The central government injected US$45 billion into two debt-ridden state-owned banks yesterday, to help them recover from decades of bad loans.

The bailout allotted fresh capital from the country's bulging foreign exchange reserves to the Bank of China and China Construction Bank, the People's Bank of China announced yesterday.

The government gave US$22.5 billion to each of the two Beijing-based lenders, according to Wang Zhaowen, the BOC's spokesman.

The PBOC, China's central bank, said in a statement that the injection is part of reforms aimed at helping state-owned banks enlarge their capital bases, speed up disposal of bad debts and strengthen internal corporate governance in order to list on the stock market in the future.

The financial profiles of the two banks have been improving in recent years, but are still weak, said analysts.

The non-performing loan ratio of the BOC, the second-largest lender on China's mainland, stood at 22.4 percent at the end of 2002, compared with 27.51 percent a year earlier.

The NPL ratio for the CCB, the third-largest lender on the mainland, was reduced to 15.2 percent at the end of 2002, down from 19.35 percent at the end of 2001.

"The two banks have been making progress on their own, but the capital injection will free their hands to move more rapidly," said Jack Rodman, managing director of Ernst & Young Beijing.

"In my 10 years of experience managing NPL issues throughout Asia, there has never been a successful resolution of the NPL crisis without significant involvement and participation by the government," said Rodman.

The fresh capital injection does not come as a surprise to the banking community, as there has been plenty of speculation and leaked information about the move in recent weeks.

"Given the threat of competition from foreign banks to local banks in the next three to four years, it makes sense for the government to assist the reform of state-owned commercial banks' balance sheets by injecting capital," said Tai Hui, an economist with Standard Chartered Bank in Hong Kong.

During its bid to join the World Trade Organization, China pledged to fully open its banking market to overseas competition by the end of 2006.

Some analysts worry the capital injection will leave banks dependent on further bailouts from the government if loans go bad.

"These are genuine concerns, but the central bank also mentioned that the capital injection will come with responsibility to improve lending standards," said Hui.

Several state-owned commercial banks have already set up risk management committees reporting directly to the board of directors.

Industry officials did say that it was an appropriate choice to use forex reserves to restore the health of state-owned commercial banks.

"The current level of forex reserves (in China) is more than sufficient and drawing from it will not add additional burden to the government's finances," said Hui.

China's forex reserves, the world's second-largest after Japan's, rose to a record high of US$403.25 billion at the end of last year, a rise of US$116.84 billion from a year earlier.

(Shanghai Daily January 7, 2004)