Posted on 08/23/2006 5:36:38 AM PDT by TigerLikesRooster
China's weak banking system threatens economic growth, reforms: experts
by P. Parameswaran
Tue Aug 22, 5:48 PM ET
Saddled with bad loans, China's critically weak banking system risks stifling its rapid economic growth and reform process, Standard and Poor's pointman for Asia-Pacific ratings warned.
Michael Petit, the global ratings agency's managing director of Asia-Pacific corporate and government ratings, said "the most visible weakness" of China's banking system was the extent of its problem loans, which the agency estimated at 500-650 billion dollars at the end of 2005.
In contrast, China's official figure is about half the agency's estimate at 225 billion dollars, he told a congressionally-mandated panel hearing on China's financial system and monetary policies.
Given both the dominance and weakness of the banking system, "the risks China faces in setting down a liberalizing path are in making a misstep," he cautioned.
"Its reform program needs to be carefully coordinated and implemented in a sequenced approach to avoid any unwanted disruption to its economic system," Petit said.
The size of China's bad loans has been a source of controversy.
Global auditing firm Ernst and Young in May estimated that the Chinese financial system was exposed to 900 billion dollars in bad bank loans but later retracted its opinion.
The withdrawal came after China's central bank said the report, which claimed the NPLs stood at 358 billion dollars for the big four state-owned commercial banks alone, "seriously distorted" the actual situation.
Fitch Ratings had said in May that China's banking system still contained about 476 billion dollars in nonperforming and problem loans.
"Although no one can know for sure, China's banks and instrumentalities are probably sitting on a trillion dollars of doubtful loans at this moment," Gordon Chang, a China expert and author of "The Coming Collapse of China," told the hearing of the US-China Economic and Security Review Commission.
He warned that "a bank failure in the next few years is possible, if not likely" and that China's banks, "almost without exception, are hopelessly insolvent from a balance sheet point of view.
"Chinese banks are blowing up their balance sheets at unprecedented rates," he said, adding that banking failure would "almost certainly lead to a collapse of the economy" and cause the political system to be even more fragile.
Chang also said that China was burdened by too much debt.
Beijing claims that China's debt to gross domestic product (GDP) ratio is only 18 percent but Chang said it was a staggering 81 percent, based on his "conservative" calculations.
Petit of Standard and Poor's said China's overly rapid loan growth suggested "vulnerability to an eventual economic slowdown and to the emergence of a new wave of problem loans."
But he hastened to add that the Chinese government had the wherewithal to prop-up its banking system through additional capital infusions or purchases of troubled loans, if needed.
Even so, China's "critically weak banking system" placed a "massive contingent fiscal cost on the government," he said.
Petit noted that "overlap" between the Chinese government -- the main shareholder in the banking sector -- and banks and borrowers and the frequent rotation of Chinese Communist Party members through them was "inimical to the creation of arms-length relationships."
It is "likely to inhibit the creation of effective corporate governance practices alongside a culture of commercial banking," he said.
A 2005 survey by the Chinese central bank showed that more that 80 percent of non-performing loans could be attributed to such conflicts of interest and directed lending, he said.
Financial WMD in the making. A related thread:
Ping!
You might be right. My guess is that the bad loans are definitely higher than the official estimates but not quite as high as USD 900 billion.
I am also not sure if liberalization of the banking sector will accellerate the crash. Inspite of the 'liberalization' most foreign banks will be made to dance according to China's tunes. This will also mean that they will be made to buy into some of the bad loans. It may not amount to much but still. Nextly, the new standards set by foreign banks in terms of prudent loans and risk mitigation will probably influence Chinese banks positively.
On the other hand, if there are no restrictions on interest levels (I am not sure if this is possible), we might also see the corporations with a better repayment record shifting to borrowing from foreign banks. This might leave the nationalised big banks with the scum of the borrowers (the state owned corporations) eventually sinking them further, beyond their current positions.
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