Pressure on Chinese banking system

[Chris Burford <cburford@xxxxxxxxxx>]

One crucial factor in the development of the world economy is whether
regions other than the USA can go on accumulating capital/surplus and
keeping their economies circulating.

Clearly China has made many compromises along the capitalist road, but it
is not yet clear whether it has lost overall control over its economy.

And the extract below suggests in the eyes of the writers there is no moral
fault in state intervention in stabilising the capital market.

Does anyone know how China may try to stabilise the situation?



> Beginning in 1999, the Chinese government sought to resolve these concerns
> by relieving the four big banks of $170 billion worth of bad loans - 12
> percent of loans outstanding - and then writing off the loans or reselling
> them, following the same general approach that worked for the United
> States after the savings and loan crisis.


Chris Burford



from



Experts worry over loans by big banks in China Keith Bradsher The New York
Times Saturday, May 11, 2002


HONG KONG Financial experts are expressing grave worries about the solvency
of China's banking system, which may have a bad-loan problem several times
as bad as Japan's.

The head of China's central bank said recently that 25 percent to 30
percent of all bank loans were not being repaid.

On Thursday, the credit-rating agency Standard Poor's estimated that the
situation might be twice that bad, with half of all loans classifiable as
nonperforming. And the agency found signs that the banks were busily making
matters worse.

Without a robust banking system, it will be increasingly difficult for
China to sustain rapid growth, attract foreign investment and develop the
modern economy it needs to provide jobs and maintain social stability at a
time of widespread disillusionment with the Communist ideology that united
the country for 50 years.

Standard Poor's warned Thursday that Chinese banks appeared to be trying to
prop themselves up by issuing new loans at a furious pace, in many cases
financing vaguely described projects with little discernible effect on
China's overall economic output.

This approach could yield even more bad loans, and may be creating a
financial bubble of wasteful and mismanaged overspending of the kind that
led to crises in many other East Asian nations in the late 1990s, said
Terry E.H. Chan, the rating agency's director for Chinese and Southeast
Asian financial institutions.

"Is the bubble building?" Chan asked at a news conference. "We are
concerned. Where is the money going?"

Though a few privately owned and foreign banks have gained small footholds,
China's banking system is dominated by four giant commercial banks, all
state-owned.

Questions have arisen periodically for a decade about the banks' viability,
mainly because of the evident pressures on them to make uneconomic loans
for various political reasons.

Beginning in 1999, the Chinese government sought to resolve these concerns
by relieving the four big banks of $170 billion worth of bad loans - 12
percent of loans outstanding - and then writing off the loans or reselling
them, following the same general approach that worked for the United States
after the savings and loan crisis.

But those efforts do not appear to have succeeded, Chinese and Western
officials now say. The central bank governor, Dai Xianglong, said in a
recent speech that even under the most generous accounting rules,
one-quarter of the loans left on the books of the country's banks were
nonperforming.

More stringent rules being introduced will push the figure above 30
percent, other regulators have said.

The banks are gradually earning profits to offset the bad loans, Dai said
in his speech. He called on the banks to lower the bad-loan number to 15
percent within five years.

By comparison, the highest estimates of the bad-loan situation in Japan,
where banks have been in desperate straits for a decade and are very slow
to write loans off, put the size of the problem at 15 percent or less of
outstanding loans.

In the United States, banks are much more aggressive about writing off
loans on which they are not receiving interest payments. At banks with
assets of more than $1 billion, just 1.5 percent of loans were more than 90
days overdue on Dec. 31, according to data from the Federal Deposit
Insurance Corporation.

Standard Poor's is far from alone in its assessment of China's problems.
Wei Yen, vice president for Chinese banking at Moody's Investors Service,
also says the bailout has failed. But he is less pessimistic than Standard
Poor's about the potential for Chinese banks to grow their way out of their
problems by finding creditworthy new borrowers.

Yen said the four main commercial banks had made considerable progress in
centralizing control over lending and in imposing strict risk controls. The
goal of these measures is to insulate local branch managers against
pressure from local politicians and factory bosses to make ill-considered
loans.

"We don't dispute that the Chinese banking system has terrible problems,
but if you take a long-term perspective and look at what they have done in
the last five or six years, it's tremendous," Yen said, adding that Moody's
would soon release its own report.

In the Mao Zedong era, Chinese banks were not businesses in the Western
sense. They were conduits for distribution of state subsidies to local
enterprises, and for collection of taxes and other contributions to
national revenue from those enterprises. How much borrowers received had
little to do with how much they repaid.

In 1994, Beijing tried to put the banks on a commercial footing by setting
up three new institutions to take over the job of financing big state-owned
enterprises, the ones that employed so many people that for the sake of
social and political stability they could not be allowed to fail.

The commercial banks were supposed to stick to making loans strictly on the
financial merits from then on. But they do not appear to have done so.

China plans to open up its banking sector to international competition over
the next five years as part of its entry to the World Trade Organization,
putting more pressure on domestic banks. Foreign banks now have less than 2
percent of all deposits and loans in China.

The four big domestic commercial banks - the Bank of China, the China
Construction Bank, the Industrial and Commercial Bank of China and the
Agricultural Bank of China - are in various stages of preparing to sell
minority stakes to public shareholders, in the hope of raising money to
offset their bad loans.

The Bank of China is furthest along, and it had been expected to issue
stock this year in China, Hong Kong and possibly New York. But its plans
have been set back by several scandals in the last five months involving
allegations of fraudulent loans to friends of bank managers.

Chan, the Standard Poor's executive, predicted that the level of bad loans
at Chinese banks would discourage international investors from buying any
of their shares.

Moody's and Standard Poor's usually agree on most credit ratings, but they
have sharply divergent assessments of the four big banks.

Moody's puts all four at Baa-1, three grades above the minimum to qualify
as investment grade. But Standard Poor's does not rate the Agricultural
Bank at all, and rates the other three at BB-plus, a speculative rating
four notches below Moody's.