China's financial authorities appear to be on the verge of another giant banking bailout. This round of bank reforms will be tougher than the last and more expensive but even less likely to succeed in turning state lenders into genuine commercially driven banks.
If the mainland media are to be believed, the central bank is preparing to recapitalise the Agricultural Bank of China with as much as US$40 billion of the country's foreign exchange reserves; meanwhile, it will inject a further US$20 billion of reserves into state policy lender China Development Bank.
If the US$60 billion handout goes ahead as reported, the central bank will be spending as much to recapitalise Agricultural Bank and China Development Bank as it did on the bailouts of China Construction Bank, Bank of China and Industrial and Commercial Bank of China put together. On the surface, the timing seems propitious. Yesterday, Agricultural Bank announced a 65 per cent year-on-year increase in first-half operating income, which rose to 42.3 billion yuan. At the same time, the bank said non-performing loans dropped by 2 percentage points.
But behind the facade, things look ugly. According to the bank's own figures, more than 21 per cent of its outstanding loans, worth about 728 billion yuan, are non-performing.
That leaves the Finance Ministry's 84 billion yuan of equity worthless. But the ministry is loath to surrender control by writing off its entire stake ahead of a central bank capital injection as it did with Bank of China and China Construction Bank. As a result, the restructuring of Agricultural Bank has already been delayed by more than six months as Finance Ministry and central bank officials bicker over the details.
Whatever the final outcome, recapitalising Agricultural Bank will be costly. A back-of-the-envelope calculation indicates the bank needs new capital of about 400 billion yuan, more than US$50 billion, if it is to achieve its desired capital adequacy ratio without drastically shrinking its balance sheet. Some of that might come from foreign strategic investors - Agricultural Bank has been talking to other farmers' banks around the world, including France's Credit Agricole - but inevitably most will have to come from state coffers.
