Accessibility links

Breaking News
News

Chinese Banks Burdened by Bad Loans - 2002-05-22


China's central bank says it is punishing more than 100 people following an investigation of billions dollars worth of loans that will never be repaid. It is just the latest symptom of the bad loans hampering the country's banking sector.

The newest scandal covers hundreds of loans at the four largest state-run banks in China. A news report says 114 people are being demoted, reprimanded or fired, mostly for bad business judgments. A few may face police investigations.

Chinese officials say that nearly one third of the loans made by the nation's four major banks are not being repaid. A recent report from outside financial experts says the situation is even worse than the grim official statistics, with perhaps half of all outstanding loans unlikely to be repaid.

Credit-ratings agency Standard and Poor's estimates that to immediately cut bad loans to five percent of the total, China must spend more than $500 billion. That equals just under half of the country's total gross national product.

One financial analyst notes that China may be underestimating the level of bad loans, which bankers call non-performing loans (NPL). "The NPL ratio is still very high by international standards," said Ryan Tsang of Standard and Poor's in Hong Kong. "The People's Bank of China reports about 20-something to 30 percent NPL level for the big four banks. And our estimation for the whole system is about 55 percent."

Chinese officials, however, have said they prefer to solve the problem gradually, funding it with economic growth, and using the banks' future profits to write off the bad loans.

Standard and Poor's and other analysts, however, reckon that method could take up to 20 years to cut bad loans to more manageable levels.

A troubled banking system hurts China by making it hard to attract foreign investment and allocate capital to growing companies that create jobs. Unemployment is a huge and growing problem in China as antiquated state-owned enterprises shed millions of workers, and an estimated 150 million farmers have abandoned their fields.

Chinese officials are counting on continued rapid economic expansion to create new jobs for some of the displaced workers. The banking sector's problems, however, slow that process at a critical time.

Banking analysts say most of the troubled loans are the result of the government ordering banks to lend to state industries, regardless of their ability to pay back the money. "Now the banks are trying to be more commercialized, and they are adopting new international loan classification system, which will give them better assessment of the true asset quality of their loan book," he said. "So the problem is not like they are trying to hide something, the problem is more like it was already there and they realize it and they are trying to do something about it."

The next head of the World Trade Organization, Supachai Panitchpakdi, says Beijing needs to move more quickly to reform its banks. China's membership in the WTO means its banks face more competition from foreign banks in the next few years. "The Chinese authorities in the Ministry of Finance and their central bank certainly are working very hard to deal with the issues of banking reform in particular," he said.

Some analysts say dragging out the reforms could make things worse. They point to Japan as an example. Japanese economic growth has been stalled for a decade, in large part because the banks are buried under bad loans.

Former U.S. Treasury Secretary Nicholas Brady helped clean up a bad loan crisis in the U.S. savings and loan industry in the 1980s. Recently, he wrote in The Wall Street Journal that delay only increases the cost of reform. And, he continued, a country can not have a healthy economy without a healthy banking sector.

XS
SM
MD
LG