News Analysis: Safety Zones Designed to Salve Credibility

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Last updated at: (Beijing Time) Saturday, June 15, 2002

News Analysis: Safety Zones Designed to Salve Credibility

The financial safety zone (FSZ), a new concept that has emerged during the past two years in most parts of China, offers hopes of salving social financial credibility.

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The financial safety zone (FSZ), a new concept that has emerged during the past two years in most parts of China, offers hopes of salving social financial credibility.

The FSZ, a joint effort by enterprises, local governments and financial institutions, is quickly spreading through all administrative levels from grassroots townships to counties, cities, provinces and autonomous regions. Its fast expansion has aroused the interest of economists who are discussing the phenomenon in the media with considerable enthusiasm.

Under the FSZ framework, individuals and businesses with good credit records are rewarded while those who default on debt are punished. The starting point of local governments is to improve regional credit records to win backing from banks, while that of banks is to minimize their capital risks and realize asset value appreciation.

Economists hold that the rising of the FSZ reflects a major ideological transition for the banking system and local governmentofficials.

Under the planned economic system that China pursued for many years, enterprises had the idea that since they and banks were both owned by the state, defaulting on loans from state-owned banks wasn't a problem.

At the same time, banks granted loans according to administrative orders. They seldom made project appraisals, or investigated borrowers' credit records. As a result, large amountsof loans became unrecoverable and state-owned commercial banks hadto shoulder the heavy burden of non-performing assets, the pain ofwhich they still feel even today. ��

Over the past few years, with the market-oriented reform of state-owned commercial banks forging ahead, the influence of the planned economy on China's credit system has basically faded. All the banks have set up new operating mechanisms that are suited to market rules, and credit and capital returns have replaced administrative orders to become the prerequisite for granting loans.

In addition, the central bank has ordered all commercial banks to operate strictly on commercial lines, demanding they minimize newly-increased non-performing loans while lowering the rate of existing non-performing loans to less than 15 percent within the next five years.

The shift in banking mechanisms has obviously produced pressureon local governments and enterprises. At present in China, banks remain the most important finance source for businesses; once theylose banks' support, they face the danger of a suspended "blood supply." This pressure translates into motivation for enterprises and local governments to improve their corporate and regional credit reputation, the result of which is the birth of FSZs.

Xie Qingjian, director of the Nanjing Branch of the central bank, says that the rise of FSZs is actually an expression of social credibility construction. It aims to establish an awarenessof credit among individuals and enterprises. Good social credibility is not only the basis for the normal operation of a modern economy and finance system, but also a significant measureof a country's or a region's investment environment.

The central bank's Nanjing branch and businesses and local governments in Jiangsu Province jointly initiated the move to build FSZs two years ago, adopting both administrative and legal means to crack down on debt-evasion practices. In 2001 the outstanding amount of debt that borrowers' refused to repay in theprovince fell by 6.1 billion yuan, with payments promised on 32.72percent of this.

In another large FSZ comprising Yunnan, Guizhou and Sichuan provinces and the Tibet Autonomous Region, the outstanding non-performing assets of local banks shrank by 6.67 billion yuan, and the rate of non-performing assets was lowered by 3.59 percentage points last year.

A noticeable phenomenon is that the success of FSZs has been achieved with the support and cooperation of local governments. Having understood the importance of financial support to the long-term development of local economies, the governments, which used to help businesses evade debt via false bankruptcy or restructuring, now urge them to pay their debts.

In many cases local judicial authorities have a role in retrieving credit debt.

Banking experts now pin their hopes on the setting up of FSZs, saying that it is an important attempt to minimize financial risksand give full play to banks' support of economic growth. This effort could achieve satisfactory results with the support of local governments.

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