China bails out two banks with $45 billion

China has injected $45 billion into two big state banks in a long-awaited bail-out of the debt-ridden industry, a major step towards strengthening the Achilles' heel of the world's sixth-biggest economy.
China used a tenth of its massive foreign exchange reserves to pour fresh capital into Bank of China and China Construction Bank, which split the funds evenly, government officials and bank executives told Reuters.
The injections, completed at the end of 2003 but officially announced only on Tuesday, pave the way for eventual initial public offerings of the banks. News of the bail-out sparked a rally in shares of Chinese banks.
The move was welcomed by analysts who have long fretted over the sorry state of China's financial system, weighed down by decades of reckless lending to unprofitable state companies.
"It's a positive move. It indicates the efficient use of government resources to untie its financial difficulties," said Tai Hui, an economist with Standard Chartered in Hong Kong.
Still, one foreign banker said more was needed to rescue a sector still plagued by corruption and cronyism.
"What is sure is that it's not going to be enough, but still it's a very positive sign," said a senior executive with a European bank in Beijing.
The health of the financial system is seen as crucial for China to maintain its blistering economic growth, widely expected to have reached 8.5 percent in 2003.
"It's becoming clear that the government is putting financial sector reform at the top of its list of priorities this year," said Dai Yizhong at Guotai Junan Securities."
China's Big Four banks, which also include the Industrial and Commercial Bank and Agricultural Bank, are saddled with bad debts that officially account for more than 20 percent of total loans.
But many Western analysts say the ratios are closer to 40 percent and regard most banks as technically insolvent.
Analysts estimate the Big Four have at least two trillion yuan ($240 billion) in bad debts and that a $20 billion injection would help bring Bank of China's bad loan ratio down to about 10 percent. The banks need to get into single digits before listing, they said.
Bank of China, the country's largest foreign exchange bank, has said it aims to list by 2005. Construction Bank, whose books are the cleanest of the Big Four, has already invited investment banks to vie for a mandate to help it go public, perhaps in 2004.