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China closes ITICs in Hainan By James Kynge in Beijing - 1 Mar 2000 09:26GMT China has shut down an international trust firm in the southern province of Hainan and is set to close several more, signalling a renewed effort to clean up the operations of some 240 "Itics" - the vehicles through which local governments raise funds overseas.

Foreign creditor banks, which have lent several billions of US dollars to the international trust and investment companies, may have to take a "haircut" on debt repayments as the Itics are closed, merged or restructured, officials said.

The collapse in 1998 of the Guangdong International Trust and Investment Corp (GITIC), with debts of US$4.7bn, has forced its foreign creditors to write off a significant portion of their lending to GITIC.

The Hainan Hong Kong and Macao International Trust and Investment company was closed on Saturday because its debts far exceeded assets and "it seriously violated business rules", a government official, who declined identification said on Tuesday.

The trust company was small in comparison to many among China's Itics.

But in spite of its small size, the closure of the Hainan Hong Kong and Macao Itic is indicative of something much bigger, officials said. It signifies that authorities are preparing to shut or restructure the other Itics in Hainan, and thereafter throughout the country over the next several months.

"The general idea is that after the restructuring is over, only one Itic will be left in each province and municipality, apart from in Beijing, where there may be a few left," said one official.

The management of the Hainan Hong Kong and Macao Itic closure revealed that payment of foreign creditors is not a top priority. A task force set up by the Bank of China's asset management company, China Dongfang Asset Management Corp, has identified compensation for individual depositors as its top priority.

Other Hainan Itics have ceased operations and are awaiting either closure or restructuring. Saige Itic on the island has failed to pay staff for more than one year and has suffered a recent run on deposits, officials and Itic executives said. It is expected to be put into receivership soon, officials said.

The province's largest foreign borrower, the Hainan Itic, has ceased taking deposits and making loans, although it is still seeking creditors to help cover liabilities. The provincial government is keen to avoid closure for the Hainan Itic because of the negative impact that this would have on the provinces international reputation.

Its options, and those of another troubled Hainan-based Itic, the Huitong Itic - which has borrowed heavily from South Korean creditors - are limited to a bail out by either the provincial or central government, or closure and possible rebirth following a restructuring arranged by one of the "big four" state banks' asset management companies.

"I don't think the local government can afford to bail out all of the Hainan Itics. They will have to close them," said one financial official on the island in southern China.

-- Spoonfed (Spoonfed@spoonfeddd.xcom), March 01, 2000