The State Council, China's cabinet, yesterday announced a long-anticipated move to boost the capital adequacy levels of its bad loan-laden banking sector, pumping a total of US$45 billion from its foreign exchange reserves into two major State-owned commercial banks.

The fresh capital infusion gave the banks a critical push in the process of their ongoing reforms that has a target of an eventual public stock offerings no later than 2006, when the banking sector is opened up to foreign banks under China's World Trade Organization commitments.

"There isn't much time left for the four State-owned commercial banks,'' said Xu Hongyuan, a senior analyst with the State Information Centre. "But such a move has an immediate effect (in improving capital adequacy ratios).''

The Bank of China and the China Construction Bank, which the State Council said yesterday were chosen for pilot joint-stock restructurings, each got US$22.5 billion. Their total capital adequacy ratios stood at 8.15 per cent and 6.91 per cent respectively at the end of 2002.

Despite increases in assets during the past year, their capital adequacy ratios will be at least close to the 8 per cent minimum requirement if not definitely above, analysts estimated.

The use of foreign exchange reserves in recapitalization, which is rare worldwide, has been an alternative to the more favoured means of a special Treasury bond issuance, which was dropped as China's debt-to-GDP ratio is approaching the 3 per cent alarm level, sources said.

Rating company Standard&Poor's, which said China's State-owned commercial banks need a recapitalization to have their credit ratings upgraded, said yesterday that information available so far is insufficient to estimate the implications on ratings.

"But the recapitalization absolutely has a positive effect on the overall performance of the bank as it provides additional resources to solve their problem of non-performing loans,'' said Ryan Tsang, a Hong Kong-based director of the rating firm.

Standard&Poor's currently assigns BB-plus ratings to the two banks, which is below investment grade.

Ryan said the use of US dollars instead of the local currency would not result in a major constraint on the recipients' operations. "There is no major difference if it comes in the form of cash,'' he said.

But he said the banks now would have to deal with the exchange rate risk and it remains to be seen how they use the new capital to increase their earnings and reduce the cost in bad loan write-offs.

Some analysts have expressed worries about the "non-net assets'' nature of foreign exchange reserves, a result of issuance of banknotes that are seen as central bank liabilities, but the State Administration of Foreign Exchange (SAFE) said the just-finished recapitalization has the same nature as previous ones the government had done.

In 1998, the central government injected 270 billion yuan (US$32.5 billion) of capital into the four State-owned commercial banks with the use of fiscal funds, which analysts said are the government's net assets.

The Ministry of Finance, the People's Bank of China and SAFE had set up a special company to handle the recapitalization and to, acting as a shareholder, urge the banks to implement reform measures and improve corporate governance.

"Meanwhile, it is consistent with the orientation of foreign exchange reserves,'' said a SAFE spokesperson, citing such reserves' function of "ensuring overall financial stability.''

China's forex reserves have been growing fast in recent years largely due to strong export increases. The number, after deducting the capital injection, stood at US$403.3 billion at the end of last year, up US$116.8 billion from one year earlier, the biggest annual increase.

The infusion did not have any negative impact on international financial markets, the SAFE spokesman said, dismissing rumours that China had been dumping its holdings of bonds for the recapitalization move.

A considerable part of China's forex reserves is held in foreign government bonds, mostly US Treasuries.

The news sparked strong buying interest yesterday in China's five listed banks. The Huaxia Bank, the liveliest of the five, rose 2.9 per cent to finish at 8.40 yuan (US$1.01), while Minsheng Bank climbed 3.36 per cent to 10.45 yuan (US$1.25).

Close

Today's Top News		Top Business News
+Changing careers in mid-stream ( 2004-01-07) +Deadline set for civet disposal ( 2004-01-07) +Premier demands licensing reforms ( 2004-01-07) +Constitutional amendment paves way for Emergency Law ( 2004-01-07) +Educational exchanges, expansion encouraged ( 2004-01-07)		+Telecom software firm shifts focus ( 2004-01-06) +Chinalco itching to invest abroad ( 2004-01-06) +Hongta makes West cigarettes ( 2004-01-06) +Nation to increase oil-supply security ( 2004-01-06) +Automakers to double JV production capacity ( 2004-01-06)