In China's Baoshang debt repayment, haircuts of 30% possible: sources

BEIJING/SHANGHAI (Reuters) - Chinese regulators have issued instructions for the repayment of debts owed by China’s beleaguered Baoshang Bank that could see larger debts facing haircuts of as much as 30%, two sources with knowledge of the matter told Reuters.

Staff members are seen at the booth of Baoshang Bank at an investment and finance fair for small and medium sized enterprises in Beijing, China July 18, 2013. Picture taken July 18, 2013. REUTERS/Stringer

According to oral instructions detailed by the sources, regulators will guarantee the principal but not the interest on interbank debts between 50 million yuan and 100 million yuan.

Debts of more than 5 billion yuan ($723.47 million) will have no less than 70% of their principal guaranteed, the sources said.

For debts between 100 million and 2 billion yuan, regulators will guarantee no less than 90% of principal, and for debts of 2 billion yuan to 5 billion yuan, no less than 80% of principal will be guaranteed.

The People’s Bank of China (PBOC) previously said it would guarantee all principal and interest of corporate deposits and interbank liabilities below 50 million yuan.

The sources said implementation of the debt guarantees would be carried out at the provincial level.

“(The regulators’) mood is very clear, they want to clarify the plan as quickly as possible to stabilize expectations, and reduce potential risks as much as possible,” said one of the sources.

“But custodian banks have not yet made a move. This money can’t come out of custodian banks as they’re facing a lot of pressure, so we’re still waiting for relevant departments to provide liquidity support.”

Company registration documents posted on the website of China’s State Administration of Industry and Commerce showed the PBOC had established a deposit insurance fund management company, with registered capital of 10 billion yuan, on May 24, the day regulators took over Inner Mongolia-based Baoshang Bank.

The documents said the company will carry out equity, debt, and fund investments, and would manage assets related to deposit insurance funds according to the law.

China’s banking regulators were not immediately available for comment.

The rare takeover by regulators of a commercial bank has jolted financial markets, lifted interbank borrowing costs and stirred contagion fears.

Reporting by Cheng Leng in BEIJING and Zheng Li and Andrew Galbraith in SHANGHAI; Editing by Shri Navaratnam