Chinese Banks Sell Bad Debts to Itself:Who Are the Victims?
Days ago,several Chinese major state-owned banks found
“a new trick"to handle their bad loans.
They are selling distressed debts to their subsidiary
By doing this,those banks not only make their accounting
books look better,but also reduce their losses significantly.
However,such an insidious trick has shocked foreign media.
An expert said those banks are trying to transfer distressed
debts to ordinary people through their investment units.
Probably those subsidiaries will finally go bankrupt
and leave those debts unsettled.
On March 27th,president of Bank of China Chen Siqing made
an announcement in a press conference at it’s headquarters.
Chen said the Bank of China would battle to protect its asset
quality in 2014.
Resolving nonperforming loans via investment bank units is
exactly one of the measures that Chen mentioned the bank
would take in the “battle."
A Wall Street Journal report wrote that Bank of China"has
started a new strategy of unloading soured loans to its
investment-banking unit,which then would try to restructure
It was reported that Industrial and Commercial Bank of China
(ICBC),China Construction Bank(CCB)and Agricultural Bank of
China(ABC)were considering using similar strategies.
According to the Wall Street Journal report,"With the
investment-banking unit expected to pay more than an
outside investor,the bank would be able to record lower
“The problem loan would be off the bank’s balance
sheet after the sale under Chinese accounting rules."
Ren Zhongdao,Chinese financial analyst:"Selling bad loans
to its subsidiary units can make account books look healthier.
More interestingly,bad records will no longer be seen for
parent banks as they are transferred to subsidiary units.
Anyway those units can go bankrupt if the condition becomes
worse,and distressed debts can be left unsettled in that way."
However,western accounting rules usually do not regard
intra-company transactions as real sales.
It was reported that investors have become increasingly
skeptical of Chinese banks’balance sheets.
Xie Tian,Professor at University of South Carolina Aiken
School of Business:"In a regular financial system, there is
strict division between normal banks and investment banks.
You cannot use money from saving accounts for investment,
buying stocks or other public funds.
Money for Investment is not protected by federal
insurance for savings."
In its annual report,Agricultural Bank of China claimed that
it"diversified the measures"in handling bad loans,and so
had doubled write-offs of bad debt.
A high-level official from Bank of China said,after investment
banks accepted bad loans,they might need to inject more
capital into a struggling project to make it pay off later.
Xie Tian:"On one hand,distressed debts may result from
economic decline,overcapacity and shrinking markets.
On the other hand,many bad debts are largely due to
If the Chinese Communist Party(CCP)simply tries to fill
the hole without solving that problem,the hole can only
become even bigger.
More money will be embezzled,and essentially the situation
is the same as always:"the party’s interest groups plunder
money from all Chinese civilians in disguised forms."
Traditionally,the CCP’s state-owned banks usually disposed
of nonperforming debts by selling them to state-owned asset-
management firms,such as China Cinda Asset Management.
In 1999,China Construction Bank(CCB)sold bad assets
worth of 250 billion Yuan($40.2 billion)to Cinda.
Cinda only paid 3 billion Yuan($0.48 billion)by cash,
and issued the rest(247 billion Yuan)in 10-year bonds
with a friendly 2.25% interest rate back to CCB.
So after asset-management firms accepted bad debts from
state-owned banks,they would benefit from state-level
financial support and other subsidies.
They can make a lot of money from that.
For example,in 2004 the Ministry of Finance issued a notice
saying If Cinda was not able to make full payment of interests
for historical debts,the ministry would provide financial help
In September 2009,the ministry again announced that it
had extended Cinda’s bond term from 10 years to 20 years,
continuing to assist Cinda in paying all debts and interests.
Ren Zhongdao:"Indeed the party is giving warrant with
its state credit.
That is,it is still Chinese people who are forced to pay the bill.
We all know that the CCP runs no company or business itself.
It always turns out that the CCP make all Chinese
pay for bad results due to their faults."
Xie Tian commented that,now that the CCP’s banks are still
deceiving Chinese investors by selling bad debts to investment
units,China’s financial problems are visibly worse.
However,no matter what strategy the party uses,it can
hardly escape the bursting of all its assets in the end.