China policy mantra signals privatization, securitization: official


Ever since Chinese Premier Li Keqiang used the cryptic phrase "revitalize the stock" in an official policy statement in June, market watchers have pondered what policies it entails.

A central bank official has told Reuters that according to his personal understanding, the phrase refers to packaging loans into securities and sales of minority stakes in state firms.

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Such reforms would be aimed at cleaning up bank balance sheets and bolstering China's welfare system, said the official, who heads a People's Bank of China branch in a major city and is a member of the National People's Congress, China's parliament.

China's new leadership has pledged to wean the nation off its addiction to investment and credit-fuelled growth in favor of a more consumption-driven model. A range of reforms are expected to be announced at a Communist Party meeting likely to be held in October.

Such re-balancing will require a more generous social safety net that can persuade Chinese households to save less and consume more, as well as cleaning up a banking system saddled with potential bad debts from China's 2008-2009 stimulus spending spree.

The official asked for anonymity because he is not authorized to speak to media about government policy. Branch presidents participate in official PBOC policy discussions, while the NPC votes to approve major policy initiatives.

Li told China's cabinet in June that China would "make good use of the flow and revitalize the stock," a phrase that top leaders have since repeated many times.

"If various levels of government can reduce their equity ownership partially, it will not only further advance state-owned enterprises reform, but also release some funding. That is 'revitalizing the stock,'" the official said.

Funds raised from stake sales could be used to shore up the national pension fund or finance more generous health-care benefits as part of Beijing's efforts to spur consumption, he said.

While the branch president's comments indicate some official support for privatization, such proposals remain contentious. A World Bank report in February 2012 that recommended gradual sales of partial stakes drew criticism that such proposals undermined the socialist foundations of the economy.


The official said he believed the other key reform signaled by Li was a proposal to allow banks to package some risky loans into securities that could be sold off, creating space on their balance sheet to support the economy with fresh credit.

"This is also 'revitalizing the stock.' And the commercial banks really need it," he said, predicting that the non-performing loan ratio would rise as China's economy slows.

Analysts say the official ratio, which is below 1 percent, clearly understates the scale of bad debt problems and they fear that banks will seek to avoid write-downs by keeping unviable borrowers on life support.

The official said that state-backed asset management companies would likely be the main buyers of securitized bank assets.

That could set the stage for a modified version of China's last round of bank recapitalization.

China set up four such companies up in 1999 to take 1.4 trillion yuan ($230 billion) off the books of the nation's Big Four banks. The companies raised money to buy the bad debts by issuing 10-year bonds backed by China's finance ministry.

But by 2010, those companies only recovered about a fifth of the value of the loans they had bought at or near face value, leaving them unable to repay the bonds. That forced the government to extend the bonds for another decade.

Last year, provincial governments were authorized to set up their own asset management companies to buy bad debt from smaller banks, but so far only Jiangsu, a wealthy province in southeast China, has formally established one.

"Credit asset transfer and securitization really isn't that innovative. Internationally, (the practice is) already quite developed. We're just taking readily available things off the shelf and putting them to use," the PBOC official said.

China began experimenting with asset-backed securities (ABS) before the 2008-2009 financial crisis, with the first deal issued by China Construction Bank <601939.SS><0939.HK> in 2005. But regulators halted these pilot projects during the crisis.

Securitization was cautiously restarted last year, but progress has been slow. Only 25.6 billion yuan in credit-based ABS are currently outstanding in China's interbank market, a tiny fraction of the 27.25 trillion yuan in total bonds outstanding, according to data from China's two main bond clearinghouses.

($1 = 6.1217 Chinese yuan)

(Editing by Tomasz Janowski and John Mair)