International Law

US to Implement Chinese-Style Toxic Asset Buy

American lawmakers appear to have shelved the frightful idea of "nationalizing" failing banks. However, they've now settled down to discuss -- from media commentary, frantically -- a plan that mimics the experience of modern Chinese banking regulators: the creation of a "bad bank" to remove toxic assets from the system.

You may remember that the Chinese banking system was (and remains) functionally bankrupt. [This article from 2005 is worthwhile reading.] Through deft financial sleight-of-hand, a satisfactory percentage of non-performing loans (NPLs) were removed to a state-controlled holding companies (AMCs), thus allowing, among other benefits, quasi-state-owned financial institutions to list on foreign stock exchanges, sporting "acceptable" NPL ratios. But NPLs continue to rise, despite Chinese statistics (read "notorious.") to the contrary. (Whom to believe?)

PWC Hong Kong's China NPL Investor Survey 2006 -- evidently the last issued, for good reason (remember that Ernst & Young retracted its NPL report of 2006 under pressure from Chinese regulators) -- states:

The size of the China NPL market is extensive. Based on the statistics provided by the China Banking Regulatory Commission ("CBRC") as at the end of the 3rd quarter of 2006, the total number of NPLs in China's commercial banks was approximately RMB1.3 trillion (US$160 billion). However, this amount does not include the NPLs that are presently held by the AMCs -- the only NPLs from China's banking system that to our knowledge are available for sale to investors.

It is difficult to estimate the amount of unresolved NPLs within the AMCs as they generally only report the amount disposed from their initial 1999 transfer loans of RMB1,400 billion (US$170 billion), and not amounts disposed from the various subsequent transfers made in 2004/05 which, based on press reports, we estimate total approximately RMB1,225 billion (US$153 billion). Recent press reports indicate that as of the second quarter of 2006, the AMCs have resolved approximately RMB1,169 billion (US$145 billion and paren of the 1999 transfer loans. That leaves a balance of RMB231 billion (US$30 billion) of the 1999 transfer loans that still need to be resolved and an unknown number of the RMB1,225 billion (US$153 billion) subsequent transfer loans requiring disposal. Whatever way you look at it, the AMCs still have a large number of NPLs on their books that they need to resolve.

It shouldn't surprise that foreign investors are no longer in the market for NPLs:

The China NPL market for foreign investors is very quiet and we expect it to remain so for some time. While there is supply and demand, only a handful of transactions have been completed this year and foreign NPL investors are leaving the market in droves. In addition, we have not noticed any new entrants to the market.

Now, with the U.S. very likely to purchase its own children's toxic assets, perhaps it will turn to China for expertise? With similar "success?"

And who will buy these assets, if they can be called that, from the proposed "bad bank?" And for what prices: who will determine them and by what method? Mark to market? What market? what astronomical sum would it, in fact, cost? No one, it seems, really knows...

Full post as published by Asia Business Intelligence on January 28, 2009 (boomark / email).