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SPEAKING
FREELY
China's asset management companies
a liability
By Sue Anne Tay
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing.
WASHINGTON - A
recent spate of bad press has exposed the many
limitations and lackluster performance of China's
asset management companies (AMCs). The AMCs are
one of the most important mechanisms being used by
the Chinese government to clean up the country's
non-performing loan (NPL) mess, but they are not
doing enough, and more sweeping reforms -
especially regarding the legal environment and
improved corporate governance - and the political
will to execute them are needed before it is too
late.
China's four AMCs - Cinda, Great
Wall, Huarong and Orient - were set up in 1999 to
take over NPLs from the "big four" state banks -
the China Construction Bank, the Agricultural Bank
of China, the Industrial and Commercial Bank of
China and the Bank of China. Originally, each AMC
was paired with a single state bank - Cinda with
CCB, Great Wall with ABC, and so on respectively;
later, the AMCs were allowed to purchase NPL
packages from any of the four.
The Chinese
AMCs were patterned after foreign predecessors
like the US' Resolution Trust Corporation (RTC),
created in 1989 to resolve the problem of troubled
thrifts. Following the Asian financial crisis,
Korea, Thailand and Malaysia succeeded in
recovering NPLs utilizing the same concept. The
Korea Asset Management Corporation (KAMCO)
impressively resolved over 60% of its acquired
loans, while making a profit on the final sale of
its NPLs. Thailand created the Financial Sector
Restructuring Authority (FRA), which divested the
assets of suspended finance companies and
eventually shut down 56 of 58 companies. NPL
restructuring, which took place through the Thai
Asset Management Corporation and Corporate Debt
Restructuring Advisory Committee (CDRAC), allowed
Thailand to successfully reduce its NPL ratio from
45% to 12% by 2004.
Malaysia created two
recovery agencies, Danaharta and Danamodal.
Danaharta was tasked with reducing the level of
NPLs to facilitate the intermediation process and
to maximize the recovery value of the acquired
assets, while Danamodal was established to
recapitalize undercapitalized banking institutions
to increase their resilience and enhance their
ability to generate new lending activity. The
Chinese model appears to have followed the Korean
model most closely, which is reasonable given the
similarity of their NPL portfolios, and it was
believed that the speedy resolution undertaken by
KAMCO was preferable in the Chinese case.
While progress has occurred - estimated
NPLs as a percentage of GDP have fallen from 50%
to 30% - most of the 1.7 trillion yuan worth of
NPLs transferred from the four state banks to the
AMCs remains unrecovered. In more bad news,
officials from the China Banking Regulatory
Commission (CBRC) announced last week that as of
May 31, the AMCs have successfully disposed of
53.1% of their accumulated NPLs, worth 700.8
billion yuan, achieving a cash recovery ratio of
20.5%. This was a far cry from earlier official
projections that cash recovery rates would hit 30
to 50%.
This announcement was preceded by
various reports, including one from the National
Audit Office, accusing the AMCs of misusing funds
and engaging in illegal procedures like
falsification and embezzlement of more than 800
million yuan. Weeks earlier, foreign investors had
boycotted an international NPL auction organized
by Cinda, complaining about the participation of
local AMCs, whose eligibility for special tax and
payment deferment benefits was perceived to
inflate bid prices to the foreign bidders'
disadvantage. Such incidents have resulted in
calls by foreign investors for the AMCs not to
"bid against the global market". Around the same
time, a major US newspaper broke a story alleging
that managers of local AMCs were selling off loans
to family and friends at low values that severely
reduced the overall percentage of bad loans the
government was able to recover.
Still, in
favor of China's efforts is the fact that there is
a good market for China's bad debt. A China NPL
Investor Survey, conducted by Price Waterhouse
Coopers in late 2004, indicated that the foreign
investment community alone was prepared to invest
up to US$250 million in the NPL market over the
next few years. Overseas investment banks,
including Morgan Stanley and Goldman Sachs, have
already formed consortiums with Huarong that have
been buying billions in debt. Such cases
demonstrate both foreign liquidity injection and
the transfer of intellectual capital. However, if
China intends to replicate the success of its
Asian neighbors in eradicating its NPL problems,
it must make improvements in several key areas:
the low asset quality of its NPLs, a weak legal
framework surrounding debt recovery, and poor
corporate governance in the AMCs.
An
example of the low asset quality problem is the
murky legal status of much of the real estate on
offer. Potential investors in China's NPLs
typically prefer real estate due to its liquidity.
However, state-owned enterprises in default
typically hold "allocated" land that the
government can take back at any time, rather than
the more secure "granted" form of land. There is
also a fear among investors that the more viable
and salvageable projects have been cherry-picked
by local governments and incorporated into
profitable conglomerates through government
restructuring efforts, and are therefore
suspicious of what local governments or AMCs pitch
as potential asset sales.
In addition, the
vagueness of China's bankruptcy regulations is
widely recognized as the number one obstacle for
many NPL investors. Bankruptcies are usually
"policy-oriented" and seldom adhere to the nominal
bankruptcy laws embodied in the Enterprise
Bankruptcy Law. Heavily influenced by local
political entities, local regulations, especially
pertaining to foreign ownership, are
underdeveloped outside of several major cities.
This gives officials and the court system a wide
discretion to implement policies that often work
against investors' interests. For example, if
investors buy NPLs of industrial properties with
the aim of restructuring them, local authorities
may welcome capital infusions and transfer of
technology, but may not allow redundant workers to
be laid off or waive the pension debt of retired
workers. The process of improving current
bankruptcy legislation is still under way with no
concrete reforms. Without real repossession and
foreclosure laws, investor confidence in the legal
support behind NPL purchases remains low.
Finally, the structural set-up of China's
AMCs is such that they report to various political
agencies. The China Banking Regulatory Commission,
the Ministry of Finance, and the China Securities
Regulatory Commission all have officials on the
supervisory board of the AMCs. This lack of
independence makes it difficult to cope with the
multiple (and sometimes conflicting) agendas each
government agency imposes on the AMCs. Weak
information disclosure is another problem noted by
state auditors, who have expressed doubt in the
ability of AMCs to fulfill their responsibilities.
In addition to existing corruption and
embezzlement within the AMCs, a major weakness is
the potential moral hazard created by personal
relationships (guanxi) with the parent
banks. Parent banks have viewed the AMCs as
convenient outlets for the future transfer of
additional NPLs, which will unfortunately tend to
encourage reckless bank lending practices,
potentially exacerbating the very problem the AMCs
were created to solve. Collusion between the two
entities can be particularly difficult to monitor
in distant provinces with deep-seated local
networks that even Beijing has difficulty
penetrating.
China is a country whose
sky-high personal savings rate should have created
a healthy pool of capital to internally fund
development, but this capital has historically
been squandered by the noncommercial policy loans
of state banks. This problem resulted in a
dangerous overdependence on foreign direct
investment, among other effects, and eventually
resulted in a government realization that the
country can ill afford to have its domestic
capital tied up in NPLs. Despite the current
efforts by state banks to clean up their balance
sheets, there is a fear that bad loans will rise
again in 2006 or 2007 if the predictions of an
impending economic slowdown in China come true.
The rapid credit expansion over the last few
years, stymied by the government through
administrative measures in mid-2004, is likely to
take a toll when companies are unable to repay
their loans.
This looming problem makes it
all the more imperative that AMCs fulfill their
responsibilities as facilitators of NPL resolution
and contribute to the minimizing of financial
risks. Structural improvements to the AMCs are
needed, along with legal and regulatory reforms to
improve the working environment for the AMCs and
NPL investors alike. If the government is truly
committed to living up to its public declarations
on debt reform, it must follow through with the
AMCs to ensure a successful campaign.
Sue Anne Tay is a
research assistant with the Freeman Chair in China
Studies at the Center for Strategic and
International Studies in Washington DC. She can be
reached at satay@csis.org.
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing. |
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