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 PART
3
Banks menaced
By
Miao Ye
Part 1:
Investing in misery
Part 2:
Crooks line their pockets
HONG KONG - China's property problem is at least
partly China's banking problem, and vice versa. As the
real estate sector has continued to grow in 2003, so
have non-performing loans (NPLs). And not for nothing is
the popularity of the old cliche that when you owe the
bank a little money, you are the bank's hostage, but
when you owe the bank a lot of money, the bank is your
hostage.
With an estimated 70 percent of capital
for property development coming from loans, developers
are able to exert great pressure on banks. The realty
market already is oversupplied with large numbers of
vacant properties, adding considerably to the rapidly
increasing bad loans in the banking system. In March,
the weighted average of NPLs in four state-owned
commercial banks stood at 24.13 percent. Their NPLs
continued to total US$500 billion despite the
authorities' efforts since 1999 to prune them (see Banking means never having to repay a
loan, August 20).
Now belatedly aware of
this problem, Beijing has begun to attempt to strengthen
regulations on banks and to seek to curb excess
investment in property development as a precaution
against the swelling bubble. This is a part of perhaps
the biggest bank reform in China's history, which is
also expected to address the even bigger problem of
loans to the country's notoriously deficient state-owned
enterprises (SOEs).
The reforms are expected to
include an enormously costly bailout that will total
$300 billion, or 22 percent of China's forecast 2003
gross domestic product (GDP), according to Qu Hongbin, a
senior economist with the treasury and capital markets
division of HSBC in Hong Kong. However, Qu wrote in a
recent analysis of the bank system restructuring,
China's low debt-to-GDP ratio and a national saving rate
of 40 percent should enable Beijing to finance the
bailout through public borrowing.
It is
questionable, however, whether the recapitalization in
store for China's big four banks will succeed. It must
be accompanied by a real restructuring of the system, Qu
writes, which has to include rationalizing the state
banks' lending behavior and tightening liquidity in the
economy. That would curb risky lending and cool
overheated investment, not only in property but local
government-directed industrial parks and other
construction projects.
The financial sector
overall is considered to be one of the last impediments
to the transition to a market economy. Yi Xianrong, a
researcher with the Institute of Financial Studies at
the Chinese Academy of Social Sciences, was quoted in
the government-supported China Daily as saying that
"with economic bottlenecks such as the energy, raw
material and infrastructure sectors having been removed
one after another, the financial sector has become the
biggest hurdle to China's economic development".
Will there be such a restructuring? Shi Jiliang,
deputy director of the country's sole banking watchdog,
the China Banking Regulatory Commission (CBRC), recently
said that supervision and auditing on all banking
institutions had begun with an emphasis on loans for
property developers and large associated corporations.
"We are mainly targeting bank loans that have
grown in an abnormal way and too fast to be in keeping
with the economic development," Shi noted.
The
move was apparently part of efforts to check rocketing
new loans by commercial banks, which recorded 1.9
trillion yuan ($228.9 billion) between January and July,
compared with a full 2002 total of 1.8 trillion yuan.
According to the People's Bank of China (PBOC), the
country's central bank, domestic loans increased by 23
percent year-on-year between January and August to
$1.967 trillion, the highest recorded since August 1996.
Among the loan increases, medium- and long-term ones,
mainly mortgage loans for housing and automobiles,
accounted for about 50 percent.
However,
unoccupied properties throughout the country by 2002
totaled more than 100 million square meters, half of
which had been vacant for 12 months or longer. As a
result, the vacancies have locked up more than 250
billion yuan, making property the leader among all
Chinese industries in terms of non-performing assets.
Obviously, real estate is running on the wheel of the
financial industry.
The overheated real-estate
market has aroused considerable anxiety among
high-tanking officers and the official media and stirred
heated discussion on the potential property bubble,
International Finance Journal reported. The media are
rife with speculation that soaring real-estate
investment, coupled with the record high vacancy rate,
implies a possible recurrence of a bubble similar to
those elsewhere in Southeast Asia that led to the Asia
financial crisis in 1997.
As experience shared
by China and the world, particularly Japan, has proved,
banks usually are at the receiving end when property
bubbles burst. With realty investment climbing by 30
percent annually, much higher than GDP growth at 7-8
percent, alarms are beginning to sound, according to a
recent report from a research institute affiliated to
the National Development and Reform Commission.
On condition of anonymity, a Beijing veteran
economist expressed concern about the industry, saying
that the overheated property market, if and when it
collapses, might not only demolish the economy but
strike at social stability, he said.
In view of
this, Beijing has been sparing no effort to take
countermeasures. Besides rigid supervising realty loans,
the central government has strengthened auditing over
the so-called big four state-owned banks, the Bank of
China, Industrial & Commercial Bank of China,
Agricultural Bank of China and Construction Bank of
China.
Furthermore, the PBOC in June issued a
Notice on Further Strengthening Management of Real
Estate Credit to diversify the capital channels for
realty enterprises and hence decrease banks' risk. The
document raised the reserve ratio for commercial banks
to 7 percent from 6 percent as of September 21. PBOC
officials see disturbing parallels to the 1993-95
nationwide investment boom that led to three years of
double-digit inflation and economic dislocation. They
plainly do not want it to happen again.
The
banking reforms to be put in place are expected to be
part of a three-year master plan to overhaul the entire
financial system by 2006, is a requirement imposed on
China as a condition of its entry into the World Trade
Organization.
In addition to the bailout, the
master plan is expected to include two other key
components: corporatization and listing of the state
banks on the stock market. China's policymakers clearly
understand that the 270 billion yuan capital injection
of 1998 and the subsequent transfer of 1.4 billion yuan
in dud assets to asset management companies over the
next two years didn't work.
"The policymakers
appear to realize that writing a big check for each bank
will not be sufficient to rescue them," Qu says, noting
that the previous recapitalizations have not only been a
waste of money, they also reduced the incentive for the
banks to control credit risk, giving rise to moral
hazard.
"Recent experience in both China and
other economies in transition indicates that
corporatization does not guarantee that professional,
rather than political managers will be appointed," Qu
writes. While corporatization should make it easier for
banks to rationalize their operations and separate good
assets from bad, the fact is that corporatization
represents only the start, not the end of a real
restructuring.
In addition, the state banks much
be commercialized to make profit-seeking their primary
reason for existence. Entire new mechanisms must be put
in place to ensure that political figures are supplanted
by professional managers in key positions. Finally,
proper internal incentives that base salaries on market
rates and include performance incentives must be put in
place.
An even bigger problem for the
state-owned banks is their continuing obligations to
lend to the government and the SOEs. Together, Qu
writes, the big four banks have pooled 8.3 trillion
yuan, or more than 80 percent of private domestic
savings, for lending to the SOEs and the government,
particularly to large SOEs in key cities, crowding out
private-sector savings and basically throwing good money
after bad to inefficient and failing operations.
Remarkably, despite China's continuing drive to make
capital markets a primary financing channel, 90 percent
of the funds raised in the equity markets and all of the
funds from the bond market go to SOEs and the
government.
The result has been disaster.
According to HSBC, net NPLs for the Bank of China are
135 percent of equity, 420 percent of equity at the
Industrial & Commercial Bank of China, 225 percent
of equity at the China Construction Bank, a whopping 500
percent at the Agricultural Bank of China and 157
percent at the China Construction Bank.
Most of
China's other major banks are in similar straits. In
2002, according to HSBC, 70 percent of banks' profits
were used to write off non-performing loans, although
their return on equity at less than 2 percent meant it
did very little to lower their NPL ratios.
In
2004, the government appears finally set to take more
dramatic action on the SOEs, according to Eddie Wong,
chief economist at ABN AMRO Asia Ltd in Hong Kong.
Beijing, Wong wrote in an "Asia Vision Flash" on
Wednesday, "intends to focus more on asset sales in
2003. That is likely to include a major sell-down of
state assets through initial public offerings (IPOs) and
placements." Particularly, Wong wrote, that will include
bringing forward the listing of the four state
commercial banks from 2005 to 2004.
Copyright
2003 Asia Times Online Co, Ltd. All rights reserved.
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