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Bad loans dim China's rising
star
By Antoaneta Bezlova
BEIJING - With one of the world's
fastest-growing economies and a technocratic leadership
committed to aggressive modernization, 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 past 10 years has
been sustained by running up bad debts, which are now
equal to about 50 percent of the country's total loans,
compared with 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
this year.
Government data say China's
non-performing loans (NPLs) stand at 25 percent of the
total. CLSA, a Hong Kong-based brokerage, puts the NPL
estimate at between the government's US$180 billion and
$450 billion. Japan's bad-loan figure of $1 trillion 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 deal with than
Japan, its economic rival in Asia.
Tokyo can no
longer stimulate much domestic demand with government
spending, because a sophisticated infrastructure has
already been 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 program to rebuild cities, create new ones
and link the country by modern infrastructure.
The government is plowing people's savings into
new freeways, airports, railways and vast expanses of
housing and shopping centers. Unlike Japan's graying
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 million to 30 million
people a year.
Moreover, China has one of the
lowest rates of urbanization 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 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 in
foreign investment that has poured in over the past
decade. Officials under outgoing Premier Zhu Rongji have
managed to channel the capital into areas that are
fueling 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 as well as a
rust-belt zone of factories, where state managers try to
balance the clashing interests of productivity and
surplus labor. 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
were 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 recapitalize 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
worth of NPLs 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 NPLs 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," said Frederick Hu,
Greater China financial analyst at Goldman Sachs in Hong
Kong. "There is no quick fix."
But channeling
capital from ailing state companies into productive
investments would mean factory closures, more layoffs
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 will have to show more muscle in dealing with
banking woes if China is to remain the star performer in
the region.
(Inter Press Service)
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