The government has assigned two asset management companies (AMCs) to dispose of nearly 200 billion yuan (US$24 billion) in bad loans written off by the Bank of China (BOC) and China Construction Bank (CCB), for "maximum recovery," sources said.

Larger amounts of non-performing loans (NPLs), classified as "doubtful" under the international five-category loan classification system, are also likely to be transferred from the two banks to the two AMCs as the banks prepare for initial public offerings (IPOs), they said.

But the method of removing the doubtful loans from the banks' books is yet to be settled, and they may instead be sold at auctions open also to international investors.

The decision is part of the government's broader plans to reform the nation's four biggest state-owned banks, which also include the Industrial and Commercial Bank of China and the Agricultural Bank of China.

It is a follow-up measure after a US$45 billion capital injection into the BOC and CCB at the end of last year to prepare them for a pilot joint-stock restructuring and public share offerings.

The two pilot banks reportedly used their original capital to write off part of their huge NPLs.

Sources said the two AMCs--China Orient Asset Management and China Cinda Asset Management--are required to give a minimum amount of cash that they recover from the bad assets to the government, and may keep the remainder.

Sources declined to disclose the minimum recoveries, which they said were negotiated by the AMCs with the two banks and approved by the government.

"It is certainly a good thing," said Wang Haijun, director of China Cinda's investment banking department. "It not only pushes ahead China's banking reform, but also it will help the asset management companies to play their specialized role in the resolution of China's non-performing loans."

The sources said the Ministry of Finance sent a circular to the four AMCs in early March. It notified them of the ministry's selection of China Orient and China Cinda to "take over and dispose of" the bad loans that the two banks wrote off in 2003 and "all the loans categorized as loss" that were written off during the restructuring of the banks, which they said largely refers to the recapitalization scheme.

Under the five-category loan classification system that China's banking regulator is promoting, the three lowest categories--substandard, doubtful and loss--are typically seen as non-performing loans.

China Orient is entrusted with the BOC's 140 billion yuan (US$16.9 billion) in bad loans, while China Cinda will take over the CCB's 56.9 billion yuan (US$6.9 billion). The amounts exclude interest payments.

The assets are currently being transferred to the AMCs' books.

In the agreements, the finance ministry requires the AMCs to establish risk-control mechanisms, try to achieve maximum recoveries and separate the entrusted assets from their own.

The BOC and the CCB are the healthiest of China's Big Four. However, their NPL ratios are still high, standing at 14.8 percent and 8.8 percent, respectively, at the end of March.

The China Banking Regulatory Commission said last week that the combined total in NPLs for the Big Four stood at 1.9 trillion yuan (US$228 billion) as of March 31.

The BOC and the CCB are required to adopt the stricter five-category loan classification system this year and to keep their NPL ratios below 5 percent.

The government's decision to give the business of disposing of the pilot banks' written-off assets to the AMCs instead of letting the banks handle it themselves is good news for the AMCs as they await new business opportunities.

However, the deal itself may not be lucrative, say analysts.

China Cinda's Wang says it will become the trend for NPL business to be left to AMCs, which are more experienced, efficient and free of the accounting confusion that could arise if the task were left to the banks.

(China Daily May 17, 2004)