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Weekly Updates"Consequently, in the early stages of the RTC's existence, real estate auctions were prohibited for fear that they would aggravate already distressed markets and damage the financial standing of banks and thrifts that were heavily invested in the real estate market" (FDIC, 1998, v.2, p.62). This prohibition was later lifted when it became apparent that it was inhibiting the rapid disposition of assets and increasing the cost of resolution.
In fact, the two distinctive asset disposition techniques used by the RTC in its successful handling of NPLs were (1) the creation and sale of large asset pools; and (2) the use of securitization. Nearly 500,000 loans were packaged for securitization. To accomplish this, a variety of collateral types were used: e.g., home mortgages, commercial mortgages, manufactured housing loans, leases and installment contracts on personal property. 71 of these transactions, out of a total of 74, performed extremely well (Glassman, 1998).
The RTC's effectiveness in the crisis can be attributed to the following five principles: (1) Throughout the entire process, the efforts of the RTC were coordinated with those of legislators. (2) Clearly defined roles and objectives for the FDIC and the RTC helped both agencies to remain focused. The RTC's resolution process was based largely upon the prior experience of the FDIC. (3) The RTC gradually adopted an evolutionary approach to resolution methods. (4) By using private-sector resources whenever possible, it saved a lot of time and money in the disposition of the NPLs. (5) By going to the public capital markets through securitization, it was able to achieve unprecedented results.
Over its seven-year life, the RTC succeeded in disposing of more than $410 billion in NPLs and other assets. While the pricing of early pools was low, prices rose quickly as investors became comfortable with the process of resolution and recovery. In the end, the government's losses on NPL resolution were much lower than originally predicted.
China's NPL Problem
The second relevant strand of literature for this paper is on the subject of Asian NPLs. Most work in this area has focused so far on the macro-economic or political and legal aspects of the debt resolution process [Olson (1999), Dornbusch and Giavazzi (1999), China Daily (2001)]. The micropricing aspect of the loans has yet to be given serious analysis. This is not surprising since the transactions that by definition would underlie any econometric analysis have occurred only over the last couple of years.
Two systemic studies of Chinese NPLs are worthy of note: 1) a survey report entitled "China's Non-Performing Loan Problems," (Watanabe, 2000); and 2) a working paper entitled "China's Asset Management Corporations," (Ma and Fung, 2002). The first of these fully explains the macro-mechanisms that have generated the bulk of China's NPLs. The second focuses on their scope and offers a theoretical deduction of the actual amount of the loans, as well as an analysis of the financial shortcomings of the resolution process presently being implemented by China's four AMCs.
In addition to the above two academic publications, there have been a number of articles in the financial press that trace the sequence of events in the NFL resolution process. These articles focus on the establishment and development of China's four Asset Management Corporations (AMCs) and the groundbreaking international auction of NPLs carried out by the Huarong AMC (Dow Jones International News, 2001; Financial Times, 2001).
The cover story of the February 2002 edition of EuroMoney Magazine was the first to offer an in-depth report on the auction process and to discuss the opinions of the various foreign investors and government officials regarding the value of the NPLs being auctioned.
PART II: NPL RESOLUTION IN CHINA
The underlying causes of China's NPL situation have to do with the way China has traditionally financed its multitude of state-owned enterprises (SOEs). The trials and errors resulting from the country's efforts to return to a market economy have complicated NPL resolution. The current NFL dilemma is the product of a legacy of central planning, and the main players in the drama are Chinese government officials, particularly members of local governments; in most decisions, third parties are conspicuously absent. The banks involved have acted primarily as government agents, disbursing funds to a variety of pre-determined projects without any preliminary credit analyses. Such analyses were never performed, nor was there thought to be any need for them, since all credit terms--the amount of the loans, loan maturity, interest rates, and so forth--were pre-determined by the government. Such a system could not help but generate irrational investment decisions, and these decisions frequently resulted in non-performin g loans.
Moreover, in China's transition to a market economy, there remain institutions that inhibit the maintenance of capital and traditions that have long since outlived their usefulness. Of these, the most serious is the lack of attention given to the maintenance of capital. This, more than anything else, can be blamed for the current NPL problem. In essence, State-owned enterprises (SOEs) have treated their share of credit allocations as government grants and used them to finance working capital and fixed investment. In too many cases, these disbursals have not been thought of as debt obligations that had to be repaid. Though state enterprises have been able to shift the consequences of their lack of foresight to Chinese banks, the banks have had no way to pass the burden on.
The overly optimistic expansion of credit that China experienced in the early 1990s was an additional source of NPLs. It overheated the economy and created runaway inflation. Domestic credit grew at the rate of 30% per year between 1991 and 1995, a rate significantly higher than the average growth rate of 21.3% in the 1980s. During that same period of time, real estate lending increased rapidly and fueled property development that was far beyond the limits of the country's demands. Many of the problem loans that now plague China's banks were created by the credit boom in the 1990s and by subsequent asset price bubbles. The majority of the country's NPLs are the survivors of loans to, and assets of, failed SOEs. This is a significantly different NPL scenario from that of the United States.
The Banking System in China
Since the banking reforms of the mid-1980s, the People's Bank of China (PBOC) has been turned step-by-step into a central bank. Three policy banks have been established to take up the job of policy lending, and the four state-owned specialized banks are being gradually transformed into commercial banks. Meanwhile, thirteen shareholding commercial banks and four public-quoted banks have been set up. 75 credit cooperatives were turned into city commercial banks, and 65 foreign banks have set up 155 branches and 248 representative offices.
The three policy banks are:
* The China Development Bank (CDB)
* The Export and Import Bank of China (Chexim)
* The Agricultural Development Bank of China (ADBC)
Policy banks, with mandates from the national government, use their capital to support infrastructure construction, develop basic and mainstay industries, release bottlenecks, and adjust industrial and local economic structures. After the 1994 bank reforms, three policy banks started to issue Policy F-bonds to commercial banks and other non-bank financial institutions.
The "Big Four" dominant state-owned commercial banks are:
* The Industrial and Commercial Bank of China (ICBC)
* The Agricultural Bank of China (ABC)
* The Bank of China (BOC)
* The China Construction Bank (CCB)
Because the "Big Four" hold a crucial position in China's national economy, the central government has required them to sort out their assets and restructure into "true commercial banks" within the next five years. By that time, they will have to compete in a market that will be fully open to foreign financial institutions.
The "Big Four" face disadvantages and advantages for competing against Western banks. Their disadvantages include the current overhang of huge bad loan portfolios; they lack modem banking products; they have many uncreditworthy customers (SOEs); and they are overstaffed and over-branched. Their advantages are that they are too big to fail: they dominate about 80% to 90% of China's banking assets. They retain profitable customer bases, widespread branch networks, and government support for building competitive infrastructures. The government is using AMCs to purchase the banks' bad loans at apparently full-book value with bonds guaranteed by the state.
Over the next five years, the Chinese government wants to transform the "Big Four" into modem strongly competitive commercial banks. Some state-owned commercial banks will be restructured to become state-controlled shareholding commercial banks. Cutting down on the number of NPLs has become a reform priority, with impressive results having been achieved. In April, the ICBC became the first to make public its NPL rate, and it was followed by the CCB and the BOC.
Moreover, commercial banks are now competing for the efficient resolution of NPLs in an effort to prepare themselves for competition with foreign banks and to obtain a better chance to go public through an IPO before their peers do. Chinese central bank chief Dai Xianglong has urged the four big banks to reduce their bad loan rations from 28% to 13% of their total lending over the next five years.
Non-state-owned Banks
In addition to the state-owned banks, there are two types of non state-owned banks: One is called a shareholder-owned bank and is actually owned by investors, private citizens, and corporations: the CITIC, the Bank of Communication, and municipal commercial banks, such as the Beijing Commercial Bank and the Bank of Shanghai are all banks of this kind. The other type includes four banks that trade on the stock exchange: they are the Shanghai Pudong Development Bank, the Minsheng Bank, the China Merchants Bank, and the Shenzhen Development Bank, the previous Hainan Development Bank, etc.
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