported last week that the regulators had rejected it, demanding a second draft.

The bank's NPL ratio, a measure of its problem debts to total loans, stood at a high of 19.1 percent at the end of 2004, but President Jiang Jianqing has noted his bank could lower the index to a range of 3 to 5 percent "with the assistance from the government", nearing the 1 to 2 percent NPL level of leading global banks.

More than 90 percent of the existing bad loans still came from lending extended before 1999, the year China set up four special asset management companies (AMCs) to handle a combined 1.4 trillion yuan (169.1 billion dollars) in NPLs transferred from state banks, and then the ICBC's NPL ratio for newly-added loans was capped at just 1.6 percent, implying the bank either recovered or wrote off nearly 5 billion yuan (603.9 million dollars) in NPLs on a monthly average since 2000, he said.

Qiu Zhaoxiang cited it as a hard job for the bank to invite potential strategic investors including more sophisticated overseas investment banks to buy their stakes and bring in scientific business modes.

"The ICBC is too big, and too much money is needed for a big enough stake. The bank's investor should be an 'aircraft carrier', " he said.

China's banking regulators now stipulate that a single foreign investor should hold a stake of no more than 20 percent in a Chinese bank.

Source: Xinhua