Bad debts put strain on Chinese bank system

WHEN Larry Long visits the imposing marble-tiled office of his local bank, he sees what many regard as the biggest threat to China’s Communist leadership. The white-haired property developer tried recently to withdraw £8,000 from his account at the Beijing branch of the Everbright Bank. The embarrassed bank manager confirmed that Mr Long had enough money in the account but was adamant that he could withdraw no more than £800.

Overnight, and without informing customers, China’s largest semi-privatised bank had introduced a rule allowing no more than 10 per cent of deposits to be withdrawn in a month. Mr Long was enraged but not surprised.

For months China has been rumoured to be on the brink of a financial crisis. The fact that some banks may now have run out of cash to pay depositors confirms some people’s worst fears. Some experts believe that China’s economic miracle is threatened by an impending crisis similar to that which crippled South-East Asia five years ago when its tiger economies were humbled. According to Mr Long, bank insolvency is a grave problem for the private businesses that power the new Chinese economy. He said: “I have to buy timber and the merchant will take only cash, like most people in China. When I can’t get cash, my business just stops.” After his first unsuccessful trip to the bank in the autumn, Mr Long was enraged again when he returned a few weeks later. Without notice, Everbright had raised its so-called “reserve requirement”. Depositors were limited to withdrawing 5 per cent in a month.

Mr Long, who is building a holiday villa complex outside Beijing, said: “I couldn’t believe they had changed the rules again. It was clear that the bank did not have enough money to pay its depositors. The financial crisis everyone fears is already upon us.”

Anecdotal evidence suggests that Mr Long’s experience is a common one. While the four big state-owned banks will remain solvent after Beijing pledged the third bail-out in four years, some semi-privatised banks such as Everbright cannot pay out routine withdrawals by account holders. Worse still, new loans to deserving growth-creators, such as Mr Long, are even less likely.

The reason is that most Chinese banks are burdened by bad debts said to exceed those of their troubled counterparts in Japan, where a loan crisis is choking the economy. During the boom of the past decade, China’s banks have been lending without asking too many questions.

Induced by bribes and misguided official directives, loan officers pumped cash into nefarious construction and export schemes regardless of economic reality. Some turned out well, making China a rising nation. Many others did not.

The bottom line is that between 30 and 50 per cent of all China’s loans are write-offs. Standard & Poor’s, the ratings agency, estimates that the problem will cost about £300 billion to clean up, or 43 per cent of China’s gross domestic product (GDP). By comparison, America’s 1980s savings and loans crisis cost 3 per cent of US GDP. Even worse, China’s financial crisis extends to local governments. According to a recent report in the People’s Daily newspaper, some cities have started to borrow from underworld figures because they can no longer pay for essential services.

Gordon Chang, author of the book The Coming Collapse of China, said: “When government officials have to go to loan sharks to meet their obligations, we must realise that China’s financial policies are simply unsustainable.”

A combination of rising unemployment, bankrupt local governments and insolvent banks has now raised concerns that a financial meltdown would almost certainly act as a catalyst for political upheaval.

Rick Baum, of the University of California in Los Angeles, said: “If the economy falls below the current growth levels, the leadership will be in real trouble.”

There have not been any runs on banks yet but in the absence of external enemies and significant domestic opposition groups, a financial crisis is currently the biggest threat to the regime. Many banks are no longer fully state-owned and their debts are not a sovereign risk. Everbright, for example, is still managed by officials, but part-owned by shareholders. There is no guarantee that the Government will bail out such banks. Even so, Mr Long gave his bank one last chance. As co-owner of a foreign joint venture company, he is entitled under government regulations to receive direct currency transfers from abroad. Mr Long arranged for the payment of a $10,000 (£6,250) bill into his account, expecting to be able to take out at least some of it.

But the bank manager demanded to see the contract detailing the work for which Mr Long had billed his foreign client. “Because I couldn’t show them a contract they refused to credit the funds to my account,” the developer said. “I didn’t get any money at all. This never happened before.”

Let's embargo their products for a while at lezst. Maybe their whole system will collapse. Then they won't be able to point nuclear warheads at America (even if it is only Hollywood.)

This is not good news. Then again, if it topples the Communist leadership, and makes the country more democratic, it could be good news. Not sure what the result will end up. We need a capitalistic healthy China. My wife and I were just over there this summer, and this country is far more capitalistic than our own in many ways. I do hope that this pending crisis does not stop them from this open market direction. Although I am not a fan of China products being everywhere in our economy, and their captured labor pool is in contrast to where their "free economy" is headed, I do think that we need China as an economic allie, and not to resort to any "red scare" statements and "serves them right" remarks.

Walmart and K-mart can reduce the size of their stores by about 75% if they no-longer can get Chinese-made products. I have long since stopped buying Chinese products, especially ones with American names etched into them (Craftsman, Stanley, most shoes). It will be fun to watch this collapse. Maybe some of the work will return here, where it belongs.

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