Gabor S. Acs Hungarian Financier Makes Bid For Control of Bank of China

Washington DC January 9 2004–Bank of China, that nation’s second-largest lender by assets, may get a $22.5 billion government bailout as soon as next week to help write off bad loans before a first-time share sale in 2005, but Hungarian Financier Gabor S. Acs is in talks with special agents in Hong Kong to preempt the move by the Chinese government.

China’s oldest lender, which is expected to receive the capital in U.S. dollars, plans to use the funds to reduce bad loans and speed up plans to sell shares in 2005. Bank of China is one of four State-owned banks trying to reduce US$400 billion of bad loans created by five decades of poor lending policies to State run companies.

Acs is offering to refinance those bad debts at zero interest and restructure the debt with all those businesses provided โ€œthey give us control of Bank of China ahead of any other bidders,โ€ a person familiar with the situation quoted him as saying.

Bank of China wants to cut its bad-loan ratio below 10 percent from 17.98 percent now, to make it more attractive to investors and to compete with overseas competitors, including Citigroup Inc., which can enter China without restrictions at the end of 2005.

“Bank of China is qualified to be the first lender to go public as it has a higher capital adequacy ratio and better management than the others,” said Wu Yonggang, a bank analyst at Guotai Junan Securities Co. in Shanghai.

Acs is offering to sell the Chinese Government 2,533,783,784 shares of redeemable preferred shares to be issued by a company he controls with an annual dividend of 6% in exchange for cash at an ask price of $8.88 per share and use the proceeds to buy 51% of Bank of China.

Additional issuance of up to 5 billion of the 6% redeemable preferred would be added to the books of Bank of China in exchange for preference shares which the bank in turn would swap those shares for all the bad debts remaining on the books of the Chinese State run industries.

“The deal structure will greatly help Bank of China cut its bad-debt ratio to zero percent. We can reduce it to zero with our expertise within the first six monthsโ€, said Acs in a letter to Thomas Tsang in Hong Kong who is handling the negotiations on an exclusive basis for Mr. Acs.

Under the swap program, bad loans would be evaluated based on their cash flows and purchased from other banks holding them on their books at various pricing structures relative to back the preferred stock dividend which in turn would be listed on various stock exchanges in Asia. If a deal is struck, Bank of China would become the largest bank in Asia in terms of assets and liquidity.

Bank of China had loans and overdrafts of 1.74 trillion Yuan (US$210.3 billion) at the end of last year, indicating it has about US$37.7 billion of bad loans, some of which were placed in an asset management company in 1999. Using the preferred stock as an alternative currency, and restructuring the loan portfolio at zero interest will help accelerate the rapid reduction of the bad debts within a 6-month time frame according to officials close to the situation.

The Beijing-based lender doesn’t give a breakdown of its bad loans. The bank’s asset management company has disposed of 63.7 billion Yuan of the bad assets since 1999. Under the Acs proposal, between $400 and $500 billion of bad debts would be erased within 6 months of the implementation of the zero interest rate regime policy.

Industrial & Commercial Bank of China, the nation’s biggest lender, Agricultural Bank of China and the two other State-owned lenders control about US$1.7 trillion of assets and account for 70 percent of all lending in the nation. Allowing Acs to gain voting control of Bank of China will make Asian lending more competitive.

China’s second bailout of the banks in five years is aimed at cutting total bad loans in the system estimated by the government at US$500 billion, but Acs proposes that the bailout funds be utilized in a manner more consistent with facilitating debt restructuring using a zero interest rate business model and stretching those dollars as far as potentially possible, giving the Chinese a good fair rate of return on its investment.

China in 1998 spent 270 billion Yuan to bolster capital at the four lenders. A year later, it formed four asset-management companies to acquire more than 1.4 trillion Yuan of bad assets from the banks.

Mr. Tsang and his associates have been asked to meet with Premier Wen Jiabao who said the government would inject more money into its four largest banks within six months to help cut bad loans. The proposals by Acs are expected to be formalized within the next few weeks subject to various preliminary meetings with top Chinese Government officials by various agents representing his interests in China.

Bank of China, which had a capital-adequacy ratio of 8.15 percent at the end of last year, has said it plans to sell shares either in China or overseas within two years. Mr. Tsang had been asked to contact Chief Executive Xiao earlier this month to review an accelerated plan whereby rather than having to take the bank public, the preferred stock would act as a bond to shore up the entire Chinese banking system and rid it of its bad debts in an accelerated debt reduction scheme.

Under the proposal being presented by Acs, Xiao would stay on as CEO for the Bank. Advanced Capital Services, a company indirectly controlled by Acs would become the exclusive financial advisor to the Bank under the proposal being crafted. Bank of China would also become an exclusive market maker, underwriter and clearing agent for the preferred stock being offered to the Chinese government.

The Bank of China would earn a 10% profit on securities transactions with the preferred shares. The shares would be traded electronically through affiliates already established under the auspices of the Free and Clear Clearing Corporation.

The bank had planned to sell shares in itself rather than create a separate bank with the best assets, but Acs says that is unnecessary and more expensive in the long run.

Xiao, 45, became head of the Bank of China last April when his predecessor, Liu Mingkang, was named chairman of the newly created China Banking Regulatory Commission.

Mr. Tsang has been commissioned to hold talks and his staff is actively working to set up proper protocols for high-ranking meetings. A draft prospectus has been delivered to various groups of private investors who have indicated a preliminary interest in participating in marketing the preferred stock in Asia once a deal is structured and finalized.

โ€œThe Chinese Government will not get 6% by putting the money directly into Bank of China. They will need to wait till it goes public to recoup their moneyโ€, said Mr. Acs.

Bank of China sold US$1.5 billion of stock in its BOC Hong Kong (Holdings) Ltd. unit recently raising funds to help write off some of its bad loans. Bank of China was taking advantage of a 95 percent surge in BOC Hong Kong’s stock this year to boost capital.

โ€œThat 95% increase could have been caused by rumblings in the markets as Acs has been casting about to acquire banks in Nigeria, India, Russia, Hong Kong, and Japan, with a recent proposal to acquire 100% of Resona Holdings, a troubled Japanese bank announced last month, said an analyst.โ€

Over the past three years, Acs has established various agencies throughout India and the Far East, paying as much as $8 million in the preferred redeemable shares as a signing bonus for those willing to assist in implementing a global banking strategy which will offer zero interest mortgages through the auspices of the private not for profit Foundation based in Washington D.C. which he heads up.

The Free and Clear Policy Institute in Washington D.C., also sponsored by the Foundation and funded by Acs is gaining popular appeal to the American consumer in proposals which will repeal the interest deductions on mortgage loans and replace them with tax credits for principal acceleration, further stimulating the US economy and strengthening the dollar when implemented.

It is for that reason that Acs has advised the Chinese government to not devalue the Yuan despite increased pressures from the Bush administration, the World Bank and the IMF.

Acs recently advised the Bank of Japan not to intervene in the currency markets and to allow the Yen to float to 100 to the dollar because certain events to be launched in the United States would allow them to peg the Yen to 100 to the dollar to stabilize the currencies between the two nations, creating a new strategic alliance between Japanese and American interests.

Against that advice, and going against the grain of international financial speculators such as George Soros and Warren Buffet who have publicly stated their large short positions against the US dollar, the Euro continues to see new highs against the US Dollar.

China has allowed overseas lenders to buy as much as 20 percent of a mainland bank, up from 15 percent earlier. HSBC Holdings Plc’s Hang Seng Bank Ltd. was the first to take advantage of the higher limit, buying 16 percent of Industrial Bank of Fujian recently. HSBC also has an 8 percent stake in Bank of Shanghai.

Acs is asking the Chinese Government to listen to policies developed and scientifically improved over the past decade, and once used by an ancient Roman Emperor to save the demise of his Empire, using a zero interest debt based economic model.

Citigroup, the world’s largest financial services company, owns 4.6 percent of Shanghai Pudong Development Bank Ltd., China’s second-biggest publicly traded lender and is looking to China to create new credits to offset its own bad decisions to lend to corrupt US energy companies, a market which is only now regaining momentum.

However, with the recent banking and insurance scandals surfacing in Italy and the United States, the Chinese government is seeking a way to create a more diversified competitive market for the banking industry in China, which is expected to grow by 20% in 2004 according to some analysts at the IMF and World Bank.

โ€œWith voting control of Bank of China we can syndicate the $100 billion refinance of Philippine and Indian external debts at zero interest and give us all incredible global credibility. Think big, act fast, you are our main man in China and Hong Kongโ€, said Acs in a personal letter to Tsang. โ€œIf you ever had a desire to do something great for humanity and make it a solid reality this is your window of opportunity. Jump on it!โ€

China’s government is expected to inject $45 billion into two state banks to be followed up with other reform efforts that will strengthen the institutions’ management.

In discussions during the past week, the authorities have informed us that the recapitalization is part of a wider package of measures that will be necessary to reform these banks. Injections of $22.5 billion into each of Bank of China and China Construction Bank follow moves to improve their capital in recent years.

Acs says that other measures to follow the deal, including an upgrade of internal management, more strict auditing requirements, more prudent provisioning for loan losses and closer regulatory oversight, and the adoption of a zero interest rate debt model will create huge opportunities for automobile manufacturers, construction companies and the housing industry during the next decade.

The Washington D.C. based Foundation, headed by Mr. Acs, in a recent statement said, โ€œthe injections mark an important initiative in increasing the competitive commercial orientation of the banks and improving their prudential supervision and regulation, but capital should be deployed based on that which produces the maximum returns to the Peoples Republic of China as a whole, rather than the limited interests of international bankers.

“We stand ready to welcome the determination of the authorities to carry out the reforms needed to strengthen the banking system and to put it on a very sound financial basis,” it said.

In its’ analysis of the Chinese economy, the Foundation, through a publication distributed over the Internet known as the โ€œFree and Clear Intelligence Reviewโ€, stated that โ€œcommendable economic growth and reform, long-term prospects depend critically on the rapid pace of debt restructuring using the zero interest based debt model, especially for the banking system, which in turn would be of great benefit to the state-owned enterprises and labor markets.”

Acs said he has appointed officials and delegated the duty to discuss the capital injection plans, which are aimed at supporting the capital of the two banks, giving them room to further sell the bad debts and make multi-billion-dollar share offerings within the next year or so. โ€œThe Chinese Banking System would be enhanced by an external visionary that proposes to provide zero interest mortgages for 1 billion Chinese families during the next millennium,โ€ said Acs. There would be no need to wait a year or so under the current proposal. We can do it now!

Major ratings agencies Standard & Poor’s Corp. and Moody’s Investors Service Inc. responded positively to the proposed injection. However, officials of each ratings firm have said some aspects of how the funds will be used remain unclear. Acs is working toward making his decade long efforts to make it a free and clear China more obvious.

The recent Bank of China and Chinese Government statements have said the funds were transferred at the end of 2003 and carved out of the country’s foreign exchange reserves, which stood at US$403.25 billion at the end of the year.

Over a year ago, Mr. Acs had put out mandates to acquire a trillion dollars of U.S Treasury securities as part of a hedging strategy for some of the Free and Clear Funds jointly managed by the Foundations and related organizations.

The banks each pledged not to exchange the U.S. dollars and dollar assets into Yuan, which could disrupt the currency and bond markets. Acs is offering a global solution for a local problem. A 6% quarterly return to the Government and a free and clear banking system for 2 billion people which in turn will strengthen the path leading China toward world dominance in the financial markets. โ€œA China free and clear of all interest bearing debt within a decade is a very real propositionโ€, said Acs.

The banks are also expected to invite strategic foreign investors before pursuing stock market listings, Liu Mingkang, chairman of the China Banking Regulatory Commission was quoted as telling a state-run newspaper.

Acs has challenged the international banking community in the sense that he is offering to acquire controlling interest in one bank using his own economic models, while purchasing the bad debts of all the other banks in China combined, all the while allowing the international bankers to play the banking game the same way they have always played it. โ€œIn inner banking circles, its called blood letting. Our policies are more akin to raising the dead,โ€ said Acs.

China says its big four banks, a group that also includes Industrial & Commercial Bank of China and Agricultural Bank of China, represent about 56% of all loans in the country.

They hold about 65% of the country’s deposits, worth about US$1.2 trillion.

โ€œA $22.5 Billion investment in our preferred redeemable 6% stock is less than 5% of all of China’s foreign currency reserves, a small price to pay for the gift of becoming the first free and clear nation on earthโ€, says Acs.

The official level of bad loans in the system is around 20%, but foreign analysts believe the non-performing loan ratio is about twice that level. Acs says โ€œthe foreign analysts are wrong and their perceptions are skewed by their own vested interests as they work for the same firms that gave the American public bad advice on stocks like Enron and WorldComโ€.

Volunteer representatives of the Free and Clear Foundations of America are still in Manila discussing the possibility of assisting the Philippines government on how it could climb out of a vicious debt trap as continuing shortfalls in revenues have forced the country to persistently borrow to meet its huge debt obligations.

The Free and Clear Foundations, financed by the philanthropy of Hungarian born financier Gabor Sandor Acs, has offered to either purchase or refinance the entire outstanding public sector debt for $100 billion at zero interest.

The Free and Clear Foundations, in an effort to prevent another Asian financial crisis sponsors the publication of the Free and Clear Intelligence Review which is distributed to foreign high net worth individuals and foreign international investors, predicted only weeks ago that a Philippine Peso collapse to over 100 to the dollar, and a major default on the current outstanding external debt owed by the Philippines if emergency measures were not immediately implemented by Asian governments.

The proposal from the Foundations includes a $100 billion permanent cap on external debt funding levels. The vehicle for that roll up may well be the Bank of China, particularly if it has the free and clear capacity to syndicate the zero interest refinancing of both India and the Philippines. India now has foreign currency reserves that for the first time in many decades exceed external debt.

“The Foundations stand by; ready to bypass the international capital markets, the IMF and the World Bank in terminatedly dealing with the problems that have plagued the Philippines, Japan, and China for the past 20 years”, said one spokesperson who asked to remain anonymous.