The move marks another breakthrough in weeding out China's massive non-performing loans (NPLs) through a model of quasi-asset-backed securitization (ABS). The ABS mechanism for financial reform has been used by a number of domestic financial institutions, but is not being supported by central regulators.

Under the repackaging deal, Huarong will build up a large NPL package with a book value of 13.25 billion yuan (US$1.60 billion), which covers the liability rights of 256 companies in 22 provinces. About 95 percent of the liabilities are loans.

Among the trust pool, a package of senior beneficiary rights worth 1 billion yuan (US$120 million) is designed to form the trust product.

It will be transferred to institutional investors operating in the domestic market and the remaining inferior beneficiary rights will be held by Huarong.

With an expected annual return of 4.14 percent -- much higher than that of deposits and treasury bonds -- the three-year-long trust product will be open to both offshore investors operating in China and local institutional investors.

"Our major targeted customers will be institutional investors, and qualified individual investors can also buy the product," said Yao Haixing, general manager of CITIC Trust & Investment, adding the minimum amount for individual investors will be 1 million yuan (US$120,000).

"Most of the senior beneficiary rights have already been ordered by financial institutions, such as banks and securities houses," said Yao, whose company will get commission as returns.

Yang Kaisheng, president of Huarong, also one of the pioneers in China's financial reform, said: "The move could greatly help us speed up the pace of disposing of problem assets and boost the efficiency of funds."

Different from Huarong's earlier practices, one of the most attractive targets for its trust plan, according to Yang, is that the firm may get a return of 1 billion yuan before the end of next month.

"By doing so, we could maximize the value of the assets in the pool," said Yang.

Huarong has collected a total of 407.7 billion yuan (US$49.23 billion) in problem loans from the Industrial and Commercial Bank of China, the nation's largest commercial bank.

Huarong and its three counterparts have received a mammoth amount of bad assets worth 1.4 trillion yuan (US$169 billion) from the four largest state-owned banks.

"We already have 10.2 billion yuan (US$1.23 billion) in cash returns from last year and our target this year will not decrease from that figure," said Yang.

In December, Huarong established partnerships with two foreign financial groups to dispose of another hefty amount of NPLs, greatly boosting the disposal of NPLs.

Of the firms, the First United AMC was founded by Huarong and a Morgan Stanley-led investment banking group. It is responsible for disposing of four packages of NPLs amounting to 10.8 billion yuan (US$1.30 billion), which covers the problem lending of 254 companies in 18 provinces.

And Rongsheng AMC, launched by Huarong and Goldman Sachs, is in charge of a NPL package totaling 1.97 billion yuan (US$238.2 million) from 44 firms in 13 provinces.

(China Daily June 27, 2003)