No more bailouts for Chinese banks - report

[HenryTo]

Bring in Western expertise to reform the financial system is definitely a good idea. In the short-run, however, this may be very dangerous - especially in light of huge overcapacity in various sectors in the economy and continuing falling profit margins. i.e. Reforms when times are going great is one thing - but implementing reforms when times are getting tough is another.
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Sun Dec 25, 2005 4:08 PM GMT

BEIJING (Reuters) - China's state-owned banks will receive no more government cash bailouts for business losses after they absorb new private investment, the country's top banking inspector told a Chinese-language newspaper.

Liu Mingkang, the director of the China Banking Regulatory Commission, said China's large commercial banks can expect no more state rescue payouts as they recruit outside strategic investors and issue stock.

"After their investment and beneficiary entities have diversified, it will be impossible for state finances to again bury debts from commercial banks' business losses; otherwise, that would fly in the face of principles of fair market competition," he told the 21st Century Business Herald.

But Liu said China's banks should be looking to outside investors for their expertise, not their money.

"The policy design and objectives for attracting strategic investors are directed at attracting expertise, not capital. That means banks shouldn't rush to attract investors to meet capital adequacy targets," he added in an interview with the paper.

Liu's comments come as another leading economic official warned on Sunday of excessive borrowing by some of China's biggest state-owned companies, who are still Chinese banks' dominant customers.

Li Rongrong, the chairman of the State-owned Assets Supervision and Administration Commission, said many of China's 169 centrally-controlled state enterprises recorded brisk sales growth in 2005.

These state-owned conglomerates include business flagships such as the Baogang Steel Group and the China Petrochemical Corporation.

But Li said too many state-owned conglomerates are doing poorly even as China booms, according to the official Xinhua News Agency.

FALLING PROFITS

Forty-five of the companies recorded falling profits in the second half of the year, and 80 recorded costs rising faster than sales income, Li said. And many of these companies are turning to loans from state banks, he added.

"Some enterprises are relying on using new loans to pay off old ones in order to maintain daily operations, and a few are facing crisis," Li said.

He called for faster internal reform of these companies.

Since 1997 the Chinese government has poured recapitalization funds of over $100 billion into the top four state-owned banks to help prepare them for commercial competition. The government has taken off their hands non-performing assets with a book value worth even more.

Officially, these four banks -- the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China -- have non-performing loans worth about 1,016 billion yuan, or 10 percent of their total loans.

But many economists believe the real level is higher.

In October, the China Construction Bank issued stock in Hong Kong, but investors' reaction was tepid.

By late October, 19 foreign institutions had bought stakes totalling $16.5 billion in 16 Chinese banks -- about 15 percent of their total capital. They include, Morgan Stanley, HSBC Holdings and Deutsche Bank.

The Bank of Agriculture, which carries many bad loans from unprofitable agricultural and local government projects, is the only state-owned bank that has not attracted outside partners.

Liu said the Bank of Agriculture needs major reorganization before it is ready to offer equity to outside investors.

"First, it must undergo financial reorganization and absorb its historic burdens, and then it must undergo corporate governance reform," he said.

"Producing the specific plan may take some time," Liu added.