Friday, October 15, 2004

Now that you have suffered through my self-congratulation, back to some cynical observations:
The SCMP reported a mini item, which is much more interesting than its space allotment suggests.

SCMP, 10/15/04
"China Petroleum & Chemical Corp's (Sinopec) parent Sinopec Group has agreed to buy a 5.67 per cent stake (five billion state-owned shares) in Sinopec from China Cinda Asset Management for nine billion yuan in cash and a 7.08 per cent stake (6.14 billion state-owned shares) in Sinopec from China Development Bank for 11.05 billion yuan in cash."

What is going on here? Why is Sinopec buying Sinopec shares from Cinda, which is a state asset management company, and from the China Development Bank? Is Sinopec trying to reduce shares outstanding? Basically, this is a classic outcome of command economy inter-bureaucratic bargaining. But they are buying and selling shares, you say. Well, you have to understand that Cinda and CDB acquired those shares through debt-to-equity swaps in the first place from non-performing loans. Essentially, in 1998, the Premier of China ordered Cinda and CDB to acquire a mountain of non-performing loans. One way to deal with these NPLs is to convert them from debt to equity, which magically transform these distressed assets into performing assets in the books of Cinda and CDB. The problem of course is that most beneficiaries of d-e swaps can't pay any dividend since they are broke. Not so the oil companies, however.

Cinda and CDB probably knew that NPLs from oil companies aren't so bad and demanded a share of oil NPLs among the mountain of NPLs they acquired. The State Council (the Premier) brokered a deal with all the agencies whereby the asset management companies and CDB would acquire some pretty good assets (oil shares) and a lot of very, very bad assets. Because of high oil prices, this deal probably worked better than expected. Now, Cinda and CDB are asking for the pay-offs, which is an injection of oil profit from this year into the books of Cinda and CDB. CDB hardly needs it since it is the best run bank in China, but Cinda, which is stuck with a huge mountain of worthless assets, can really use the cash injection. This cash injection will boost the "cash recovery ratio" of Cinda and make everyone in the NPL policy area look good, including the AMCs, CBRC, and MOF.

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