China’s Asset Management Corporations (work-in-progress)

1. China’s Asset Management Corporations(work-in-progress) Guonan Ma and Ben Fung December 2001

2. SIX QUESTIONS AT STAKE • How large was the NPL transfer in 99-00? • How have the AMCs been financed? • What are the likely monetary implications? • Who will bear the expected AMC loss? • Are the AMCs financially sustainable? • Would debt-equity swaps make sense?

3. BACKGROUND • The big four state-owned banks account for 65% of the entire banking sector • High NPLs: policy lending and lax controls • Major reforms enacted in 1998: • RMB 270 billion ($33bn) government bonds to boost big four’s capital base • Central bank structure modeled on the Fed • Credit quota and allocation plan abolished

4. I. THE NPL TRANSFERS • Four AMCs pair up with the big four banks • RMB10bn ($1.2bn) MoF equity for each AMC • RMB1.4trillion ($169bn) NPLs transferred • They represent less than half of the total NPLs at the big four banks • A major step towards more realistic diagnosis

6. CONFUSIONS • RMB1.4 trn are “policy-based” transfers dealing with NPLs from policy lending • “Non-policy” NPL transfers are quietly going on, reaching RMB300 bn • Some NPL transfers are not from the big four banks, while some transferred assets could be “performing”

7. MAKING SENSE OF CHINESE STATISTICS

8. II. AMC FINANCING: A MYSTERY • Obscure AMC financing arrangements • Four permitted sources of AMC financing • MoF equity (cash) • Borrowing from other financial institutions (cash) • Special PBoC credit (cash) • AMC bonds (IOUs) • Challenge: estimate their relative importance

9. AMC FINANCING ESTIMATES • MoF injected RMB40bn ($4.8bn) AMC equity (3% of the policy-base transfer) • AMC borrowing from other financial institutions appears trivial (0% of the transfer) • PBoC credit to AMCs is estimated to be RMB208bn or $25bn (15% of the transfer) • AMC bonds are derived as a residual (82% of the transfer)

10. MASSIVE JUMPS IN PBOC CLAIMS ON NMFI

11. STEP 1: SETTING UP THE AMC PBoC RMB208bn Credit AMC MoF RMB40bn Equity

12. STEP 2: AMC BOND & NPL TRANSFER AMC bonds + Cash Big Four Banks AMC RMB1.4tr NPLs

13. PBOC BALANCE SHEET ADJUSTMENT

14. POST-TRANSFER AMC BALANCE SHEET

15. BALANCE SHEET ADJUSTMENT: BIG FOUR BANKS

16. III. MONETARY IMPLICATIONS • Large jumps in PBoC claims on NMFI • Modest growth of reserve money • Sharp falls in the big four banks’ liabilities due to the PBoC

17. PBOC CLAIMS ON NMFI (% OF RESERVE MONEY)

18. THE BIG FOUR’S LIABILITIES DUE TO PBOC

19. OFFSETTING MOVEMENTS • What do the big four banks do with their additional reserves of RMB 248 bn? • Offsetting sterilization by PBoC • PBoC loan recalls to the big four banks to offset PBoC credit to AMC • AMCs assumed the big four banks’ liabilities vis-à-vis the PBoC

20. MoF Equity (1998) Equity (1999) NPLs Big four banks AMCs Bonds + “Cash” Claims + Credit PBoC

21. IV. FINANCING: MOF VS PBOC • PBoC risks 5x more than MoF in AMC financing: MoF equity of RMB40bn and PBoC credit of RMB208bn • Expected AMC losses surpass RMB248bn in all plausible recovery scenarios • With effective subordination, the PBoC loses all RMB208bn

22. LOSS SHARING(Subordination and MoF backing assumptions)

23. ULTIMATE SHARING OF AMC LOSS • The RMB208bn PBoC credit to the AMCs: one-off or the first installment? • Two motives to involve the PBoC in financing the AMCs • Financing loss: ambiguity vs. transparency • Implication for PBoC balance sheet quality

24. V. AMC FINANCIAL SUSTAINABILITY • Annual interest payment obligations of the AMCs exceed RMB30bn • Cash recoveries have fallen far behind their accrued interest payment already • Some of the AMCs may not survive in cash flow terms for more than two years • A call for additional MoF equity injection or PBoC credit to AMC before long?

25. AMC ASSET RECOVERY (Through Sept 01)

26. PROSPECT FOR ASSET RECOVERY • Rising cash flow pressure spurs a faster pace of NPL disposition • First credible market price from the recent international auction: 21 cents on the dollar • Small real estate portion, no consumer loans and low collateral coverage • Average recovery for the entire portfolio of NPL transfers is likely to be less than 20%

27. VI. AMC AND DEBT-EQUITY SWAPS • Debt-equity swaps involve 30% of the policy-based NPL transfers • Lifting SOE financial performance in three years and medium-term equity listing • Half of the swap-related transferred loans might be “performing” (15% of the transfer) • The state-owned AMCs: helping state-owned banks or state-owned enterprises?

28. PRELIMINARY CONCLUSIONS • Policy-base NPL transfers of RMB1.4 bn • AMC funded by 3% MoF equity capital, 15% PBoC credit and 82% AMC bonds • Short-term monetary implications limited • The PBoC takes more risk than the MoF • Rising cash flow pressure on the AMCs • Who is the winner of debt-equity swap?