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Improvement of the Operating Mechanisms of the SOEs in the Process of Dealing with Bad Bank Assets
1999-02-16
Wei Jianing
In the reform of the past 20 years, the lag in the banking reform left the banks a considerable amount of non-performing assets which were accumulated when the banks replaced the government finance as the wickets of releasing the government fund. From 1992 to 1993 in particular, the economic overheating goaded the bond and securities market and the real estate market to inflate like bubbles and bad bank assets to rocket. The bad assets could go into latency by repaying old debts with new borrowings while the money market was still expanding. However, they will come to the light once credit deflates. According to the statistics by the People's Bank of China, bad assets of China's banking system have amounted to roughly 25 percent of GNP with unrecoverable bad debts making up about 8 percent of GNP.
The large accumulation of bad assets not only hinders normal bank deposit and lending business, but also poses a grave threat to the stable development of the national economy. First of all it will create among domestic and foreign investors ill expectations on China's investment environment and prospects for economic growth. It will damp their enthusiasm for investment, leading to an economic slowdown which will cut the government tax revenue, forcing the government to intensify the levy of taxes. The continuation of such-a trend will produce a vicious cycle of economic downturn. To prevent such an economic disaster, it is necessary to take resolute actions to cope with the bad bank assets.
In view of the large accumulation of bad assets in the Chinese banks, the State Council decided at the beginning of the year to set up asset management corporations to restructure the assets of the state-owned banks (see Appendix: Asset Management Corporations to Deal with Bad Bank Assets). Our investigation and study show that the following questions call for attention in order to ensure fulfillment of the job assigned to the asset management corporations.
Ⅰ. To stick to the principle of treating the problem by looking into both its symptoms and root cause
The amount of the bad assets is enormous, whereas the resources, namely the financial revenues that can be used to tackle the problem, are relatively meager. But with the growing national strength built up in the process of the reform and opening up, it is entirely possible for us to deal with the bad assets by writing them off after verification and putting new investment into the banks' assets. The question lies in the fact that in the final analysis, the bad bank assets had been generated by the inefficient system of the state-owned enterprises (SOEs) and banks. As now we are in the transition from the planned economy toward a market economy, the pursuit and the way of behavior of the banks and SOEs fall far short of those of the enterprises operating in a market economy. Moreover, the deficiencies in the legal system and the intensity of law-enforcement has further aggravated the problem. So long as these problems are still in place, new bad assets will emerge after the old bad assets have been cleared up at tremendous cost, landing the authorities in an increasingly passive situation. Such a circumstance determines that the clearing up operation must be carried out through looking into both the symptoms and the root cause, with the emphasis laid on the root cause. In another word, the operation should focus its attention on the prevention of the emergence of new bad assets, and the clearing up drive should be combined with the reform of establishing a modern corporate system and commercializing the banks. In the operation, restrictions on the finance and budget of industrial and commercial enterprises and banks should be reinforced and their operating mechanism must be transformed.
The asset management corporations should aim at recovering the value of bad assets to the largest possible extent so that they can effectively deal with the existing bad bank assets. Different from the ordinary commercial banks in functions and business operations, the corporations focus more on the functions of investment banks, such as asset sales, debt restructuring and enterprise regrouping, debt-to-equity swaps, as well as share-holding by stages, assets-to-securities arrangements, management consulting, and participation in supervision and management of enterprises. It should be stressed that, in achieving these objectives, the asset management corporations must strive to prompt the industrial and commercial enterprises and state-owned banks to establish their effective corporate governance structure on the basis of reforming the equity structure, in order to strengthen their business management and improve the quality of their assets.
II. To do a good job in determining the bad assets and prevent the evasion and abrogation of debts
To prevent bad morality in risking debt evasion and abrogation in the handling of bad assets and to ensure the objectiveness and scientific approach in determining bad assets, bad bank assets should not be determined by commercial banks themselves nor by the central bank which has the responsibility of supervision. They should be defined and determined by objective, neutral and authoritative credit rating agencies or other intermediate organizations. The determination of bad assets and credit rating should become a regular system, which serves to strengthen external supervision over enterprises and facilitate the prevention and early warning against financial risks.
When determining bad bank assets, the amount and composition of bad assets, the causes for their formation and the persons chiefly responsible for them should be verified and dealt with according to different circumstances. Minor errors should be recorded in the dossiers of the responsible persons, and, in the case of serious offenders, the administrative and legal responsibilities must be looked into. No matter who should share and bear the losses, the relevant plan should not be made public too early. It should be determined by all parties concerned after consultations or by the market in order to avoid artificially minimizing or magnifying the scale of bad assets as a result of iii expectations.
Ⅲ. To adopt various ways to tackle bad bank assets in accordance with different circumstances
Bad bank assets were tackled in the past few years largely through government- presided process of enterprise bankruptcies and mergers. This practice can be regarded as a progress compared with the "blood transfusion" for the ill-managed enterprises or those having no value for existence. However, it cannot prevent debt evasion and abrogation by enterprises when they are backed by the authorities concerned, thus bringing about excessive losses of bank assets. Moreover, the move to auction the bad assets or to write them off after verification is beyond the bearability of the state finance. Under these circumstances, the turning of the rights of banks as creditors into stockholders' equity to the indebted enterprises may provide an option, which can preserve to a large extent bank assets and enable both banks and enterprises to survive.
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