State Banks Urged to Channel More Money to Non-State Sectors

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Last updated at: (Beijing Time) Thursday, August 29, 2002

State Banks Urged to Channel More Money to Non-State Sectors

The crux of reforming China's banking system lies not in how to dissolve the enormous historically-deposited bad debts, but in how to make its current assets earn more.

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The crux of reforming China's banking system lies not in how to dissolve the enormous historically-deposited bad debts, but in how to make its current assets earn more.

"Supposed China could curb the banks' total bad debts at their current level and maintain a gross domestic product (GDP) growth rate at around 8 percent, seven years later, the ratio of total bad debts to the GDP will go down by half, and continuously down by 70 percent after one decade," said Fan Gang, director of the Institute of National Economy, in the Beijing-based China Securities Journal.

For the time being, the total bad debts of the four State-owned banks of China stand at 26~27 percent of China's current GDP. The ratio will shoot up to 40 percent - a widely-recognized alarming level - if the bad debts now stripped to the four government-sponsored non-performing debts management companies are also taken into the account.

One question is why the four State-owned banks can still sail along calmly, despite such a big volume of bad debts, and Chinese keep, as always before, putting their money confidently to them?

"This is because these bad debts are, to a big extent, the debts of the State or the national debts," Fan said.

The credit behind the four State-owned banks is that of the State, he said. Therefore, depositors do not believe that the State-owned banks will go bankrupt, as long as the State is still sustainable.

As for the reason for the formation of the bad debts, the bulk of them comes from State banks' loan to State-owned enterprises, which afterwards turn out unable to pay back the loan as promised.

So, the non-performing debts can be treated as the central government's "fiscal subsidies" to State-owned firms, although the so-called subsidies flow to State firms through the State banks instead of, as it should have, the financial ministry.

If State banks bad debts are computed into the "national debts", the picture will be completely different.

Even with the successive four-year expansionary fiscal policies, the national debts of Chinese Government is now only 16 percent of China's GDP, the bottom level in the world and even by far lower than most developing countries, according to a report by the National People's Congress, China's parliament, early this year.

Even when State banks' bad debts are wrapped together with all national and foreign debts shouldered by Chinese Government, the sum stands largely at 60~70 percent of China's current GDP. Excluding the foreign debts, the ratio will come down to about 57 percent, a completely manageable level for China's economy, according to Fan.

"This is why there is no financial crisis happening in China, despite a very high ratio of bad debts in State banks," Fan said.

But such a situation by no means indicates that the big non-performing debts do no harm to China's economy, he said.

As a matter of fact, the unshakeable bite of the deflation starting from 1996 can in a great sense be attributed to the highly-packed bad debts in State banks, which have sapped State banks' capacity in injecting more credit into the economy.

In addition, as more and more economic sectors formerly controlled by State-owned firms now are forced to open up to non-State investors, the latter are rising as a dynamic drive behind China's economy.

But the State banks still prefer to turn their capital faucet to State-owned enterprises, claiming a higher loan security there.

To date, only about 30 percent State banks loan finally flow to non-State businesses, although they have contributed about 70 percent of China's annual GDP, according to Fan.

Whereas State-owned enterprises have sucked away the remaining 70 percent of State banks' loan, despite their 30 percent contribution to China annual economic output.

"Such a situation might have explained the 40 percent bad debts in State banks' balance," Fan said.

By PD Online staff Forest Lee

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