Free Red Capitalism by Carl Walter, Fraser Howie Page B

audited to strict professional standards or, for that matter, to any professional standard. As with GITIC, no one could say with confidence how big the problem might be. Given Wang Qishan’s experience in having to answer an angry Premier’s questions about GITIC’s black hole, one can imagine the pressure people at the MOF must have felt as they sought to come up with a figure that would satisfy Premier Zhu.
    There was, of course, no time for a real audit, but someone was clever enough to come up with a number purportedly sufficient to raise bank capital adequacy to eight percent of total assets, in line with the Basel Agreement on international banking standards. This figure turned out to be RMB270 billion (US$35 billion). For China, in 1998, this was a huge sum of money, equivalent to nearly 100 percent of total government bond issuance for the year, 25 percent of foreign reserves and about four percent of GDP. To do this, the MOF nationalized savings deposits largely belonging to the Chinese people (see Table 3.2 ).
    TABLE 3.2 Composition of Big 4 bank deposits, 1978–2005
    Source: China Financial Statistics 1949–2005

    In the first step, the PBOC reduced by fiat the deposit-reserve ratio imposed on the banks, from 13 percent to eight percent. This move freed up RMB270 billion in deposit reserves which were then used on behalf of each bank to acquire a Special Purpose Treasury Bond of the same value issued by the MOF (see Figure 3.1 ). 2 In the second step, the MOF took the bond proceeds and lent them to the banks as capital (see Figure 3.2 ). This washing of RMB270 billion through the MOF in effect made the banks’ depositors—both consumer and corporate— de facto shareholders, but without their knowledge or attribution of rights.
    FIGURE 3.1 Step 1 in recapitalization of the Big 4 Banks, 1998

    FIGURE 3.2 Step 2 in recapitalization of the Big 4 Banks, 1998

    As part of the CCB and BOC restructurings in 2003, these nominally MOF funds totaling RMB93 billion for the two banks were transferred entirely to bad-debt reserves and then used to write off similar amounts of bad loans. 3 This left the Ministry of Finance responsible for repayment. For the banks this was a good deal, as the MOF was now obligated not just to “repay” what was originally the banks’ money anyway, but to use its own funds to do so. It is no wonder, therefore, that the bond maturities were extended to 2028, just as it is no wonder that the MOF did not support the PBOC approach to bank restructuring. How could it when, without the approval of State Council and National People’s Congress, it had no access to such massive amounts of money?
    Bad banks and good banks, 1999
    Having shored up the banks by such accounting legerdemain, work began on preparing them for an eventual IPO. Zhou Xiaochuan proposed the international “good bank/bad bank” strategy that had been used successfully in the Scandinavian countries and the US. This involved the establishment of a “bad bank” to hold the problem assets spun off by what then becomes a “good bank.” Zhou proposed the creation of one “bad” bank, called an “asset-management company,” for each of the four state-owned banks. It was a critical part of the plan that, after the NPL portfolios had been worked out, the AMCs would be closed and their net losses crystallized and written off, a process that was expected to take 10 years. In 1999, the State Council approved the plan and the four AMCs were established.
    The MOF capitalized each AMC by purchasing Special AMC Bonds totaling RMB40 billion or roughly US$1 billion each (see Figure 3.3 ). In line with the plan to close the companies, these bonds had a maturity of 10 years. But RMB40 billion was hardly enough to acquire bank NPL portfolios. More funds were needed and where else to get them but from the banks themselves? The AMCs, therefore, issued 10-year bonds to their respective banks in the amount of RMB858 billion (US$105