Friday, April 22, 2005

The central government recently approved ICBC's plan for restructuring, again in preparation for its eventual listing. To help ICBC in its restructuring, the central government will inject some 15 billion USD from its foreign exchange reserve (currently totally 659 billion USD) into ICBC to increase its capital adequacy ratio from the current 4.77% to around 6%. International financial rules typically requires a capital adequacy ratio of 8%. Is this injection any different from previous bailouts of Big Four state banks? What are the implications of this bailout?

First, the ICBC is in more trouble than were the Construction Bank and the Bank of China. Becacuse ICBC historically took charge of financiang SOEs, it still has an official NPL ratio of around 20%, or roughly 700 billion RMB. At the same time, its CAR is still relatively low. Thus, the State Council has to clean up ICBC in a two-part process, both likely involving injection from China's foreign exchange reserve. The current injection is merely the first step in a two-step process of preparing ICBC for listing. First, banks find a way to increase capital adequacy ratio, which in the case of CCB and BOC was accomplished through good-old-fashion profit accumulation. Both ICBC and BOC had capital adequacy ratio above 6% in early 2004, with BOC having a CAR well above 8%. In the case of ICBC, the central government sped up the recapitalization process with a forex injection and with issuance of subordinated debt. The second step will be to reduce the store of NPLs. It is in this second step that CCB and BOC received the 45 billion injection. The two banks also got to off-load some 350b RMB in NPLs to the AMCs. I suspect ICBC will undergo a similar process. With China's foreign exchange reserve continuing its upward climb, ICBC will enjoy another forex injection and, for sure, ICBC will transfer a big slice of NPLs to AMCs, probably around a half of their current NPLs, or 350 billion RMB.

Thus, ICBC enjoyed a greater "free lunch" than did BOC and CCB. While BOC and CCB have had to work hard to build up profit every year in order to bulk up their capital, ICBC now receives substantial injections with hardly any improvement . I think this is the wrong move on the part of the central government. Instead of speeding up ICBC's IPOs-- although I believe that the injection into the BOC and CCB was justifiable-- why not set profitability targets for ICBC in the next few years and allow ICBC to slowly build up a capital base? By speeding up restructuring with what will be two foreign exchange injections, the central government merely encourages ICBC officials to rely on central bailouts instead of working harder to change corporate structure and culture. Also, the global capital market will not have a large enough appetite to buy shares from all three banks in the near future anyway. Through this accelerated restructuring process, those in charge of finance are looking to increase their "administrative accomplishments" before the 17th Party Congress. Once again, politics trumps sound economic logic in China.


央视国际 2005年04月22日 16:38


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