The bank, trying to cut its non-performing loans (NPLs) for an eventual stock listing, tentatively agreed to sell the bad assets to the US investment bank after months of talks.

"We have tentatively reached an agreement," said Yang Xiaoyang, head of CCB's asset-preservation department. "We are preparing to sign a formal legal document, and will submit it to the government for approval."

The deal would be similar to the one pioneered by Huarong Asset Management Corp, which received approval to form joint ventures with foreign investors, bank officials said.

CCB and Morgan Stanley had agreed on a price for the bad assets, and the deal would include some cash and revenue from the disposal of the bad assets through the venture, Yang said.

Bank officials declined to reveal the price, but Yang said CCB aimed to eventually recover between 25 and 30 per cent of the face value of the bad loans.

Covering a wide range of sectors, including real estate and factory equipment, bad assets were repackaged at branches in China's booming eastern provinces of Jiangsu and Zhejiang, and in the commercial hub of Shanghai.

But Yang said winning approval for a deal would be tough, as the government had yet to give the green light to bad loan sales by banks to foreign investors, despite Huarong's landmark deals.

"There are still uncertainties over whether we can get approval, or when we will be able to get approval," he said.

In December, Huarong received approval to form a joint venture with a Morgan Stanley-led consortium, and a second with Goldman Sachs to resolve some of the bad assets it had taken over, paving the way for a bid to offload US$170 billion in bad bank loans.

The government approved Huarong's joint ventures a year after the firm clinched deals with foreign investors.

China set up asset management firms - Huarong, Cinda, Orient and Great Wall - in 1999 to take over nearly 1.4 trillion yuan (US$170 billion) in bad loans from the Industrial and Commercial Bank of China (ICBC), CCB, Bank of China and Agricultural Bank of China.

The deal between CCB and Morgan Stanley, if approved, would help open a new channel for State banks to tackle an estimated 1.8 trillion yuan (US$218 billion) in bad loans, analysts said.

CCB made a pre-tax profit of 4.33 billion yuan (US$523 million) in 2002.

The bank made 34.43 billion yuan (US$4.16 billion) in gross profits last year, and used some of the earnings to write off 30.1 billion yuan (US$3.6 billion) in bad loans.

CCB made a 4.8-billion-yuan (US$580.4-million) profit from intermediary services last year, up 36 per cent from 2001.

The bank's non-performing loan (NPL) ratio fell to 12 percent by the end of 2002, based on traditional loan classification standards, said CCB President Zhang Enzhao.

China aims to cut the average bad loan ratio at its State banks by 2 to 3 percentage points a year - to 15 per cent by 2005 - to help them list shares amid rising foreign competition resulting from China's entry into the World Trade Organization.

(Business Weekly January 21, 2003)