Beijing Bank Bailout May Help Farmers

With economic growth slowing, China must boost demand in the countryside. That starts with a government rescue for the Agricultural Bank of China

By Chi-Chu Tschang

A peasant farmer works near woven baskets full of bok choy on a farm on October 12, 2008 in Wuhan of Hubei Province, China. Photos/Getty Images

Among China's many troubled banks, the Agricultural Bank of China (ABC) has long given Chinese officials the biggest headaches. Established in 1979 to provide financial services to peasants, the Beijing-based bank has accumulated more bad loans—$120 billion at the end of 2007—than any other Chinese state-owned bank. For years, Chinese policymakers have debated proposals to reform the state-owned bank and turn it into a publicly listed commercial bank, but they haven't taken any action.

On Oct. 21, Beijing finally approved a restructuring plan. In the biggest bailout ever for a Chinese bank, ABC will receive a $19 billion capital infusion from the Ministry of Finance and from Central Huijin, a subsidiary of China's sovereign wealth fund, China Investment Corp.. Each will take a 50% stake in the bank. Agricultural Bank is the last of China's so-called "Big Four" state-owned banks to get a government bailout. Since 2003, the state has spent $60 billion to recapitalize the other three banks: Bank of China, China Construction Bank, and Industrial and Commercial Bank of China, and restructure them and list them in Hong Kong and Shanghai.

The global financial crisis, which has forced the U.S., British, and Dutch governments to nationalize banks, may have spurred the Chinese government to move at last. To be sure, ABC has the smallest exposure among Chinese banks to the subprime mortgages and other risky financial products which brought down Western banks, but Beijing apparently feels it's better to be safe than sorry. The bank has not released details of the restructuring, so it's unclear what will happen to ABC's bad loans. However, presuming the bank does shed its bad loans (perhaps through an asset management company) and is recapitalized, ABC's nonperforming loan ratio will fall to 4.1%, from 23.5% at the end of 2007. That should "improve the bank's ability to withstand risk and face the turbulence in the international markets," says Zhao Xijun, a Renmin University professor who consults for the Asian Development Bank, JP Morgan (JPM), and the China Securities Regulatory Commission.

Stimulating Domestic Demand

Already, China's economy is starting to feel the effects of the slowdown in the global economy. For the third quarter, China's gross domestic product grew 9%, its slowest pace since 2003. Beijing has been trying to boost domestic consumption, specifically in the countryside where 780 million people (more than half of China's population) live, to offset weak overseas demand. That's why the government can no longer afford a weak Agricultural Bank. "The global financial meltdown affects the farmers the least," says Shi Jianping, a finance professor at Central University of Finance and Economics. "To stimulate domestic demand, you need to start with the farmers."

Reforming the Agricultural Bank is one of a series of steps to boost demand in the countryside. On Oct. 22, the Ministry of Finance announced measures to help farmers and other low-income people by reducing to 20%, from 30%, the amount required for a downpayment on a house. The ministry also announced tax cuts for home buyers, including a temporary exemption from value-added tax. The government recently passed a land reform act that allows farmers to earn money by subletting, leasing, or transferring the rights of their farmland to factories. Rural villages are now allowed to organize their own credit cooperatives to provide financing to farmers.

Post-restructuring, the bank will return to its roots to serve China's rural areas, according to a statement posted on the bank's Web site. As China's other state-owned banks have listed overseas and in Shanghai and come under pressure from shareholders to earn fat profit margins, many have closed unprofitable branches in the countryside, creating a vacuum for financial services. The restructured ABC may go public as early as the middle of next year, although the financial crisis will make it harder to bring on strategic investors and sell shares. "Considering the recent financial crisis and market turmoil, to be honest it's not very easy to find qualified strategic investors," Senior Executive Vice-President Pan Gongsheng told journalists in Beijing.

Tschang is a correspondent in BusinessWeek's Beijing bureau.