China is moving to strengthen its banking industry, starting with massive capital raising efforts by the four largest state-owned lenders and the formation of "bad banks" that will siphon off the soured debts accumulated by smaller banks in the countryside.

The Wall Street Journal reported that China's top banks are in the process of raising $73 billion through debt and equity sales to shore up its reserves, an initial step towards accumulating $300 billion over the next five years.

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Described as "one of most determined efforts ever by Beijing to restore health to the financial system," the move is expected to free up the flow of credit in the world's second largest and protect the banks from loans that may sour.

The pre-emptive strikes were first taken by the Industrial & Commercial Bank of China, Ltd. and Bank of China, Ltd., which raised 50 billion yuan ($8.7 billion) earlier this month, the report said. China Construction Bank Corp. and Agricultural Bank of China Ltd followed suit on Friday an similarly raised the same amount to add to their capital stock, it added.

The Wall Street Journal said the same banks are also set to raise billions of dollars by selling preferred shares thus raising equity without surrendering control.

In separate statements to the papers, JP Morgan Asset Management and Aberdeen Asset Management described the actions as part of efforts "to be much less state dependent and more market driven" and "defensive measures in case there is a sudden change in the economy and you see a big spike in non-performing loans."

On top of these, five local governments will be launching asset-management companies, or so-called bad banks, that will buy nonperforming loans from local lenders to ease the soured loan burdens of those companies, reported the Wall Street Journal.

It said this action is similar to the one taken by state agencies in the 1990s to have the top lenders transfer its bad loans to asset-management companies. This cleared the way for the biggest lenders to beef up their capitals through initial public offerings in the mid to late 2000s and robustly lend.  

The bad banks will be set-up in areas with provinces that have the highest debt burden:  eastern and southern China. The effort is seen to spread the bad debt burden around and extend their tenures, the the London-based Hermes Fund Managers, told the Wall Street Journal.

With lighter load of bad debts, the lenders are expected to resume extending credit to borrowers. The paper said new loans plunged to 385.2 billion yuan in July from 1.08 trillion the previous month, which shows bankers are growing skittish in lending despite the government's pump priming actions.

TagsChina banking industry