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Christine Chan

Beijing is considering a multi-billion-yuan recapitalisation of its technically insolvent big four state banks, ahead of a key meeting this week of China's financial policy-making institutions aiming at reforming the sector.

Detailed proposals have yet to be finalised, but banking officials and analysts hinted that the range could be between 300 billion yuan (about HK$281.6 billion) and 600 billion yuan - possibly towards the high end.

'The news is overwhelming,' Arthur Lau, a China analyst at ratings agency Fitch, said yesterday.

Beijing-based Business Post  reported on Saturday that a US$40 billion (328 billion yuan) capital injection was looming. That would follow the 1998 injection of 270 billion yuan and the 1999 transfer of 1.4 trillion yuan worth of bad loans to asset management firms.

Officials declined to comment yesterday, but Salomon Smith Barney economist Huang Yiping said: 'The recapitalisation is likely to happen, following recent heated government talks.'

Analysts have long been calling for swifter methods, including a 'big bang' approach, to reduce bad loans. Mr Huang said the big four's huge non-performing loans (NPL) could be the hotbed for a 'financial and fiscal crisis'.

However, the impact of recapitalisation on the four banks will vary depending on how the funds are used: bad-debt charge-offs or capital enhancement.

If 500 billion yuan, for example, is used for charging off bad debts, it will lower the big four's NPL ratios by an average six percentage points - a feat China needs two years to achieve - and help them reach a 15 per cent target by 2005, according to Fitch. The average NPL ratio of the big four was 24.9 per cent at the end of June last year.

However, if it is used to bolster capital-adequacy ratios (CARs), three of the four - Industrial and Commercial Bank of China, Bank of China and China Construction Bank - will probably see their CARs go above the 8 per cent international best practice in the existing Basle Accord. The exception is the Agricultural Bank of China.

Mr Lau preferred a bad loan charge-off because it would directly improve the asset quality of the banks, while capital enhancement would not.

About 25 per cent of the big four's total loans of seven trillion yuan in 2001 were bad, coming off alarming levels of more than 45 per cent in 1999, Fitch data showed.

Mr Huang cautioned, however, that timing of the injection was unfavourable given the big four's inability to check new loan problems with their poor corporate governance standards.

'Given their poor credit controls there could be concerns of a repeat of the banking reforms in Eastern Europe, where repeated recapitalisation was required,' he said.

Mr Lau was opposed to moves to inflate the banks' books, as with the 1998 injection, as a means of recapitalisation, favouring instead direct capital injection.

At that time, the Ministry of Finance's action did not involve a cash injection but was an artificial inflation of the banks' books. 'On the books, the assets and liabilities were both inflated by the same amount. In reality, however, there was no cash injected,' Mr Lau said.

A central bank spokesman said he was unaware of an injection.

Another key policy development is that Beijing plans to break up the big four banks over a three to five-year transitional period, with proposals varying from one to another, the Business Post  reported.

CASH CRUNCH

Banking officials hint at a recapitalisation of up to 600

billion yuan

Media reports say a 328 billion yuan capital injection looms

A recapitalisation's impact will vary among the four state banks



Mainland ponders capital boost for big four banks