ECONOMY: Bad Loans Take Shine off China’s Star Performance

By IPS Correspondents Reprint | | Print |

Analysis - By Antoaneta Bezlova

BEIJING, Nov 26 2002 (IPS) - With one of the world’s fastest-growing economies and a technocratic leadership committed to aggressive modernisation, communist China looks set one day to eclipse Japan as an Asian economic powerhouse.

But while China’s star remains among the brightest in Asia and the world, its bad debt problem is even bigger than Japan’s – a vast black hole that analysts predict may trigger a financial crisis within the next five or six years.

A growing pile of bad loans and the threat of a huge banking meltdown may well be the biggest shadow over China’s economic future, just as a younger leadership took over the reins of power this month.

To be sure, China’s economy is growing by a robust 8 percent a year. But this breakneck growth over the last 10 years has been sustained by running up bad debts, which are now equal to around 50 percent of the country’s total loans, compared to 8 percent for Japan.

China’s bad-debt level is also just a little over Indonesia’s 48 percent, says Standard & Poor’s Corp, which ranks the two countries as having the highest banking risk in Asia. An October report by Moody’s Investor’s service puts China’s bad loans at 45 percent.

”It is the banks that have assumed the cost of the country’s economic transition,” Jiang Jianqing, chairman and president of the Industrial Bank of China, cautioned earlier this year.

Government data says China’s non-performing loans stand at 25 percent of the total. The country has between 180 billion U.S. dollars of non-performing loans according to the government or 450 billion dollars according to CLSA, a Hong Kong-based brokerage.

Japan’s bad loan figure of 1 trillion dollars is bigger, but adds up to a smaller percentage of total loans than China’s.

However similar their banking woes may look on the surface, China’s economy has a very different crop of issues to with deal compared to Japan, its rival in Asia.

Tokyo can no longer stimulate much domestic demand with government spending, because a sophisticated infrastructure has been already built and there are few new products for consumers to splash out on.

By contrast, China is making up for decades of economic stagnation by embarking on a frenzied cash programme to rebuild cities, create new ones and link the country by modern infrastructure.

The government is ploughing people’s savings into new motorways, airports, railways and vast expanses of housing and shopping centres. Unlike Japan’s greying populace, China’s 1.3 billion population is young. Although its growth is restrained by the one-child policy, it is still adding some 20 to 30 million people a year.

Moreover, China has one of the lowest rates of urbanisation in the world and in the next 50 years, perhaps millions will be moving out of their villages into city life. This means China’s economy will continue growing for years to come as the rural population emerges as the next big spender on anything from household items to houses and cars.

The country is also being powered by roughly 350 billion dollars in foreign investment that has poured in over the last decade. Officials under outgoing premier Zhu Rongji have managed to channel the capital into areas that are fuelling China’s fast-expanding exports.

While Japan still runs great trade surpluses, every day brings news of Japanese factories closing and being relocated to China. The trend has caused some economists to warn that Japanese industry is ”hollowing out” as it gets sucked into China.

But Beijing has its own problems, tied to the cumbersome legacy of state-run industries inherited from the Mao Zedong era. Nearly every big city in China features a bright new industrial zone aimed at attracting foreign capital and a rust-belt zone of factories, where state managers try to balance the clashing interests of productivity and surplus labour.

Instead of closing these factories down, China’s Communist Party has staked the entire financial system on restoring their financial health. Nearly all companies listed on China’s domestic market belong to this ailing club.

The core of Chinese banks’ problems remains the burden of supporting such insolvent enterprises. State-owned firms still employ 50 percent of the urban workforce but their profits remain persistently low. They posted a 0.8 percent decline in profits last year.

China could afford to bail out the banks or their clients – the state firms – if it was really able to raise taxes, but tax revenues make up only 17 percent of the gross national product.

In reality, the state is using treasury bonds to pay interest on its treasury debt and to recapitalise the big four state banks – Agricultural Bank of China, Industrial & Commercial Bank of China, China Construction Bank, and Bank of China.

In an effort three years ago to prepare to take the big four banks to the capital market, Beijing moved 160 billion dollars worth of non-performing loans from the banks’ books into asset management companies.

But the scheme has done little to solve the banks’ problems. Many of the loans, instead of being sold for cash, have been converted into stock in the bankrupt companies, allowing even the most inefficient to stay in business under government ownership.

Progress on dealing with the non-performing loans is difficult not so much because the collateral is worthless, but because China has no properly functioning legal system, let alone an effective bankruptcy law.

If China is to avoid slipping into its own version of Japan’s banking crisis, it must promptly arrest the rising tide of bank loans and push thorough structural reform, analysts say.

”Time is running out and China’s banks need to be diligent in continuing the reform process,” says Frederick Hu, Greater China financial analyst at Goldman Sachs in Hong Kong. ”There is no quick fix.”

But channelling capital from ailing state companies into productive investments would mean factory closures, more lay-offs and ultimately social chaos, which the leadership of outgoing party chief Jiang Zemin dreaded most.

While the new Communist Party leaders are expected to continue the economic philosophy of their elders and push China further toward a market economy, they would have to show more muscle in dealing with banking woes if China is to remain the star performer in the region.

ECONOMY: Bad Loans Take Shine off China’s Star Performance

By IPS Correspondents Reprint | | Print |

Analysis - Antoaneta Bezlova

BEIJING, Nov 26 2002 (IPS) - With one of the world’s fastest-growing economies and a technocratic leadership committed to aggressive modernisation, communist China looks set one day to eclipse Japan as an Asian economic powerhouse.
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