Banks to Government: Send Money

It's time for the Chinese government to bail out two of its large insolvent banks. The banking system here is a disaster.

China will soon provide capital injections for the long-planned restructuring of state-owned Agricultural Bank of China and China Development Bank (CDB), the head of the fund that will carry out the recapitalisations said on Tuesday.

Lou Jiwei, chairman of China Investment Corp (CIC), did not give a detailed timetable.

But his comments provide the clearest official signal yet that the restructuring of both CDB and AgBank [ABC.UL] is imminent, particularly after AgBank earlier this month denied reports that its restructuring plan had won Beijing's approval.

The injections will be carried out by Central Huijin, an investment arm of the central bank that was acquired earlier this year by CIC, the government's fledgling sovereign wealth fund.

The restructuring they refer to looks a lot like an "Enron" restructuring. They create a number of subsidiaries, put all their non-performing loans to state-owned industries in them and market the parent as a model of solvency that only the Fed could love.

This isn't news to anyone, but I still don't understand the heavy investment these banks are seeing from western banks like Citibank and Bank of America. It is a tremendous risk.