Bank of East Asia, Hong Kong's fourth largest bank, plans to expand its operations in mainland China to counter a slump in its home market. Chairman David Li told Bloomberg that the bank would upgrade its office in Beijing to branch status and would also upgrade its outlet in Chengdu, Sichuan province. Its insurance unit plans to open an office in Shanghai.
A slowdown in economic growth has affected banking in Hong Kong, where loans fell for a fifth consecutive year in 2002. Bank of East Asia's profits fell last year by a fifth, to HK$1.29bn. Operations in the mainland accounted for 12.3 per cent of the bank's profit, up from 11 per cent in 2001.
Banks need massive bailout A report published by US financial services giant Goldman Sachs calculated that China's state banks would require up to US$290bn to clean up their balance sheets and prepare themselves for sales of strategic shares to institutional investors. On an optimistic estimate of non-performance ratios, and assuming that assets could be resold at 50 per cent of face value, the cost of cutting bad loans to 10 per cent of the total and maintaining a capital adequacy ration of 3-4 per cent would be around US$97bn. However, with more realistic assumptions of 40 per cent of loans non-performing and a 25 per cent recovery ratio, the cost rises to US$290bn, equivalent to more than 20 per cent of China's gross domestic product.
The author of the report argued that the cost would be worthwhile in order to prevent a financial crisis, and that a cautious approach would not solve the banks' problems. Reports in the Chinese press had suggested that an injection of US$40bn was being discussed. This month, the government is expected to unveil proposals for reforms of the financial sector that would turn state banks into modern finance houses.