Is China actually bankrupt?

Discussion in 'Economics' started by Free Thinker, Mar 12, 2010.

  1. That became a problem when, in the aftermath of the currency crisis, China's exports fell. That sent revenue plunging at state-owned companies that were already losing money. Suddenly, China's banks were sitting on billions and billions of debts that anybody who'd taken Bookkeeping 1 in high school could tell were never going to be paid. This was especially a problem for China's biggest banks, all of which had ambitions to raise more capital -- and their international profile -- by going public in Hong Kong and New York. But no bank could go public with this much bad debt on its books.

    What to do? Why not bury the bad debt?

    The Beijing government created special-purpose asset management companies for the four largest state-owned banks, the Industrial and Commercial Bank of China (IDCBY, news, msgs), the Agricultural Bank of China, the Bank of China (BACHY, news, msgs) and China Construction Bank (CICHY, news, msgs). These asset management companies -- China Cinda, China Huarong, China Orient and China Great Wall -- would ultimately wind up buying $287 billion in bad loans from state-owned banks. The majority of those purchases were at book value.

    So how did the asset management companies pay for the purchase of that $287 billion in bad loans? They certainly didn't pay cash. Instead, they issued bonds to the banks in exchange for the bad loans. The bonds, of course, were backed by the promise that the asset management companies would gradually sell off or collect on the bad loans in time to redeem the bonds. And in the meantime, they'd pay the banks interest on those bonds.

    Neat, huh? In one swell foop, the state-owned banks got $287 billion in bad loans off their books and turned deadbeat loans that would never pay off into streams of income from these bonds. To read more on this neat bit of financial engineering, check out this research paper (.pdf file).
  2. It's been like this even during the Boom times.

    What do you expect? It's a Communist nation.