China pumps in £25bn to shore up two big banks

Click to follow
The Independent Online

The Chinese government has staged one of the biggest ever banking bail-outs, injecting £25bn into two large state banks in an attempt to strengthen the country's debt-riddled lenders.

China used a tenth of its foreign exchange reserves to pour fresh capital into Bank of China and China Construction Bank, which split the funds evenly.

The move comes ahead of plans by China's largest banks to float themselves on the stock market, letting them raise cash and compete with foreign rivals.

China has touted plans to list some of its big four banks by 2006 when, in line with World Trade Organisation commitments, it must give foreign banks unfettered access to a market flush with $1,300bn (£700bn) in personal savings.

The health of the financial system is also seen as crucial for China to maintain its blistering economic growth, widely expected to have reached 8.5 per cent in 2003.

Yet analysts estimate China's four largest state banks have at least 2,000bn yuan (£133bn) in bad debts, amounting to nearly a fifth of the country's annual gross domestic product. The cash injections were completed at the end of 2003 but officially confirmed yesterday.

The move was welcomed by analysts as a sign that the Chinese Government wants to crack down on decades of reckless lending by banks to unprofitable companies.

"It's a positive move. It indicates the efficient use of government resources to untie its financial difficulties," Tai Hui, an economist with Standard Chartered in Hong Kong, told Reuters.

While observers said the latest cash injections would not be enough to shore up the whole sector, shares in China's five listed banks still rose strongly.

China's big four banks, which also include the Industrial and Commercial Bank and Agricultural Bank, are saddled with bad debts that officially account for more than 20 per cent of total loans.

But many analysts say the ratios are closer to 40 per cent and regard most banks as technically insolvent.

An £11bn injection is thought necessary to help bring Bank of China's bad loan ratio down to about 10 per cent. The banks aim to reduce their ratios into single digits before attempting to list as public companies.

Bank of China, the country's largest foreign exchange bank, said the bail-out would narrow the gap between it and leading foreign banks.

Construction Bank, whose books are the healthiest of the Big Four, has already invited investment banks to vie for a mandate to help it go public, perhaps in 2004.