Friday, May 12, 2006

Sigh......well, yet another squabble between foreign firms and the Chinese government has broken out. In response to an Ernst Young estimate that NPLs in China is as high as 900 billion USD, the PBOC issued a rebuttal, calling the estimate "a serious distortion." Essentially, the Jack Rodman perspective is that most special mention loans are NPLs. I have no doubt that some are, but to say that most are goes too far. I think that actual NPLs is at most 30% higher than official figures, rather than double the official figures. This was certainly the case eight years ago, but it likely is no longer the case today. The independence of the CBRC from the PBOC plays a large part in this change, and fancy auditing systems that firms like E&Y sold to Chinese banks should play a role as well!

Obviously, E&Y --especially Jack Rodman,who oversees E&Y's Asia NPL business-- is trying to drum up business for the firm. E&Y serves as an intermediary between foreign investors who want to invest in Chinese NPLs and the Chinese market. E&Y is trying to make a splash with this report to revitalize deal flow when in reality, the market has less need of intermediaries like E&Y. The Chinese NPL market today is populated either by increasingly well-financed and well-connected domestic firms or seasoned foreign investors who have been in the market for a few years. These players have little need of a foreign intermediary (they do need Chinese ones). Unfortunately, the PBOC played right into this publicity stunt by issuing a rebuttal, which will further fuel speculation about NPL ratios in China.

China Defends Its Banks
Nation Says a Report
Exaggerates the Value
Of Sector's Bad Loans
May 12, 2006

BEIJING -- China's central bank rejected a research report that nonperforming loans in the country's banking system could be as high as $900 billion.

"The overseas accounting firm's so-called research report...not only greatly distorted the current asset quality of China's banking industry, but also has great discrepancy with its audit results on many Chinese financial institutions," an unnamed official at the financial-stability bureau of the People's Bank of China, said in a statement published on the PBOC's Web site.

The PBOC didn't name the accounting firm. Earlier this month, media reports, citing a study by New York-based Ernst & Young LLP, said China's banking-debt problem is far worse than official estimates indicate.

The reports said nonperforming loans for China's Big Four banks alone were valued at $358 billion, more than double the government's figure, and the total for the banking system could be as high as $900 billion.

The PBOC statement said that China is pushing forward its financial reform and development, and that internal controls and risk-management abilities in financial institutions have strengthened, asset quality has improved, and capital-adequacy ratios have increased steadily.

The Chinese banking sector's NPL ratio fell to 8% at the end of the first quarter from 8.6% at the beginning of the year, the central-bank statement said.

Outstanding NPLs at state-owned commercial banks, stockholding commercial banks, rural commercial banks and foreign banks totaled 1.312 trillion yuan, or about $164 billion, at the end of the first quarter, down 13.76 billion yuan from the beginning of this year, the statement said.

At the end of 2005, Bank of China Ltd.'s NPL ratio was 5.41%, while China Construction Bank Corp.'s NPL ratio was 3.84%, it said. Industrial & Commercial Bank of China and Bank of Communications Co.'s NPL ratios were 4.69% and 2.37%, respectively.

At the end of 2004, according to data from the banks, Bank of China's NPL was 5.12%, China Construction Bank's was 3.92%, ICBC's was 18.99%, and Bank of Communications' was 2.93%.

Agricultural Bank of China, the weakest of China's Big Four state banks, is aiming for financial reforms, the statement said.

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