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
>> [BTW, I'm new on the forum, how do you do the italics here?]
It's straight-up HTML. If you're not familiar (probably because you're used to UBB-style unicode), check the Links from my FReeper homepage, I'm pretty sure I've got some HTML tutorials linked-to in there.
Let's hope for the worst here. Weaker China is always in our interest.
Let's be careful what we wish for. There are perhaps a billion people there whose life depends on crony capitalist enterprises overproducing junk at slave wages. The best way to correct that is to use enterprise at the lowest levels circumventing the communist middlemen. We need something like a global EBay where any Chinese craftsman can sell directly to any consumer in the world. Our priorities should be to keep the clever and productive Chinese out of state-run war factories and keep a vast number from starving.
But having a billion people means a billion mouths to feed.
If we screw their food or water supply, they're DONE.
Cheers!
Liu, along with three other senior managers, were also alleged to have made "unauthorised distribution for personal purposes" of funds belong to the Bank of China before BOCHK was established. The Standard speculated that the amount involved was HK$30 million.
Chinese court has sentenced him to death.
Has the sentence been carried out? I didn't see anything about it.
That was my impression.
Or they'll see it as a provocation by us to destroy them and fight. What will they do to preserve their commie regime? How far are they willing to go? And are we prepared for any of those possibilities? A delicate balance is required in this.
On the other hand, Wal Mart could come to their rescue. :-)
(i'm not bashing wally world)
Just the perfect combination to get into a war.
Now, on the flip side. If we get a real conservative in office, and finally get conservative control in Congress, get real tax reform, and unleash human creativity within the stogy military procurement process.....
You have a good point there. I think since the first day of the Internet it has been used for cybersex for those prolonged separations in long distance relationships and no-psychical-contact-ever relationships also. Along with the phone.
That being said, that teledildonics thingie is just plain scary!
bookmark
The US Navy, should, for the next fifty years at least, decide who and what goes anywhere. Let's hope the ChiComs don't remember the lesson the British Navy taught the frogs.
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