The Industrial and Commercial Bank of China stands accused of secretly adding a batch of class-five loans - those deemed least likely to be collected - into a batch of higher-grade, class-four loans set for auction this past weekend.

The news appeared on the Web site of Huarong Asset Management Company, one of four state agencies charged with disposing of the bad loans from state-owned banks.

The delay of the sale could threaten an auction set for next Monday in Tianjin that had already been postponed because foreign investors complained the process was unfair.

The auction, which was open to Huarong and its siblings, Cinda, Great Wall and Orient, was unexpectedly halted Friday by the People's Bank of China. It has been rescheduled for this weekend, though the asset managers want ICBC to reduce the maximum bid price for any of the 35 tranches on offer that include class-five loans. Huarong said in the statement that the four AMCs were dissatisfied about ICBC's actions, adding that it made their due diligence work "much more difficult.''

A Huarong official said Monday that the delay was "because of these issues.''

Both the the central bank and ICBC declined to comment.

The delay comes amid mounting evidence that the whole loan-disposal program is in disarray. The four AMCs were set up in 1999 to get rid of 1.4 trillion yuan of bad loans accumulated by the big four state-owned banks - Bank of China, Construction Bank, ICBC and Agricultural Bank. Yet they have managed so far to sell off a paltry US$6 billion (HK$46.8 billion) in bad debts - just 3 percent of the total - via open auctions to foreign and domestic bidders. The rest have merely been transferred between AMCs at inflated prices or sold off privately to domestic bidders for less than their true worth. Meanwhile China's banking system remains saddled with bad loans estimated at US$300 billion.

That Huarong and ICBC are at loggerheads is especially telling, since Huarong's specific mandate was to concentrate on getting rid of ICBC's bad debts.

The Huarong-ICBC imbroglio could also derail the Tianjin auction, now set for Monday. It was called off last week just a day before it was scheduled to take place after foreign investors including Citigroup, Morgan Stanley and Deutsche Bank threatened to boycott the sale. They complained that since Great Wall and Orient were likely to place bids, the process was stacked against them.

The AMCs, the foreign investors complained, were willing to pay more for the bad loans than they could reasonably expect to recover.

That sale, of 5 billion yuan of sour assets formerly owned by BOC, now could be shelved until late July at the earliest.

Some people involved in the disposal program had expected the ICBC auction to offer the asset managers a graceful way to skip the Tianjin sale - by saying they had made heavy commitments to purchase ICBC's bad debts - without having to be seen to openly bow to foreign pressure to withdraw. That face-saving excuse is now in jeopardy.

Further problems with the Tianjin sale will make it that much harder for Cinda to get on with the job of disposing of 280 billion yuan in failed assets it bought last June from China Construction Bank and BOC. ICBC last month sold 246 billion yuan of class-five failed assets to Huarong AMC, slashing its non-performing loan ratio to just over 13 percent from nearly 20 percent. The bank is being restructured to prepare for its transformation into a joint-stock bank by October or November, a necessary pre-condition to an eventual overseas share sale in which it hopes to raise US$5 billion to US$10 billion in 2006 or 2007.

elliot.wilson@singtaonewscorp.com