China urges west to establish ‘bad banks’

By Jamil Anderlini in Beijing Published: February 17 2009 19:15 Last updated: February 17 2009 19:15 The US and Europe should follow China’s example and establish “bad banks” to manage toxic assets if they want to resolve the financial crisis, according to the head of China’s largest bad bank. In a rare interview Tian Guoli, chief executive of Cinda Asset Management Corporation, urged western governments to act quickly to avoid slipping into a protracted, Japan-style recession and stagnation. “Bad assets in a bank are just like a rotten spot in an apple – you must cut it out if you want to eat the apple and if you don’t get rid of it the rotten part will spoil the rest,” said Mr Tian. “Japan waited too long to remove bad assets from their banks and when they finally set up a bad bank, it was too late.” China’s financial system has been left relatively unscathed by the global crisis. It is barely integrated into the global system and the financial sector has been transformed in the past decade after near-collapse in the Asian crisis. Two state-controlled lenders, Industrial and Commercial Bank of China and China Construction Bank, are the largest and second-largest banks in the world by market capitalisation and are among the most profitable after the humbling of groups such as HSBC and Citigroup. “Who would have thought that these banks we used to revere, such as HSBC and Citigroup would have such big problems?” said Mr Tian. “Today, Chinese banks are beginning to have a voice in the world.” Members of the US administration have advocated a bad bank that could be modelled on the Resolution Trust Corporation, established in the US in 1989 to deal with the fall-out from the savings and loans crisis. European governments are considering a similar solution. China’s four bad banks, known as “asset management corporations” (AMCs), were established in 1999 and were themselves modelled on the RTC. Analysts say China’s decision to establish the AMCs was effective in revitalising the banks, but the problems were shifted elsewhere and have never been fully dealt with. In the past decade AMCs have received a total of Rmb2,400bn ($350bn) in non-performing assets from the banks, with Cinda taking about Rmb1,000bn of that, according to Mr Tian. China’s state auditor raised concerns last year that the AMCs were unable to repay the interest or principal on bonds issued to the large banks in return for their bad assets. Copyright The Financial Times Limited 2009