The First Physical Assets Portfolio Project of China Achieved Initial Success

Recently, China Construction Bank (CCB) and the Deutsche Bank completed the asset delivery, as provided in the Agreement of Asset Transfer signed on June 30, 2004. China Construction Bank received all transaction funds of RMB 327 million from the Deutsche Bank. China Construction Bank has formally handed over the related files and documents to the Deutsche Bank. The successful completion of this delivery marks that the first Physical Asset Portfolio Project, which is focus of the banking industry, has achieved initial success in China.

On February 2004, CCB made an official announcement to start the open and competitive auction to sell its non-performing asset portfolios of northern, central and southern regions, which added up to RMB 4 billion. The announcement immediately attracted the attention of the society. The people from different circles generally believe that it is an innovative move for the state-owned commercial banks to deal with non-performing assets and a big step to the market-based handling of non-performing assets. Before the deadline of the quotation, China Construction Bank has received Forms of Quotation from 8 investment agencies. In the severe competition, the investment consortiums led by Morgan Stanley and the Deutsche Bank became the final winners, with Morgan Stanley winning two portfolios and the Deutsche Bank winning the portfolio of the northern region, which covers the real estate projects in Heilongjiang and Inner Mongolia including office buildings, retail shopping centers, hotels, multi-functional buildings, apartment blocks, factories and open grounds.

Packaging the non-performing assets means combining certain amount of creditor’s rights, equities and physical assets into a portfolio. Then the portfolio will be dealt with through debt restructuring, transfer, public bidding, auction, and replacement. During the Asian financial crisis, the Republic of Korea founded KAMCO, which has succeeded in dealing with its non-performing assets. The international experiences demonstrates that the commercial banks can deal with the non-performing assets by packaging, handle large amount of non-performing assets rapidly and save the disposal cost at the same time.

Starting from 2001, CCB learned from the international experiences and fastened the pace of disposing of non-performing assets. Such measures as international public bidding, selling the asset portfolios, auction, debt restructuring became new approaches for China Construction Bank to dispose the non-performing assets. After 2002, public auction of non-performing assets became the main disposal method. China Construction Bank launched the auction to sell these assets. These methods played a positive part in improving the asset quality of China Construction Bank.