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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
‘This is very interesting,’ said INET’s China expert Chen Long. ‘The asset management companies were not profitable enough to pay any of the bond principals in the first 10 years, so the bonds were rolled over for another 10 years, but they suddenly started to pay large amounts after the rollover started. Why did the asset management companies suddenly start to pay their bond principals after 2009? Logically there are only three possibilities; they successfully recycled cash from the bad assets so that they had enough money to pay the bonds, they used their retained earnings to pay the bonds [or] someone else helped them pay the bonds.’
It is perhaps no great surprise that the financing of the asset managers is somewhat opaque. However, Chen said Cinda was the only asset manager able to pay its RMB5.56 billion interest payments on time, even though its net profit was only RMB4.4 billion in 2009.
In 2012 Cinda’s net profit had risen to RMB7.27 billion, but Huarong, the largest asset manager, only made a net profit of RMB6.96 billion last year, way below the massive RMB140 billion it paid out.
Long said even the most optimistic analyst would not believe Huarong’s retained earnings were sufficient to cover the difference between its profit and what it paid out. This leaves the state, and ultimately the Chinese taxpayer, as the one shouldering the bulk of the bond payments.
China Construction Bank (CCB), which is tied to Cinda, established a jointly managed fund with the Ministry of Finance (MoF) in August 2010. The corporation tax payable by CCB is channelled into the fund, with the MoF’s coffers making up the difference. It also raised $1.6 billion by selling a stake in the business to investors including UBS, Standard Chartered and China’s National Social Security fund last year.
However, the other three banks have never officially announced any tie-up with the state or foreign investment as of yet.
‘For Huarong we do not even know how it was paid because Industrial and Commercial Bank of China [the bank tied to the asset manager] never publicly announced that a joint-managed fund was set up,’ Chen said. ‘But since it was impossible for Huarong to pay RMB138 billion in a single year by itself, the government must have stepped in as well.’
In a study into the asset management companies, the Bank for International Settlements (BIS) notes the bad loans were deliberately sold at book value to prevent any future potential moral hazard issues, and it said: ‘The government repeatedly vowed to have no more such policy-based transfers of non-performing loans.’
Reports last week suggest the government has reversed this policy to clean up the asset managers and banks, with reports that Cinda is to float, probably next year. The Financial Times also reported last Friday that Goldman Sachs, Morgan Stanley and Deutsche Bank are in talks to buy stakes in Huarong, which is to float up to 20% of the business.
With a massive spike in lending in China over the last five years, it appears that the asset managers are gearing up to take on board the next wave of bad loans.
These are expected to emanate from the overheated property market, but now outside funding to help has been called in.
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