By John Pomfret
Washington Post Foreign Service
Saturday, January 16, 1999; Page A21

BEIJING, Jan. 15—Aiming to avoid the pitfalls of the Asian financial crisis and sidestep the troubles threatening Brazil, China has readied a plan to deal with the massive bad debt amassed by its four biggest banks.

In a recent interview, China's influential deputy finance minister, Lou Jiwei, said the government would establish asset-management corporations to absorb billions in debt for each of the major state-owned banks.

The plan, if successful, would for the first time free these banks from the crippling weight of the debt, which is estimated to comprise between 25 percent and 40 percent of all of the banks' loans. It would be a key step in China's plans to commercialize its major banks and remove them from the influence of local political bosses who routinely pressure banks to make bad loans to moribund state-run firms.

The restructuring plan is being pushed as concerns are mounting about China's financial sector. On Sunday, a major provincial bank, the Guangdong International Trust and Investment Corp., announced it was going into bankruptcy and revealed it had debts of more than $4 billion. Another southern Chinese firm, Guangdong Enterprises, owes $2.94 billion and appears close to bankruptcy. Hong Kong's stock exchange dropped precipitously during the week because of concerns over the fate of $10 billion in loans made by Hong Kong banks to the affiliates of Guangdong Trust and similar firms that were thought to have implicit Chinese government guarantees. Friday it rebounded slightly.

The plan also is unfolding as some Western analysts argue that China, fearing unrest caused by bankruptcies and layoffs, is reneging on its commitment to economic reform.

"The Chinese clearly are aware of how important it is that they get something going," said L. William Seidman, a former chairman of the Resolution Trust Corp. (RTC), who currently advises the Chinese government. "They're too much involved in the world economy to operate without a healthy banking sector."

Chinese officials have said the plan, which they have worked on for several years, is modeled on the RTC, which was established in the wake of the savings and loan debacle in the United States. Lou, in the interview, acknowledged that China learned much from the RTC but added that instead of amassing all of the banks' bad debts under one roof, it would be broken up into four organizations: the China Construction Bank, which will lead the charge, the Bank of China, Industrial and Commercial Bank of China and the Agricultural Bank of China.

Western financial analysts, however, took issue with the comparison. First, bad loans held by these banks comprise at least 20 percent of China's gross domestic product, which hovers near $1 trillion. This is much higher than the bad debts in the U.S. savings and loan crisis, which never exceeded 8 percent of the U.S. gross domestic product.

More important, the Chinese asset-management corporations apparently will have little of the freedom enjoyed by the RTC to restructure ailing firms and sell off the bad loans of the defunct savings and loans. In effect, the asset management firms will simply function as "debt collection agencies," said Andy Xie, a financial analyst at Morgan Stanley Dean Witter in Hong Kong.

"They'll go out and arrest people and expose some scandals, but they won't be able to auction off the bad debt like the RTC," he said. "It is actually very different. It is a micro-solution. It is not a macro-solution like the RTC."

Seidman said he also is concerned about the independence of the asset-management corporations. Under an initial Chinese plan, the People's Bank of China was going to run one corporation. Now each of China's four major banks will have its own corporation, raising questions about their ability to work together.

The first asset-management corporation will be set up to deal with more than $30 billion in debt held by the China Construction Bank. Western analysts said that corporation would issue bonds, backed by the Finance Ministry, for the amount of the debt. The bonds' interest rate will determine how many people want to buy them. In the past China has forced state-run firms and banks to buy bonds issued by government agencies.

Then the asset-management entity would attempt to collect bad loans. This activity is fundamentally different from the RTC. It also issued bonds, but its key activity was to find a market to sell the bad debts held by the savings and loans, often at a discount. Western analysts said the Chinese asset management firms will not be allowed to do this.

One obstacle, analysts said, is that China fears that if this debt is put up for sale, billions of dollars in Chinese currency will flow out of China's banks to buy it. This could trigger fears of a banking collapse.

In the case of the U.S. savings and loan crisis, much of the bad debt came from insolvent real estate ventures. In China, too, this is a huge problem. Xie estimated that today as many as 350 million square meters of office space stand empty in China. In addition, around $250 billion worth of industrial inventory is sitting unwanted in warehouses.

Furthermore, unlike in South Korea and Thailand, where Western firms were allowed to buy bad debt -- and thus pieces of local companies -- no Western firms will be permitted to participate in this process, blocking Western accounting methods and management skills from an area of the Chinese economy that is vastly in need of major reform.

Nicholas Lardy, an economist at the Brookings Institution and an expert on Chinese banks, said an underlying reason for China's unwillingness to sell its bad debts was its apparent reluctance to let deeply indebted companies go out of business. This is prompted by a concern about the growing number of unemployed, and increasingly embittered workers living in China's cities.

"They think they can go through this crisis without closing any of these companies down," he said.

Currently, any bankruptcy has to be approved by local governments, which place stability, not the survivability of the enterprise, above all. Last year, the People's Bank of China earmarked $30 billion to pay off bad loans and allow bankruptcies; this year it will rise to $40 billion -- still not enough to put much of a dent in the bad loan portfolio.