Posted on 05/08/2006 7:43:07 PM PDT by Leisler
ESTIMATES of the growing pile of non-performing loans (NPLs) in China appear to have caught many by surprise, especially because Beijing's efforts to clean up its rickety state-owned banks were thought to have greatly reduced NPLs and the risk of a full-blown financial crisis.
According to Ernst & Young, the accounting firm, bad loans in the Chinese financial system have reached a staggering $US911 billion ($1.18 trillion), including $US225 billion in potential future NPLs in the four largest state-owned banks.
This equals 40 per cent of gross domestic product and China has already spent the equivalent of 25-30 per cent of GDP in previous bank bail-outs.
The revelation shows that half-hearted reforms have addressed merely the symptoms of China's financial fragility. Poor business practices are blamed for NPLs but the real source is political. As long as the communist party relies on state-controlled banks to maintain an unreformed core of a command economy, Chinese banks will make more bad loans.
Systemic economic waste, bank lending practices, political patronage and the survival of a one-party state are inseparably intertwined in China. The party can no longer secure the loyalty of its 70 million members through ideological indoctrination; instead, it uses material perks and careers in government and state-owned enterprises (SOEs). That is why, after nearly 30 years of economic reform, the state still owns 56 per cent of the fixed capital stock. The unreformed core of the economy is the base of political patronage.
Government figures show that, in 2003, 5.3 million party officials held executive positions in SOEs. The party appoints about 80 per cent of the chief executives in SOEs and 56 per cent of all senior corporate executives. Recent corporate governance reforms, Western-style on paper but not in substance, have made no difference. At 70 per cent of the large and medium-sized SOEs ostensibly restructured into Western-style companies, members of party committees were appointed to the boards. Painful restructuring appears to have spared this elite. China has shed more than 30 million industrial jobs since the late 1990s but few party officials have become jobless.
The economic costs of maintaining this patronage system are not limited to perks for individual party members. Since these members are expected to prove their managerial competence, they must deliver or appear to deliver economic results.
This in turn requires the party to provide access to capital, chiefly bank loans, even if these officials undertake non-viable projects.
The result is systemic waste. In particular, because mid-level Chinese officials are under pressure to hit fixed growth targets quickly (the average tenure of a mayor is about three years), they favour projects that may embellish their short-term performance but have dubious long-term value. The proportion of misguided investment is considerable.
The World Bank estimated that in the 1990s about one-third of fixed investments made in China were wasted. The Chinese central bank reported that during 2000-01 politically directed lending accounted for 60 per cent of NPLs. Such disregard for economic efficiency has bred a culture of irresponsibility and unaccountability in Chinese banks. In a survey of 3500 bank employees in 2002, 20 per cent reported that no action was taken against managers even when their mistakes resulted in NPLs; an additional 46 per cent said their banks made no efforts to uncover bad loans.
More than 80 per cent said corruption in their branches was either prevalent or took place quite often.
Banking reform of the past few years has failed to address these flaws. Its five main features - write-off of NPLs, capital injection, flotation in Hong Kong, minority stakes for Western strategic investors and improvement of corporate governance at headquarters - do not alter the defining characteristics of China's capital allocation system.
Nearly all senior bank executives are appointed by the party, which maintains an extensive organisational network within the financial system. That is why an IMF study finds no evidence that these reforms have improved risk management and credit allocation by banks.
The writer, author of China's Trapped Transition, is a senior associate at the Carnegie Endowment for International Peace in Washington
Now will this catch Freepers' attentions? I doubt it.
If true, then China is on the verge of economic collapse.
As much as 70% of the GDP in bad loans? Yeah, I'd say they are in big trouble. This is the 900 pound gorilla. How is this going to affect the US economy?
bump
46 per cent said their banks made no efforts to uncover bad loans.
The good news is we will be able to buy the loans for cents on the dollar.......any takers?
Our alarmists here love to point out "Look, the Chinese buy our bonds and they are owning us!". At the other side of the fence the thinking in China goes that "The US can actually freeze all the bonds these Chinese Communist nouveau riche and corrupt party officials if necessary, and because they are stored in the US the Chinese can't really withdraw them."
So this means that we will own all the businesses in China, and China will own all the businesses in the US?
Just another poor third world nation that us evil Americans have gutted and filleted.
The bonds, money deposits, and investments mean nothing for the Chinese side because they are mostly stored in the US rather than China. They think the US can call them checkmate in the event of a Taiwan war by freezing and confiscating all these capitals.
For one thing, it would force them to devalue their currency.
We can only selfishly hope.
It would mean a collapse in gas prices, just like in the late 90s, when the "Asian Tiger" economies bellyflopped, giving us 99 cent a gallon gas that Bill Clinton took credit for.
It would be a great thing for the world.
If China can keep on keeping on with things this bad, wait till they fix it. Goods will be twice as cheap.
We would be able to do that precisely once. Then our own economy would collapse because no one would buy US bonds ever again.
Don't forget their energy crisis and the fact that 30 million men there have no hope of EVER marrying...
What, I ask freepers, is the NEXT step, if they have a full-blown crisis?
I say Japan needs air-to-air refueling capability and more SDI stuff NOW.
The alternative is more civil strife (already reported as more than 60,000 instances per year). Cutting off those Mao-era "enterprises" would throw tens of millions more out of work.
Government figures show that, in 2003, 5.3 million party officials held executive positions in SOEs.
Hey! that close enough to be a free market, capitalist system. Right, free traders?
Let's ramp up the free tradin' transfer of technology, wealth, and production to our "business partners."
Apparently China's side thinks otherwise. They sees that is possible in the case of war erupting over Taiwan. I report, you decide. Too few Americans know what the Chinese side is saying behind your backs.
Wonder how "Trapper" from "MASH" feels about his China investments now?
Clown bashes Walmart and praises China in the same breath!?!?!?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.