Agricultural Bank of China

Banks to inject US$2b into bad debt managers

PUBLISHED : Monday, 09 March, 2009, 12:00am
UPDATED : Monday, 09 March, 2009, 12:00am

The mainland's two biggest banks will invest about US$2 billion for up to 49 per cent stakes in asset management companies that are expanding into securities brokering, trusts and insurance, sources said.

The new money, however, will do little to deal with the massive debt burden at the two asset managers.

'The asset managers will have the largest capitalised banks in the world behind them who are interested in their expanded business so there are valid business reasons why this should happen,' a source said.

Industrial and Commercial Bank of China would inject at least US$1 billion into China Huarong Asset Management, which bought the bank's bad debt 10 years ago, while China Construction Bank Corp would also pay at least US$1 billion to buy into China Cinda Asset Management, the money manager responsible for its debt.

The investments would happen this year, sources said.

'The asset management companies are technically bankrupt and instead of a state bailout to try to clean up their balance sheets to make them viable, the government is now saying to the banks that 'you have emerged from your troubles, listed and are big and strong so now you have to share the burden',' one source said.

Beijing formed Huarong, Cinda, Great Wall Asset Management and Orient Asset Management in 1999 to take up and sell the bad loans of the country's biggest banks, which were selling stakes to foreign lenders and planning initial public offerings aimed at strengthening risk management.

Great Wall took on Agricultural Bank of China's bad debts and Orient acquired Bank of China's.

Neither of the two asset managers will take part in the plan at this stage. Great Wall will be busy disposing of as much as US$120 billion in bad loans Agricultural Bank is set to sell it later this year, while Orient has fallen far behind its peers in successfully shedding its bad debt.

After 10 years the listed banks are on more solid footing, and the asset managers have expanded into overseeing the shakeout of weaker mainland securities brokerages, insurers and trust companies, many of which they have eventually bought.

The business licences the asset management companies have accrued from these acquisitions are attractive to the banks as they try to offer a wider array of financial products to wealthier Chinese.

Cinda and Huarong need cash because the loans they still have to dispose of are unlikely to generate much income, if any, as they are the worst they took on.

The much larger problem is the asset managers also soon face huge payments from bonds coming due that were originally used to finance the transfer of loans at full face value when the four managers were set up.

Bonds held by Construction Bank bought from Cinda total 247 billion yuan (HK$280.53 billion) and mature in September, according to the bank's most recent financial statements in 2007.

ICBC held 313 billion yuan worth of bonds which mature in 2010 and 2011.

A minimum US$1 billion cash infusion, however, barely covers a few per cent of those bonds. While the bonds were backed by the government through the Ministry of Finance and People's Bank of China a massive write off, along the lines recently of western banks, is unlikely.

The easiest way out in the short term is to just extend the bond maturity and delay the day of reckoning, a move known as a roll over.

'People are not uncomfortable with that,' said a source.

A spokesman for Huarong said the asset manager was still awaiting a final decision from the central government.

A spokesman at Cinda could not be reached for comment. ICBC declined to comment.