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The great Chinese bank debt clear up gathers steam ahead of flotations
by James Phillipps on Aug 30, 2013 at 14:14
Much has been written about the perils that lie within the Chinese banking system but, on the face of it at least, some good news has finally emerged. The nation’s toxic debt is now being paid down at a significantly faster rate ahead of an anticipated wave of flotations.
Quite how and why the amount being paid back has risen significantly has given rise to a lot of debate. Optimists see it as a means for China to ensure its economic growth has safer foundations, while pessimists believe it is to clear the decks for the next round of bad debts.
But reports out last week suggest that the government is looking to clean up several financials ahead of a round of partial flotations in Hong Kong.
As much as anything, it is the sheer size of the increase in payments that has caught the eye.
FT Alphaville describes the financing arrangements behind the bad debt as ‘mysterious’, and attempts to unpick just what is going on in the Chinese banking sector quickly reveal why.
After the Chinese banking system ran up massive amounts of bad debts in the 1990s, the government created four state-owned asset management companies, one each for its four big banks, to take on the problem loans in 2000.
The asset managers – Cinda, Huarong, Oriental and Great Wall – effectively became ‘bad banks’, buying RMB1.4 trillion ($170 billion) of non-performing loans at face value.
This was equivalent to around 20% of the four banks’ combined loan books at the time and 18% of Chinese GDP in 1998. In return, the big four banks received 10-year bonds from the asset managers and additional state funding.
According to the Institute for New Economic Thinking (INET), by 2009, ahead of the bonds’ maturity, only around RMB100 billion had been paid back because the asset managers were not making sufficient money, and the bonds were rolled over for another 10 years.
But since 2009, the asset managers have gradually started paying their bond principals at an ever-growing rate. Indeed, in 2010 the banks still held 94% of their original portion of bonds. This fell to 84% in 2011 and recently released data shows that this has now dropped to 55%.
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