Friday, July 15, 2005
More interesting facets about the Huijin Company that was revealed as I discussed the issue with my colleagues. Apparently, although Huijin is the largest shareholder of CCB and the sole shareholder of BOC, it did not get the 50 or so billion RMB in dividend due to it from 2004. Instead, the money was used by the two banks to pay back a "special loan" from the PBOC.
My guess about the loan is that it is to pay back the loan that the PBOC gave to CCB (and BOC) when the banks sold NPLs to the AMCs last year. Since the AMCs didn't pay face value for the loans, the PBOC had to step in with a reloan, which CCB and BOC are now repaying with profit. Huijin, the supposed "independent company" is taking a hit for the PBOC, which proves that Huijin is the commercial arm of the financial stability bureau of the PBOC.
A SCMP article (see below) claims that the PBOC lent to the AMCs rather than to the banks. But why would the PBOC give Cinda 140b to finance a 85b purchase? I suspect that the PBOC gave Cinda 85b and BOC and CCB the remainder to fill the gap between what Cinda paid and the face value of the loans. This was obviously done to maintain profit figures of CCB and BOC on the eve of their impending IPOs. In that case, it would make sense for BOC and CCB to repay the PBOC the 55b they owe the PBOC.
The bottom line of all of this is that without the "special loan" from the PBOC when CCB and BOC "sold" the NPLs to the AMCs, the BOC and the CCB would have recorded zero profit for 2004.
SCMP
Thursday, June 24, 2004
PBOC to finance more loan disposals
The state will provide funds allowing Cinda to buy NPLs from Bank of China and Construction Bank
BEI HU
Next Story
The central government has come to the aid of Bank of China and China Construction Bank for the second time in six months, by subsidising their disposal of non-performing loans with a face value of about 280 billion yuan.
China Cinda Asset Management is poised to buy the NPLs from BOC and CCB with financing provided by the People's Bank of China after beating three other asset managers at an auction on Monday.
In January, US$45 billion was transferred from the nation's foreign exchange reserves to the same two lenders, which are racing to clean up their books in preparation for initial public offerings later this year or next. The injection was criticised for potentially creating a moral hazard and also as an inappropriate use of national treasure.
Sources close to this week's auction said the central bank would grant Cinda a three-year, 140 billion yuan loan to finance its purchase.
Cinda would in turn pay the banks about 85 billion yuan for the NPLs - representing a 69.5 per cent discount to the face value - and intended to resell them to international and domestic investors, including the other three asset management firms, over a three-year period, sources said.
The first sale is expected in the second half of this year. The proceeds from these auctions will be used to pay back the PBOC.
"From the bids the asset managers submitted, it's almost certain Cinda's actual recovery rate would fall below 50 per cent," a mainland industry source said.
He said the government eventually would bear the loss should Cinda fail to generate enough cash.
"This is just another way of PBOC injecting money into these banks," a western observer said.
Cinda officials yesterday declined to comment. A PBOC spokesman confirmed Cinda submitted the auction's highest bid, but said "certain technical details have to be discussed" before Cinda could be declared the winner.
The auction marked only the second transfer of NPLs from the Big Four state banks - BOC, CCB, Agricultural Bank of China and Industrial and Commercial Bank of China - to asset managers. Four asset managers - Cinda, Huarong, Orient and Great Wall - took on NPLs with a combined face value of 1.39 trillion yuan on their inception in 1999.
Sources said Cinda's rivals sought to buy the NPLs at a 70 to 80 per cent discount to face value.
Besides the promised recovery rate, track record was one of the other factors determining the winning bid, sources said. They attributed Cinda's willingness to pay. Its cumulative cash recovery rate of 31.78 per cent by March led its three rivals by a wide margin.
The auction methodology falls in line with the government's recent pledge to run the four asset managers like commercial enterprises. It might also be an effort to assuage public criticism of January's government cash injection.
Little is known about the quality of the NPLs except that they have been classified as "doubtful",the second-worst designation in the new five-category classification system. Lenders must make a 50 per cent provision for doubtful loans whose quality is superior only to those marked "total loss".
The BOC had 116.3 billion yuan of doubtful loans at the end of last year, 5.3 per cent of its loan book. The CCB booked 137.5 billion yuan or 6.4 per cent.
My guess about the loan is that it is to pay back the loan that the PBOC gave to CCB (and BOC) when the banks sold NPLs to the AMCs last year. Since the AMCs didn't pay face value for the loans, the PBOC had to step in with a reloan, which CCB and BOC are now repaying with profit. Huijin, the supposed "independent company" is taking a hit for the PBOC, which proves that Huijin is the commercial arm of the financial stability bureau of the PBOC.
A SCMP article (see below) claims that the PBOC lent to the AMCs rather than to the banks. But why would the PBOC give Cinda 140b to finance a 85b purchase? I suspect that the PBOC gave Cinda 85b and BOC and CCB the remainder to fill the gap between what Cinda paid and the face value of the loans. This was obviously done to maintain profit figures of CCB and BOC on the eve of their impending IPOs. In that case, it would make sense for BOC and CCB to repay the PBOC the 55b they owe the PBOC.
The bottom line of all of this is that without the "special loan" from the PBOC when CCB and BOC "sold" the NPLs to the AMCs, the BOC and the CCB would have recorded zero profit for 2004.
SCMP
Thursday, June 24, 2004
PBOC to finance more loan disposals
The state will provide funds allowing Cinda to buy NPLs from Bank of China and Construction Bank
BEI HU
Next Story
The central government has come to the aid of Bank of China and China Construction Bank for the second time in six months, by subsidising their disposal of non-performing loans with a face value of about 280 billion yuan.
China Cinda Asset Management is poised to buy the NPLs from BOC and CCB with financing provided by the People's Bank of China after beating three other asset managers at an auction on Monday.
In January, US$45 billion was transferred from the nation's foreign exchange reserves to the same two lenders, which are racing to clean up their books in preparation for initial public offerings later this year or next. The injection was criticised for potentially creating a moral hazard and also as an inappropriate use of national treasure.
Sources close to this week's auction said the central bank would grant Cinda a three-year, 140 billion yuan loan to finance its purchase.
Cinda would in turn pay the banks about 85 billion yuan for the NPLs - representing a 69.5 per cent discount to the face value - and intended to resell them to international and domestic investors, including the other three asset management firms, over a three-year period, sources said.
The first sale is expected in the second half of this year. The proceeds from these auctions will be used to pay back the PBOC.
"From the bids the asset managers submitted, it's almost certain Cinda's actual recovery rate would fall below 50 per cent," a mainland industry source said.
He said the government eventually would bear the loss should Cinda fail to generate enough cash.
"This is just another way of PBOC injecting money into these banks," a western observer said.
Cinda officials yesterday declined to comment. A PBOC spokesman confirmed Cinda submitted the auction's highest bid, but said "certain technical details have to be discussed" before Cinda could be declared the winner.
The auction marked only the second transfer of NPLs from the Big Four state banks - BOC, CCB, Agricultural Bank of China and Industrial and Commercial Bank of China - to asset managers. Four asset managers - Cinda, Huarong, Orient and Great Wall - took on NPLs with a combined face value of 1.39 trillion yuan on their inception in 1999.
Sources said Cinda's rivals sought to buy the NPLs at a 70 to 80 per cent discount to face value.
Besides the promised recovery rate, track record was one of the other factors determining the winning bid, sources said. They attributed Cinda's willingness to pay. Its cumulative cash recovery rate of 31.78 per cent by March led its three rivals by a wide margin.
The auction methodology falls in line with the government's recent pledge to run the four asset managers like commercial enterprises. It might also be an effort to assuage public criticism of January's government cash injection.
Little is known about the quality of the NPLs except that they have been classified as "doubtful",the second-worst designation in the new five-category classification system. Lenders must make a 50 per cent provision for doubtful loans whose quality is superior only to those marked "total loss".
The BOC had 116.3 billion yuan of doubtful loans at the end of last year, 5.3 per cent of its loan book. The CCB booked 137.5 billion yuan or 6.4 per cent.
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