Bad Bank Loan Solution Looks Good If Transparent
After several years of trying to figure out what to do with billions of dollars in problematic loans made by Chinese banks during the global financial crisis, Beijing may be close to a long-term solution with plans to create a special market for selling off those loans. Central leaders should be commended for finally addressing a problem that has been hanging over China’s banking sector for the last 2 years, putting the nation’s financial recovery at risk. At the same time, this latest rescue plan once again underscores the close relationship between China’s major banks and the central government, which often prevents them from behaving like true commercial banks.
To move towards its long-term goal of creating true commercial banks out of giants like ICBC (HKEx: 1398; Shanghai: 601398) and China Construction Bank (HKEx: 939; Shanghai: 601939), Beijing should not only clean up their books of these problematic, policy-driven loans, but also require a transparent disposal process that lets everyone see which loans are being sold and at what losses.
The ongoing loan crisis at China’s biggest lenders dates back to 2009, when Beijing rolled out a 4 trillion yuan stimulus program to boost the economy at the height of the global financial crisis. Much of the extra stimulus spending came from China’s banks, whose lending nearly doubled to a record 9.6 trillion yuan ($1.5 trillion) in 2009 at the height of the program.
A big portion of the jump in new loans went to local governments for infrastructure projects, many of them unnecessary and with no real income-generating capacity to repay the debt. As a result, the banks are now burdened with billions of dollars in loans that have little or no chance of being repaid.
Beijing has helped the banks find short term solutions by letting them roll over many of the loans to avoid having to classify them as bad debt. It has also let many banks raise billions of dollars in new funds to strengthen their balance sheets for the inevitable big write-downs.
But up until now it has yet to find a long-term solution for how to let the banks dispose of the problematic loans. That looks set to change, following media reports that Beijing is developing a trading platform to allow the big lenders to sell their loans. (English article) Such a platform would allow banks to get the best possible prices by selling to a wide range of both public and private buyers.
This plan looks like an innovative way to finally end the latest bad loan crisis, repeating a similar process about a decade ago that saw the big banks sell off their bad assets to private investors before making massive public offerings in Hong Kong and Shanghai.
Since the banks are now publicly traded, they should be required to clean up their books in a transparent way by letting investors see which loans they are selling and the size of their losses. Once that happens, they should be encouraged to make future loans based on commercial rather than political considerations to avoid another future crisis.
Bottom line: The creation of a marketplace for China’s bad bank loans looks like a good solution to the problem, as long as the process is transparent.
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