Approach accounts for 40 of the value of the

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Unformatted text preview: nk of China (PBOC) carrying a fixed interest rate of 2.25%; 2) financial bonds issued by AMCs to the selling banks 25 The first 2. approach accounts for 40% of the value of the transferred NPLs and the second for 60%26 Table 4: Transfer of NPLs to AMCs AMC NPL Acquired from Huarong ICBC Cinda CCB Orient BOC Great Wall ABC Total Source: Deutsche Bank Research 25 Deutsche 26 Amount of Total Assets of NPL Acquired NPL Acquired Selling Banks As % of Assets (RMB bn) (RMB bn) 408 3,540 11.5 350 2,201 15.9 267 2,904 9.2 346 2,276 15.2 1,371 10,921 12.6 Bank Asia Equity Research, Asset Management Companies, A Tough Job Ahead, Feb 12, 2001 John P. Bonin, Dealing with the Bad Loans of the Chinese Banks, p.21, Wesleyan University The AMCs are under the governance of three government agencies. First, the Ministry of Finance is responsible for administration. It provided AMCs with their initial capital and will bear the consequences of their operation. Second, the supervision of AMCs is the responsibility of the People's Bank of China. Finally, the State Economic and Trade Commission (SETC) is in charge of selecting SOEs for debt-equity swap. In November 20, 2000, the Regulations on Financial Asset Management Companies were passed. It provided a legal framework for the AMCs' status and business scope, operation and management as well as AMCs' termination and liquidation (Appendix I). AMCs' Multiple Roles The Asian financial crisis called for China's immediate banking system reform. However, the enormous amount of NPLs could not be resolved or written off overnight. As one of the most critical components of China's banking system reform, the AMCs were set up to play multiple roles: 1) as a temporary warehouse of NPLs to relieve burdens from the SOBs; 2) as debt workout agents to dispose of NPLs; and 3) as asset managers to restructure SOEs. As the temporary NPLs warehouse, the AMCs took over about half of the NPLs from SOBs, thereby helping SOBs to clean their balance sheets. With healthier balance sheets, SOBs can move toward further reforms in order to prepare for a new challenge - China's accession to the WTO. China made significant concession in the banking sector for the WTO entry, including: 1) foreign banks will be able to conduct local currency business with Chinese enterprises starting two years after accession; 2) foreign banks will be able to conduct local currency business with Chinese individuals from five years after accession; 3) foreign banks will have the same rights (national treatment) as Chinese banks within designated geographic areas; 4) both geographic and customer restrictions will be removed in five years 27. To solve their under-capitalization problem and to prepare for the fierce competition with foreign banks, all four SOBs have been seeking to go public. However, their weak financial health has been the main obstacle. The immediate task of setting up the AMCs was to relieve the NPLs burden from the SOBs. The four AMCs' core business is to dispose of NPLs through different approaches to minimize the loss. The enormous scale and the co...
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