Trade financiers welcomed the release in mid-May by Bank of China (BoC) of information on its bad debts. This is the first time one of China's big four banks has released meaningful and accurate data on non-performing loans (NPLs), although the volume of debts carried by BoC is not as great as some analysts had feared.

At 28.8 per cent of total assets, the level of NPLs carried by BoC is high by international standards but it is lower than the 40 per cent assumed in one London trade financier's 'worst case scenario' before the official figure was released.

Price stability

Because bankers had assumed BoC's indebtedness to be at least as high as the official figures revealed, the release of the data has made little difference to letter of credit (L/C) pricing. A banker at WestLB reported 'no change' in general L/C confirmation pricing as a result of BoC's disclosure according to International Trade Finance.

The London-based trade finance journal also reported that BoC's disclosure has not changed Westpac's view of the Chinese bank as the Australian bank's assumed level of NPLs was roughly in line with what is now reported. Little change to L/C pricing is expected as a result.

Prices have already been driven down by competition for Chinese business. Banks such as HSBC, Standard Chartered and BoC have quoted as low as 70-80 basis points for L/C confirmations following a steep fall in costs last year. Typical margins however remain in the range of 100-120bp.

Transparency ahead of Hong Kong listing

The BoC disclosure is made prior to the mainland bank's much-anticipated Hong Kong listing. The main difference in the figures released now is that the bank previously made no attempt to estimate the ability of lenders to repay loans.

The figure now released is generally considered to be reliable - ratings agency Fitch has commended the disclosure and said it was satisfied with the calculations used to reach the figure.

Flotation of BoC may take place later this year and would follow the merger of its Hong Kong branch with 10 sister banks operating in the territory, a process that should be complete by October.

These actions are expected to stimulate much-needed banking reforms in China. The mainland bank would gain new skills and technologies from its cousins in Hong Kong. The deal would also transform BoC into Hong Kong's second largest financial institution by assets after HSBC Holdings, hence enabling cuts in staff and other costs.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.