Chinese banks are currently seeing an increase in non-performing loans. (Photo : Reuters)
The Chinese government recently built a "bad debt bank" using state assets in the municipality of Chongqing.
A result of the government's drive to weed out bad debts, the Chongqing Yukang Assets Management Company Ltd. was built from the state-owned Chongqing Yufu Assets Management Group Co. Ltd. This loan restructuring investment cost the Chinese government 5 billion yuan or $750 million.
Yukang's establishment is part of the government's loans-to-bond swap program, where loans to local governments are exchanged with bonds with longer maturities. This way, local governments can continue to implement public works even without municipal funding.
This new bank will also rehabilitate many state-owned firms in the city, many of which are sinking due to huge bad debts.
The loans-to-bond program has raised questions in the international financial sector. Many critics believe that this $612-billion effort will balloon into a financial crisis in China. Analysts believe that forcing banks to bail out state-owned and out-of-shape firms will cause more losses in the future.
Money Matters, a financial strategist group, believes that the government initiative is an effort to make banks look better than what they actually are. The acquisition of state-held firms makes the banks look healthy and entices more local borrowers in the process. Banks can also use this increase in bonds to attract new depositors and investors.
Despite criticism, the Chinese government is determined to pursue the loans-to-bonds swap, and has already gained footing in Chonqing.
The newly established Yukang Assets Management Company has already signed on 21 banks and has extended a total of 160 million yuan in credit line.
