Monday, December 05, 2005
Dear Readers, a friend of mine emailed me about an interesting issue. What is the status of the AMC bonds, which are mostly held by banks which sold NPLs to the AMCs. According to the CCB prospectus (see below), the State Council issued a decree in 2004 further clarifying its obligation to the holders of the AMC bonds. But, the CCB prospectus further states that "the notice is not a legally binding guarantee and, as a result, we cannot assure you that we would be able to enforce it under the law." Perhaps a certain reader in Hong Kong can further comment on this fact.
My comment:
This is an interesting topic that goes to the heart of the PRC legal system. Strictly speaking, a law isn't a law until it is passed by the NPC, but that is rarely the case for specific issues. Usually, specific issues are dealt with through State Council decrees or decrees issued by one of the subordinate agencies under the State Council. The last sentence merely recognizes that a State Council decree does not have the same force as an NPC law. Basically, if a State Council decree is over-turned, which happens quite a lot, a claimant would have little standing in court to go after the State Council. However, I think in this case the difference is academic. The Chinese government knows that it must honor the AMC bonds or face massive loss of confidence in the financial sector. When it comes to the financial sector, a lot of the guarantee is implicit, but the Chinese governnment has consistently shown a great willingness to honor implicit guarantees, whether it be for depositors, banks, or for foreign investors. In this case, they have made explicit the guarantee with a SC decree, which has much more force than a decree issued by the MOF itself.
Passage from the CCB Prospectus:
"In 1999, our predecessor, China Construction Bank, received a ten-year bond
with a face value of RMB 247.0 billion issued by Cinda and RMB 3.0 billion in cash in exchange for the disposal to Cinda of nonperforming assets with an aggregate principal amount of RMB 250.0 billion. See ""Our Restructuring and Operational Reform.'' Cinda's ability to make full and timely payment of interest and principal on the bond depends primarily on the availability of proceeds generated from its
disposition of non-performing loans it holds. In the absence of credit support or additional assets, Cinda may not be able to repay the principal or interest on the bond as it becomes due.
In connection with our restructuring, as approved by the State Council, the
MOF issued a notice dated September 15, 2004, which provides that (i) beginning January 1, 2005, in the event that Cinda is unable to pay any interest on the bond to us in full, the MOF will provide Ñnancial support, and (ii) when necessary, the MOF will provide support with respect to Cinda's repayment of the principal of the bond. We have been advised by our PRC legal counsel, Commerce & Finance Law OÇces, that (i) the above-mentioned notice is a valid and eÅective legal document, (ii) the MOF is not authorized to rescind the notice without the State Council's approval and there is no reason to believe that the State Council will rescind or approve the rescission of the notice, and (iii) the notice should be deemed as support provided by the MOF based on the sovereign credit of the PRC for Cinda's payment obligations with respect to the interest on and principal of the bond.
We believe the MOF will meet its obligations under the notice. However, the
notice is not a legally binding guarantee and, as a result, we cannot assure you that we would be able to enforce it under the law."
My comment:
This is an interesting topic that goes to the heart of the PRC legal system. Strictly speaking, a law isn't a law until it is passed by the NPC, but that is rarely the case for specific issues. Usually, specific issues are dealt with through State Council decrees or decrees issued by one of the subordinate agencies under the State Council. The last sentence merely recognizes that a State Council decree does not have the same force as an NPC law. Basically, if a State Council decree is over-turned, which happens quite a lot, a claimant would have little standing in court to go after the State Council. However, I think in this case the difference is academic. The Chinese government knows that it must honor the AMC bonds or face massive loss of confidence in the financial sector. When it comes to the financial sector, a lot of the guarantee is implicit, but the Chinese governnment has consistently shown a great willingness to honor implicit guarantees, whether it be for depositors, banks, or for foreign investors. In this case, they have made explicit the guarantee with a SC decree, which has much more force than a decree issued by the MOF itself.
Passage from the CCB Prospectus:
"In 1999, our predecessor, China Construction Bank, received a ten-year bond
with a face value of RMB 247.0 billion issued by Cinda and RMB 3.0 billion in cash in exchange for the disposal to Cinda of nonperforming assets with an aggregate principal amount of RMB 250.0 billion. See ""Our Restructuring and Operational Reform.'' Cinda's ability to make full and timely payment of interest and principal on the bond depends primarily on the availability of proceeds generated from its
disposition of non-performing loans it holds. In the absence of credit support or additional assets, Cinda may not be able to repay the principal or interest on the bond as it becomes due.
In connection with our restructuring, as approved by the State Council, the
MOF issued a notice dated September 15, 2004, which provides that (i) beginning January 1, 2005, in the event that Cinda is unable to pay any interest on the bond to us in full, the MOF will provide Ñnancial support, and (ii) when necessary, the MOF will provide support with respect to Cinda's repayment of the principal of the bond. We have been advised by our PRC legal counsel, Commerce & Finance Law OÇces, that (i) the above-mentioned notice is a valid and eÅective legal document, (ii) the MOF is not authorized to rescind the notice without the State Council's approval and there is no reason to believe that the State Council will rescind or approve the rescission of the notice, and (iii) the notice should be deemed as support provided by the MOF based on the sovereign credit of the PRC for Cinda's payment obligations with respect to the interest on and principal of the bond.
We believe the MOF will meet its obligations under the notice. However, the
notice is not a legally binding guarantee and, as a result, we cannot assure you that we would be able to enforce it under the law."
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