Tuesday, February 17, 2009

China's AMCs: Not the Model for US Banks

Financial Times reporter Jamil Anderlini scored a rare interview with the head of one of China's Asset Management Corporations (AMCs) which were set up in the late '90s to rescue China's state-owned banks. These AMCs injected 1.4 trillion RMB into the banks in 1999-00 by purchasing a load of non-performing loans (NPLs). They were so happy with the way that turned out that they injected another 1 trillion RMB in 2003.

Tian Guoli, CEO of the Cinda AMC, "urged western governments to act quickly to avoid slipping into a protracted, Japan-style recession and stagnation." By all appearances, "China's financial system has been left relatively unscathed by the global crisis." So the AMCs must have worked, right?

Not so fast.

In another article also posted to FT's website today, Anderlini analyzes the effect the AMCs have had thus far and concludes that things probably don't look as good as the AMCs advertise. While indeed relieving the Banks of their NPLs and shoring up their balance sheets, the AMCs are still sitting on most of the NPLs without much hope of recovery. In short, far from solving the problem with NPLs, the AMCs have simply swept them under the carpet.

“These AMCs must by now be massively insolvent because all the better assets have been sold and they have used the proceeds to pay the interest on the bonds they issued,” says Mr Lardy. (Nicolas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, D.C. speaking of bonds the AMCs issued to the banks in exchange for their NPLs at face value.)

Many of those bonds are due to mature in the coming months, however in dozens of interviews Chinese officials have proved unwilling to answer any questions on how the principal of bonds totalling at least Rmb1,000bn – the minimum face value of bonds thought to be still on their collective books – will be repaid to the banks.

In a report last year, China’s own state auditor said it was concerned that the AMCs were no longer able to pay the interest, let alone the principal, on the bonds they had issued to the banks.

While Tian is absolutely correct in urging the US to do something to fix its banks, his model will only work well in a government not bound by standards of openness and transparency. (And maybe someday not even the lack of transparency will prevent things from boiling over.)

The US acted fairly quickly to solve the huge S&L crisis in the late 1980s by establishing the Resolution Trust Corp, which did its job and then closed its doors by the mid-'90s. Ten years later, China's AMCs are still going strong with no signs of winding up business.

Another possible example is Sweden's rescue of its banks in 1992. In the latter case, the government took on bad assets in exchange for equity stakes in the banks. After a few years of working out the bad assets, the banks had returned to good health and the state sold its shares in the banks netting a profit for taxpayers.