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SCMP Reporter

Dai Xianglong, governor of the mainland central bank, was ready and waiting for the first questions at his news conference yesterday.

  They raised the two hottest issues of the day; whether Beijing would devalue the yuan and how it would handle Guangdong International Trust & Investment Corp (Gitic), the first financial institution to go bankrupt since 1949.

 The first one was easy. No, the mainland would not devalue and had no reason to.

 The second was the hard one and questions over it remained unanswered after the 240 reporters had left the room.

 What emerged over the 75-minute session was that the closure of Gitic had not progressed as planned when it was announced in October - and when foreign holders of registered debt were promised priority treatment.

 A three-month investigation found Gitic had far more debt than the People's Bank of China (PBOC) had originally thought.

 Paying the foreigners would mean that there was nothing left to pay domestic creditors, something unacceptable even in the name of protecting the mainland's creditworthiness abroad.

 So the government was forced to declare Gitic bankrupt, causing dismay and anger to the foreign banks when they learnt this at a meeting in Guangzhou on January 10.

 So the first unanswered questions were: how could the debt have been so much larger than expected? Why did the PBOC, responsible for monitoring international trust and investment companies (Itics) nationwide, not know? Would someone at PBOC have to go to take the rap? Or did Gitic and the Guangdong government simply send it fake statistics? Would someone from there have to swing for it?  Then Mr Dai was asked the amount of the foreign debt of all the mainland's 239 Itics. The official figure was US$8.1 billion worth of debt registered with the central bank, with about $2 billion 'due or overdue'.

 Foreign bankers in the audience greeted this with scepticism, saying other Itics were as likely as Gitic to have unpleasant surprises in their closets.

 'Last year we heard the figure was $15 billion, some say it could be $30 billion,' one said. 'They are squeezed at home by excess exposure to real estate and poor returns on projects because the economy is weak and squeezed abroad because foreign banks are reluctant to lend to them.

 'For foreign companies and joint ventures, lending is going on as before. But, for pure China risk, the appetite has slowed,' he said.

 Mr Dai has been surprised by the strong reaction of foreign creditors to the Gitic closure, perhaps because it revealed the extent of their lending to Itics under similarly grey legal principles, with guarantees of repayment made by local governments that were technically outlawed in 1995 but were commonly given nonetheless.

 'No loans to China are made using the same credit assessment as used in the West,' one securities company analyst said.

 'No company in China would meet the necessary credit quality. All figures are suspect. Do Itics have an independent audit? Everyone believed the government would pay in case of a default.'  Gitic was not the only hot topic. Mr Dai also announced details of the new asset-management companies to take over part of the bad debt of the four big state banks, following models used in the United States and elsewhere.

 The first, associated with the Construction Bank, has already been established.

 The banks have three types of non-performing loans, of which they will retain two - those overdue for up to two years and those of bankrupt companies which they will have to write off.

       The new companies will take over loans that have been overdue for more than two years.

 How the new firms would be financed - from the central bank, bonds from the Ministry of Finance or in other ways - had not been decided, Mr Dai said.

 Foreign bankers applaud this initiative as part of an attempt to clean up the poor balance sheets of the state banks but are sceptical about how it will work in practice.

 Mr Dai said the mainland had 170 foreign financial institutions, in 23 cities and Hainan island, and their lending accounted for 20 per cent of all foreign loans.

 'I have a piece of news. We will abolish geographical limits for them and they can open offices in any major city,' he said.

 It sounds better than it is. What the foreign banks want, and the local banks strongly oppose, is greatly expanded access to the yuan market that accounts for the great majority of business in the mainland.

 Mr Dai had nothing new to announce on this.



Gitic's ghost haunts PBOC bid to regain foreign trust