Red Capitalism (12 page)

FIGURE 3.4
AMCs’ additional funding from the PBOC, 2000

The rest of the answer is that the government was unable to reach consensus on the valuation of these “bad” loans. After all, these loans had all been made to SOEs which were, by definition, state-owned. Anything less than full value would suggest that the state was unable to meet its own obligations, a position anathema to Party ideologues. But that was just the point: the state
was
unable to meet these obligations. So instead of bankrupting all SOE borrowers—that is, basically the entire industrial sector—the Party chose to keep the potential losses concentrated on bank balance sheets. Instead of resolutely addressing the problem by writing the loans down, it decided to push the matter off into the future and on to some other politician’s agenda. Of course, in 2009, the Party decided to do the same thing, so the AMC obligations were pushed off a further 10 years. This is how things work “inside the system.”

PBOC recapitalizes CCB and BOC, 2003

Official data indicate that after this first tranche of bad loans was removed in 2000, the four banks still had RMB2.2 trillion (US$260 billion) more on their books, and this was
before
a stricter international loan-classification system was implemented in 2002. The government took a hard look at bank capital levels, but its own resources remained very limited. Its conservative approach extended to an aversion to increasing the national debt. If the banks were truly to be strengthened, they needed more capital and a lot of it. Zhou’s plan had concluded that this could only be provided by international investors. But the problem was how to make bank balance sheets and business prospects strong enough to attract them.

The question boiled down, in part, to how much each bank could afford to actually write off. The PBOC found that of the four banks, only BOC and CCB had sufficient retained earnings and registered capital to make full write-offs of their remaining bad loans while leaving a small but positive capital base. Neither ICBC nor ABC was capable of achieving this in 2003, and both would have ended up with negative capital; that is, they would have been factually bankrupt. But if BOC and CCB’s RMB93 billion in capital was to be written down, where could the money be found to build it back up? After much argument, Zhou Xiaochuan proposed the only possible solution: use the foreign-exchange reserves. As the famously outspoken Xie Ping, then director of the PBOC’s powerful Financial Stability Bureau, put it: “This time, we did not just play a game with accounting [a direct jab at the MOF’s methods in 1998]. Real money went into the banks.”

Zhou’s plan was approved by the State Council and on the last day of 2003, each bank transferred the value of its capital and retained earnings
⁴
into bad-debt reserves and wrote it all off. In other words, the MOF’s total capital contribution to the two banks—RMB93 billion—was written off, but the MOF remained obligated to repay its 1998 Special Bonds. This fact alone highlights the seriousness of the Party’s intention to restructure the banks and is emblematic of the PBOC’s ascendancy over the MOF at the time. The two banks each received US$22.5 billion from the country’s foreign-exchange reserves by means of the PBOC entity Central SAFE Investment (discussed in greater detail in Chapter 5). Shortly thereafter, in May and June 2004, the banks disposed of an additional total of RMB442 billion in problem assets via a PBOC-sponsored auction process prearranged to create loan recoveries and further additions to their capital accounts. As a result of all these actions, BOC and CCB were in a position to attract foreign strategic investors and ultimately to proceed with IPOs in 2005 (see
Table 3.3
). But the side effect was to exacerbate the political struggle over bank reform: the PBOC now owned 100 percent of both CCB and BOC.
⁵

TABLE 3.3
PBOC/Huijin ownership rights in major Chinese banking institutions

Source: Huijin; bank annual financial reports and ABC offering prospectus

Note: Dates of IPOs include those for both Hong Kong (H) and Shanghai (A) IPOs. “Other State” investors include strategic Chinese investors such as SOEs. For BOC, all NSSF (4.46 percent) and foreign strategic investor shares (13.91 percent) were converted into H-shares at the time of the IPO and are included in the Public number. Jianyin is a 100 percent subsidiary of Huijin.

“Commercial” NPL disposals, 2004–2005

In line with the PBOC blueprint, a second round of NPL acquisition by the AMCs, totaling RMB1.6 trillion (US$198 billion), followed in 2004 and 2005. In addition to a second batch of bad loans of RMB705 billion from ICBC, portfolios also included RMB603 billion from a number of smaller, second-tier banks. For these transactions, the PBOC provided the necessary funding, with estimated credits of up to RMB700 billion (see
Figure 3.5
and
Table 3.4
) But this time, the PBOC had already taken a down payment copied straight out of the MOF’s 1998 playbook: in 2004, it had issued compulsory Special Bills totaling RMB567.25 billion (US$70 billion) to BOC, CCB and ICBC. These bills could not be sold into the market and were designed to mature in June 2009 as a part of the unwinding of the entire AMC arrangement.

FIGURE 3.5
PBOC funding for ICBC NPL disposal and commercial loan auctions

TABLE 3.4
AMC funding obligations, 2000–2005

Source: Caijing
, July 25, 2007: 65; PBOC, Financial Stability Reports, various

In issuing the bills, the PBOC accomplished two things. First, it removed the liquidity it had created by financing the NPL spin-offs; and, second, it in effect extracted from the banks a partial pre-payment of about 33 percent of its maximum lending to the AMCs. In essence, this Special Bill was a predecessor to the mammoth Special Bond issued by the MOF in 2007 to capitalize CIC and it was issued largely for the same reason: to control excess liquidity.

The ICBC and ABC recapitalizations, 2005 and 2007

In contrast to its involvement with BOC and CCB—where its 1998 cash capital contribution had been fully written off but its liability stayed in place—in the case of ICBC, the MOF’s original RMB85 billion remained, so that the PBOC/Huijin’s contribution was reduced to US$15 billion, equivalent to 50 percent of the bank’s equity. Two years later, in 2007, ABC’s recapitalization followed the ICBC model, but things appeared to have changed completely. As before, Huijin contributed new capital from exchange reserves to the tune of US$19 billion to ABC, and the MOF’s 1998 contribution remained in place. But, as will be discussed in Chapter 5, by this stage, Huijin belonged to the MOF, not to the PBOC.

While, on the surface, things appeared to be consistent with the PBOC approach, in fact the entire structure of bank ownership had reverted to the status quo of the pre-reform era, with the MOF in control. Not only ownership was affected; the entire restructuring of problem-loan portfolios was different, as was the government’s attitude towards the banks. With the apparently successful rehabilitation of BOC and CCB, the Party was, in effect, telling the banks that they now had to share the burden. From this came the lending binge of 2009; the banks had once again reverted to their role as a simple utility.

THE MINISTRY OF FINANCE RESTRUCTURING MODEL

The MOF, of course, was unhappy with its subordination to the PBOC following the restructuring of the banks up to 2004. Historically, this was almost the first time that their roles had been reversed. However, as described above, from 2005, the MOF was able to exert its influence over the banking system once again, a process that culminated with the establishment of China Investment Corporation (CIC) in late 2007 (see Chapter 5). The principal difference between the MOF’s approach and that of the PBOC was that it assumed direct responsibility for the funding and repayment of problem-loan disposals. This, in fact, appeared to nudge things much closer to the international model. The PBOC had succeeded in pushing the MOF away from control of the reform process, but its complex funding arrangements for NPL disposals, although practical given the government’s limitations, had never been a good solution. From the start, the AMCs had been thinly capitalized and faced the hopeless task of recovering 100 cents on each dollar of problem loans. How could they really be expected to repay the PBOC, much less the banks?

Looked at closely, however, the MOF’s solution also had its weak points. In 2005, when it assumed control of ICBC’s ongoing restructuring, the MOF partially replaced AMC bonds with its own paper. That year, a bad-loan portfolio of RMB246 billion was transferred to a “co-managed account” (see Appendix) and ICBC—unlike in the BOC and CCB cases—did not receive cash. Instead, it received what can be called “MOF IOUs” as well as the traditional AMC bonds (see
Figure 3.6
).