The State Council, China's cabinet, has given the green light to a scheme which could help the nation's four asset management companies (AMCs) speed up the recovery of their massive non-performing assets.

The scheme sets specific targets on how much cash the AMCs should recover from the distressed assets transferred to them, and total expenditures allowed in their work, sources said.

AMCs who recover more cash than the targets will be rewarded, or will have a reduction in their bonuses if they fail to meet them.

Their costs are not allowed to exceed the targets, and it is "highly unlikely" for them to keep their costs below the targets carefully set by the Ministry of Finance, they said.

It also significantly broadens the business scope of the four companies, allowing commercially-based NPL disposal business to pave the way for their operations after policy-based tasks are completed.

Approval of the scheme will effectively end uncertainties surrounding the future of the four companies, which are owned by the ministry.

"We have completed more than half of the work, and giving us a policy like this now will greatly help recover the non-performing assets, contain costs, prevent moral hazards and reduce the eventual loss of state assets," said a senior official at one of the four AMCs, who declined to be named.

The four state-owned AMCs China Huarong, China Cinda, China Orient and China Great Wall were set up in 1999 and took over a total of 1.4 trillion yuan (US$168 billion) in non-performing loans (NPLs) from the nation's four state-owned commercial banks.

Their establishment was a major step by the Chinese Government in the reform of the NPL-ridden banking sector, and followed a capital injection of 270 billion yuan (US$33 billion) into the four banks.

The AMCs were initially given a 10 year life span to "to the largest extent possible" recover the bad assets they took over. But, as they have managed to finish half of the job in some four years, and as criticisms about low efficiency and loss of state assets called their reason for existing into question, worries about their future became palpable last year among AMC officials.

"It was just not a good idea to expect asset management companies to do the job, we can simply set up special departments at the banks to do what they are doing," said Yi Xianrong, an economist at the Chinese Academy of Social Sciences (CASS).

The State Council's approval dispersed gloom over the future of the AMCs. "The new policy will change the situation of unclear goals and responsibilities, will help improve our operating mechanism, and will be helpful in achieving our tasks," the AMC official said.

The reform scheme also includes measures to ensure that the AMCs make further efforts to prevent risks, improve operating mechanism and optimize their decision-making process, he said.

Starting next month, state auditors plan to audit the four AMCs as their major task for this year, another source said.

The sources declined to disclose the specific targets, but stressed that they were decided by the Ministry of Finance after careful studies of historical data and analysis of the AMCs' NPL disposal plans.

The four AMCs had disposed of 509.4 billion yuan (US$61.4 billion) worth of NPLs at the end of last year, recovering cash equivalent to 19.5 percent of them, or 99.4 billion yuan (US$11.9 billion).

They are expecting to finish their job by the end of 2006.

The ministry submitted the plan to the State Council early last year, and spent months improving it before the final approval came late last month.

"So it has been a very prudent decision," the AMC official said.

As part of efforts to speed up their disposal work, and also in preparation for their commercial operations, the scheme allows the AMCs in principle to, after "basically" completing their policy task, engage in commercialized NPL management to make full use of their expertise accumulated during the years.

They are allowed to use their own capital to make additional investment in the part "with potential" of the distressed assets obtained in the policy transfer to maximize cash recovery.

Each of the four AMCs has 10 billion yuan (US$1.2 billion) in registered capital.

The AMCs now can also use their capital to purchase non-performing assets on a commercial basis, which they say is a huge market as Chinese banks become increasingly eager to clean their books to prepare for initial public offerings.

NPLs at major Chinese banks totaled a staggering 2.44 trillion yuan (US$293 billion) at the end of last year.

Their capital, which is currently held in bank deposits, can now also be invested in Chinese treasury bonds, the sources said.

The new business areas are currently forbidden as the finance ministry is still drafting implementation rules, the AMC official said.

Yi from the CASS endorsed a functional shift for the AMCs, stressing that only commercially based management can efficiently recover distressed assets.

(China Daily March 5, 2004)