surprising, therefore, that in August 2005, the PBOC created its own asset-management company designed to take “problems left over from history” off its own balance sheet. Huida Asset Management Company (Huida) was described in its brief appearances in the press as the fifth AMC and its operations since 2005 have remained mysterious since it did not sell its distressed-debt portfolios to outside investors. Huida was meant to operate as the twin to Huijin; Huijin made investments in the financial system that created problem assets while Huida was to collect on unpaid loans associated with such assets when and if they were taken on by the PBOC as part of its operations to maintain financial stability.
Huida, like Huijin, was a creation of the Financial Stability Bureau of the PBOC and all its senior management were staff in the Bureau, just as others were senior staff of Huijin. 9 But unlike Huijin’s bank investments, the PBOC wanted to remove problem assets from its own balance sheet. Consequently, the actual equity investor in Huida had to be a third party and, given its close connections with the PBOC, Cinda AMC was the obvious choice (see Figure 3.8 ).
FIGURE 3.8 The establishment of Huida AMC, 2005
What were included in such problem assets? 10 On Huida’s business license, the targeted assets were related to real-estate loans in Hainan and Guangxi and portfolios assumed as part of the GITIC and the Guangdong Enterprise bankruptcies. Interestingly, these figures are not included in Table 3.6 , but can be estimated at around RMB100 billion. 11 Despite such explicitness, financial circles at the time believed that the PBOC’s real intention was to put Huida in charge of working out the loans, totaling RMB634 billion, the central bank had made to the four asset-management companies in 2000. With a capitalization of just RMB100 million, whether it assumed the old problem assets or any part of the PBOC’s more recent AMC loans, Huida was going to be highly leveraged.
Assuming Huida did take on some or all of the PBOC’s AMC loans, such a transaction is illustrated in Figure 3.9 . As previously described, the PBOC made loans to Cinda AMC in 2000 to enable it to purchase, on a dollar-for-dollar basis, problem-loan portfolios from China Construction Bank. These loans became assets on the balance sheet of the central bank that it then sold to Huida. Huida could only pay for such loan assets, however, if the PBOC lent it money in turn, which appears to have been the case. The net result of such a transaction was that Huida owned the loan assets associated with Cinda, while on its own books, the PBOC now held Huida loan assets.
FIGURE 3.9 The transfer of AMC loan portfolios to Huida
The only problem with this arrangement is that Huida is a 100 percent subsidiary of Cinda AMC. In other words, Cinda’s loan obligations to the PBOC (and ultimately Huida) were being held by itself. If such accounts could be consolidated, then the assets would offset the liabilities and everything would just disappear! None of this makes sense, except from a bureaucratic angle: the PBOC was able to park problem assets off its own balance sheet and Cinda—as a non-listed, and undoubtedly non-audited, entity—had no need to consolidate Huida on its own balance sheet. At best, these loans became a contingent liability: if Huida could not collect, then the PBOC’s loan to Huida would not be repaid. As noted previously, contingent liabilities ( biaowai zhaiquan ) are not considered to be real in China’s financial practice; where in the national budget report are such things mentioned? A look at Cinda AMC’s excellent website fails to provide any proof of Huida’s existence as a 100 percent subsidiary. One wonders if there is a sixth or even a seventh asset-management company lurking out there in China’s financial system.
But this is all just window-dressing compared to the PBOC’s huge exposure to foreign currencies, shown as
Huida, like Huijin, was a creation of the Financial Stability Bureau of the PBOC and all its senior management were staff in the Bureau, just as others were senior staff of Huijin. 9 But unlike Huijin’s bank investments, the PBOC wanted to remove problem assets from its own balance sheet. Consequently, the actual equity investor in Huida had to be a third party and, given its close connections with the PBOC, Cinda AMC was the obvious choice (see Figure 3.8 ).
FIGURE 3.8 The establishment of Huida AMC, 2005
What were included in such problem assets? 10 On Huida’s business license, the targeted assets were related to real-estate loans in Hainan and Guangxi and portfolios assumed as part of the GITIC and the Guangdong Enterprise bankruptcies. Interestingly, these figures are not included in Table 3.6 , but can be estimated at around RMB100 billion. 11 Despite such explicitness, financial circles at the time believed that the PBOC’s real intention was to put Huida in charge of working out the loans, totaling RMB634 billion, the central bank had made to the four asset-management companies in 2000. With a capitalization of just RMB100 million, whether it assumed the old problem assets or any part of the PBOC’s more recent AMC loans, Huida was going to be highly leveraged.
Assuming Huida did take on some or all of the PBOC’s AMC loans, such a transaction is illustrated in Figure 3.9 . As previously described, the PBOC made loans to Cinda AMC in 2000 to enable it to purchase, on a dollar-for-dollar basis, problem-loan portfolios from China Construction Bank. These loans became assets on the balance sheet of the central bank that it then sold to Huida. Huida could only pay for such loan assets, however, if the PBOC lent it money in turn, which appears to have been the case. The net result of such a transaction was that Huida owned the loan assets associated with Cinda, while on its own books, the PBOC now held Huida loan assets.
FIGURE 3.9 The transfer of AMC loan portfolios to Huida
The only problem with this arrangement is that Huida is a 100 percent subsidiary of Cinda AMC. In other words, Cinda’s loan obligations to the PBOC (and ultimately Huida) were being held by itself. If such accounts could be consolidated, then the assets would offset the liabilities and everything would just disappear! None of this makes sense, except from a bureaucratic angle: the PBOC was able to park problem assets off its own balance sheet and Cinda—as a non-listed, and undoubtedly non-audited, entity—had no need to consolidate Huida on its own balance sheet. At best, these loans became a contingent liability: if Huida could not collect, then the PBOC’s loan to Huida would not be repaid. As noted previously, contingent liabilities ( biaowai zhaiquan ) are not considered to be real in China’s financial practice; where in the national budget report are such things mentioned? A look at Cinda AMC’s excellent website fails to provide any proof of Huida’s existence as a 100 percent subsidiary. One wonders if there is a sixth or even a seventh asset-management company lurking out there in China’s financial system.
But this is all just window-dressing compared to the PBOC’s huge exposure to foreign currencies, shown as
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