If the economy slows, the problems will get bigger. Central-bank officials say the total bad debts taken over by the AMCs should reach 1.2 trillion renminbi by the end of this year, representing about half the banks' bad debt. Although Beijing declines to say explicitly that it will back the AMC bonds, thereby hoping to press the asset managers to recover as much as possible, it will have no choice but to do so to ensure the state banks get repaid, analysts say. Healthier banks will make it easier for Beijing to introduce much-needed financial reforms, such as allowing banks to compete by setting their own interest rates and allowing companies to vie for household savings by issuing more stocks and bonds. Stronger banks also will be in a better position to face new foreign competition resulting from China's entry into the World Trade Organization.
Someone has to pay the piper, though.
The initial plan was for the AMCs to act like tough loan-recovery agencies, forcing repayment through threats of bankruptcy or converting loans into equity stakes that could be sold or used to implement management changes at state enterprises. But at the May conference, officials of the AMC and central bank said they wouldn't be following the RTC path. The hope is that by giving state enterprises time to work out their debt problems, lay-offs will be moderated and those firms with a chance to survive will do so through mergers or refinancing. In any case, China's bankruptcy laws assign top priority to pension and other welfare obligations, meaning that creditors like the AMCs would see little payout from forced liquidations. We must avoid a lot of bankruptcies that would affect social stability.