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Disposal of non-performing loans (NPLs) should be stepped up to prevent further depreciation. In 2001, China's Cinda Asset Management Company successfully sold a package of NPLs worth 2.1 billion yuan (US$254 million) to an overseas fund at the transfer price of about 58 million yuan (US$7 million). Another package of NPLs worth 2.9 billion yuan (US$350 million) is expected to be transferred in the near future.
As the lowest end of NPLs, bad loans are the most difficult to deal with. Cinda's successful deals not only recovered the value of State-owned assets quickly, but it also set an example for NPL sales to foreign investors.
Since 1999, China has set up four asset management companies (AMCs) including Cinda, Orient, the Great Wall and Huarong. They have purchased NPLs totalling 1.39 trillion yuan (US$168 billion), lowering the rate of NPLs to loans granted by State-owned banks by 9.7 per cent while substantially improving their overall asset quality.
The four AMCs have launched debt-to-equity swaps worth 405 billion yuan (US$48.9 billion) involving 580 debtor enterprises, reducing their debt-to-asset ratio from 73 per cent to less than 53 per cent. Consequently, nearly 80 per cent of enterprises adopting debt-to-equity swaps had successfully wiped out deficits in the same year to facilitate the country's reform of State sectors.
The four AMCs' diversified operation measures have yielded fruit. By the end of 2001, they had disposed of NPLs worth 178.1 billion yuan (US$21.51 billion) and recovered 36.88 billion yuan (US$4.45 billion) in cash. These deals not only revitalized a great deal of NPLs but also brought more revenue to both banks and debtor enterprises.
Reorganization of assets and debts is one of the major measures the AMCs adopted to deal with the bad assets they acquired.
For example, among all the assets retrieved by the Huarong Asset Management Company, more than 60 per cent came through the reorganization of debts.
Another way to dispose of NPLs is debt-to-equity swap. Last year, Cinda recovered 1.28 billion yuan (US$157 million) in dividends, bond sales and stock rights transfers from NPL disposal.
In 2001, the AMCs also made a breakthrough in luring overseas capital to buy NPLs. By hosting an international bidding, Huarong has sold bad assets worth 12.8 billion yuan (US$1.57 billion) with a cash income above 20 per cent of the total. Orient sold NPLs of 1.8 billion yuan (US$217 million) at the price of US$21 million to foreign investors.
AMCs had also tried to retrieve the value of NPLs through legal proceedings. They also sold their NPLs through on-line auctions, special auctions or auctions across various areas.
However, the four AMCs still have a tough task to tackle. Among the 1.4 trillion yuan (US$169 billion) of NPLs they've purchased, except for 405 billion yuan (US$49 billion) in debts that were transferred into equity, about 1 trillion yuan (US$120 billion) remained, of which only one eighth has been dealt with.
In 2002, the four AMCs will take different measures to reach their own goals.
Huarong will focus on special projects such as international bidding and securitization of NPLs. The Great Wall company will enhance its functions as an investment bank while stressing asset reorganization of the enterprises and projects which could be profitable in the short term. The Orient company will reorganize assets and industries to realize the economy of scale, and the Cinda company will centre on key projects of NPLs.
Improvement of the external environment is vital to the efficiency of NPLs disposal. Now the major factor restraining prompt disposal of NPLs is limited market capability and insufficient effective demand. The investment market needs to be further utilized and cultivated, and illegal action such as failure to repay loans must be stopped.
(People's Daily April 2, 2002)
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