The short term result of the program appears

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Unformatted text preview: ividends and subsequent share repurchase from the SOEs at agreed-upon prices within ten years (Fung and Ma 2002), should the latter ever become profitable. Furthermore, local governments were often required to guarantee that the AMCs get first priority in exiting their equity stake through public listings or a change of control event. In addition to the AMCs, the banks themselves have also converted some of the NPLs into equity, although the exact amount is unclear. To date, around 580 SOEs converted more than RMB 400 billion of debt into equity rights held by the AMCs. The short-term result of the program appears impressive. The SOEs’ average indebtedness decreased from 73 percent in 1999 to 50 percent of total capital in 2000, and 80 percent of the companies turned to be profitable during the year (Ye and Zhai 2001). However, these figures were largely a result of the pure conversion of debt to equity and the termination of interest payments. The new equity stakes that the AMC inherited could remain worthless under Non-Performing Loan of China’s Banking System 141 Table�2�Disposal�of�Non-Performing�Assets�at�China’ s�AMCs,�June�30,�2006 (RMB in Billions) Total Cinda Great Wall Huarong Orient NPAs Purchased 1262.7 319.63 338.01 352.02 252.97 Accumulated Disposal 866.34 206.77 270.78 246.8 141.99 Cash Recovered 180.56 65.26 27.83 54.66 32.81 Disposal Ratio 68.61% 64.69% 80.11% 70.11% 56.13% Asset Recovery Ratio 24.20% 34.46% 12.70% 26.50% 27.16% Cash Recovery Ratio 20.84% 31.56% 10.28% 22.15% 23.11% Source: China Banking Regulatory Commission a new capital structure, if it is not accompanied by an improvement in the fundamentals of the SOEs. Therefore, the government will ultimately have to take a loss equal to a large fraction of the face value of the NPLs held by the AMCs. At the time of their establishments in 1999, the AMCs received RMB1,394 billion (US$168 billion) NPLs. The year 2000 was focused on organizational issues and debt to equity swaps. AMCs started to resolve NPLs from 2001. However, inexperience in this area and the lack of a vibrant venture-fund industry that specializes in buying distressed assets make the progress quite slow. In 2001, their first full year of operations, the AMCs resolved NPLs totaling RMB 124.5 billion. In 2002, they resolved RMB141.7 billion. Until the end of first quarter of 2006, they collectively disposed of RMB 866.34 billion, or about 70 percent of the total NPLs they acquired. It is required that the AMCs complete their missions by 2009. Further, the AMCs’ cash recovery rate of only 20.84 percent, or recovery of RMB 180.56 billion to date, was insufficient to serve the interest on the bonds they had issued and the loans they had acquired from PBOC in 1999 to fund the initial transfer of NPLs. The AMC’s total interest obligation is estimated to be about RMB 30 billion annually for five years, or a total of RMB 150 billion. Should NPL resolution continue at the current speed, the AMC could face considerable cash flow pressure. As evidenced in Ta...
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