In addition npls have to be disposed of quickly in

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Unformatted text preview: mplication as well as the extensive geographic distribution of NPLs make the workout process an arduous task for AMCs. In addition, NPLs have to be disposed of quickly in light of the ice cream theory, i.e., the longer the NPLs in the book, the less value could be recovered. The AMCs also play the role of a turnover manager for the financial and operational restructure of SOEs. Due to the lack of investment banks and venture capitalists in China, the AMCs have to perform a host of tasks required to restructure SOEs and promote their eventual financial viability 27 28 28 Yi-feng Tao, The Impact of WTO Accession on China's Financial System, 11/01, National Chengchi University John P. Bonin, Dealing with the Bad Loans of the Chinese Banks, p.22, Wesleyan University The Kinds of Assets in the Non-performing Loan Pool The NPLs at the SOBs can be classified into four major categories by source: 1) NPLs from policy lending to loss-making SOEs; 2) NPLs from real estate and stock market bubbles; 3) NPLs from loss-making enterprises due to banks' poor lending decisions; 4) NPLs from intentional default due to bad credit culture 2 9 (Table 5). Table 5: NPL Category NPL Category Policy Lending Real Estate and Stock Market Bubbles Loss-making Enterprises Intentional default Source: Estimate from Theory and Practice of AMC Operation Percentage 40% 30% 15% 15% Depending on the parent bank's specialization, each AMC has a different combination of assets. For example, 40% of NPLs assumed by Cinda from China Construction Bank are real estate and construction related NPLs (Chart 1). Great Wall, the AMC for Agricultural Bank of China, has a high concentration of NPLs in agriculture related industries. Huarong, the AMC for Industrial & Commercial Bank of China, has a high concentration (about 68%) of NPLs from SOEs (Chart 2). Broken down by collateralized status, 42% of Huarong's NPLs are unsecured, 36% guaranteed and 21% collateralized (Chart 3). 29 Zhou, Yi, Theory and Practice of AMC Operation, 01/2002, Page 19, China Price Publishing House. Chart 1 NPLs of Major Industrial Sectors 80 - - 0 702250- S40NPLs ca 30 0 Industrial Sector Source: profile. 07/2002 Chart 2 Huarong - Breakdown By Type of Borrower 0 Others 12.00% 0ndividuals I 0 Joint-Stock Co 4.50% \.0 N Collectives 15.20% %SOEs 68.00% Source: Deutsche Bank Research Chart 3 Huarong - Breakdown by Collaterized Status Mortgaged Loans 21.88% Guaranteed Loans 36.06% Deutsche Bank Research Pledged Loans 0.10% Unsecured Loans 41.96% Major Workout Approaches Debt-Equity Swap The AMCs' first and most essential task is to complete debt-equity swap for SOEs selected by the State Economic and Trade Commission (SETC). In August 1999, the SETC came up with five criteria for selecting debt-equity swap candidates: 1) products must have acceptable quality with certain market shares domestic or abroad; 2) the SOE owns state-of-the-art technology and equipments for the production as well as conforms to the environmental regulations; 3) the SOE has sound governance with complete debtor-creditor documentation and appropriate accounting practice; 4) the SOE has strong management team; and 5) the SOE has a feasible restructuring proposal and effectively implementation of all the necessary measures including downsizing, improving profit an...
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