01-08-2004, 02:56 PM
Cross posted on the Global Economy Thread :
From : The Financial Times â London â A subscription Site :
<b>THE MECHANICS BEHIND CHINAâS CAPITAL INJECTION</b>
<b>The mechanism by which China injected $45bn in fresh capital into two of its large state banks is both unusual and revealing of future intentions.
The two banks, China Construction Bank (CCB) and Bank of China (BOC), each received $22.5bn from China's pile of foreign currency reserves late last month. But the money was neither physically transferred nor was it a gift, according to officials, bankers and academics.</b>
The funds are to remain in US dollars and stay invested in their current instruments, mainly US treasuries. However, the ownership of the funds has been transferred to the two banks, both of which must pay interest to a new state company, Central Huijin Investment Co, said Wang Zhaowen, a senior executive at the Bank of China.
âFrom the hour after we received this money we have had to start paying interest on it,â said Mr Wang, who did not specify the interest rate.
The government insisted that interest be paid on the funds so that the injection would not be seen as another âfree lunchâ for the banks. In this regard, the current injection is different from a Rmb270bn bail-out in 1998 and a Rmb1,400bn write-off of bad loans three years ago.
Officials said Central Huijin was eventually set to become a shareholder in the two banks by transferring what is now effectively a loan into equity, once CCB and BOC become joint-stock companies. They are now wholly-owned by the finance ministry but plan to sell stakes to investors at an unspecified time, possibly this year.
At that time the US dollar-denominated funds probably would be changed into renminbi, requiring the sale of dollar-denominated assets, academics said. To soften the potential shock to US capital markets, it was unlikely that the entire $45bn would be sold off simultaneously, they added.
On the issue of how the capital is to be used, current plans were revealing of future intentions. An official at the State Administration of Foreign Exchange (SAFE) and Mr Wang said the capital would not be spent on writing off bad loans, but instead be added to the banks' capital base - thereby boosting capital adequacy.
This will have several ramifications. The first is that the banks will be able to lend more. The second is that - in theory at least - the banks will become more attractive to potential strategic investors, helping to prepare for the sale of equity stakes to foreign and domestic investors possibly as early as this year.
Nevertheless, the banks' balance sheets may exhibit the unusual combination of robust capital adequacy ratios and high levels of non-performing loans (NPLs) for some time to come. One reason that the capital may not be used to write off NPLs is that such activities often require the liquidation of companies, something that it is politically sensitive in China.
Cheers
From : The Financial Times â London â A subscription Site :
<b>THE MECHANICS BEHIND CHINAâS CAPITAL INJECTION</b>
<b>The mechanism by which China injected $45bn in fresh capital into two of its large state banks is both unusual and revealing of future intentions.
The two banks, China Construction Bank (CCB) and Bank of China (BOC), each received $22.5bn from China's pile of foreign currency reserves late last month. But the money was neither physically transferred nor was it a gift, according to officials, bankers and academics.</b>
The funds are to remain in US dollars and stay invested in their current instruments, mainly US treasuries. However, the ownership of the funds has been transferred to the two banks, both of which must pay interest to a new state company, Central Huijin Investment Co, said Wang Zhaowen, a senior executive at the Bank of China.
âFrom the hour after we received this money we have had to start paying interest on it,â said Mr Wang, who did not specify the interest rate.
The government insisted that interest be paid on the funds so that the injection would not be seen as another âfree lunchâ for the banks. In this regard, the current injection is different from a Rmb270bn bail-out in 1998 and a Rmb1,400bn write-off of bad loans three years ago.
Officials said Central Huijin was eventually set to become a shareholder in the two banks by transferring what is now effectively a loan into equity, once CCB and BOC become joint-stock companies. They are now wholly-owned by the finance ministry but plan to sell stakes to investors at an unspecified time, possibly this year.
At that time the US dollar-denominated funds probably would be changed into renminbi, requiring the sale of dollar-denominated assets, academics said. To soften the potential shock to US capital markets, it was unlikely that the entire $45bn would be sold off simultaneously, they added.
On the issue of how the capital is to be used, current plans were revealing of future intentions. An official at the State Administration of Foreign Exchange (SAFE) and Mr Wang said the capital would not be spent on writing off bad loans, but instead be added to the banks' capital base - thereby boosting capital adequacy.
This will have several ramifications. The first is that the banks will be able to lend more. The second is that - in theory at least - the banks will become more attractive to potential strategic investors, helping to prepare for the sale of equity stakes to foreign and domestic investors possibly as early as this year.
Nevertheless, the banks' balance sheets may exhibit the unusual combination of robust capital adequacy ratios and high levels of non-performing loans (NPLs) for some time to come. One reason that the capital may not be used to write off NPLs is that such activities often require the liquidation of companies, something that it is politically sensitive in China.
Cheers