BEIJING -
Government officials and scholars have again warned
that China's banking sector should keep alert to prevent
rebound of non-performing loans (NPLs) rate through
reckless lending.
The high rate of
non-performing loans used to disturb Chinese banks for a
long time. But the banks made major progress in their
campaigns to reduce non-performing assets from last year
to the first half of this year. Statistics released by
the China Banking Regulatory Commission, the watchdog
agency or the banking industry, show that last year, the
non-performing loans of China's banking industry
according to the five-category classification standard
dropped 7 percentage points to account for 17.8% of all
loans by the end of 2003. In the first half of this year
non-performing loans at China's major banks - the four
State-owned commercial banks and the 11 joint-stock
banks further dropped by 4.44 percentage points from the
end of last year to 1.66 trillion yuan (US$200 billion),
or 13.32% of their total lendings, at the end of June.
The four state-owned lenders held 1.52 trillion
yuan (US$183 billion) of the total, or 15.59% of their
loan portfolios. The four banks are the Industrial and
Commercial Bank of China, the Bank of China (BOC), the
China Construction Bank (CCB) and the Agricultural Bank
of China.
However, the problem is again exposed
recently.
Speaking at the 2004 Chinese Business
Summit on September 12, Vice-Chairman of the CBRC Li Wei
said the non-performing loans rate of banks is facing a
trend of rise. Thanks to write-off and auction of the
non-performing loans of the Bank of China and China
Construction Bank, the non-performing loans rate of all
national commercial banks declined further to 13.3% by
the end of June 2004. However, this positive momentum
has ended, he said, adding that by early September, the
non-performing loans rate of China's banking industry
has rebounded to 14.65%.
CBRC said the major
reason for the fast decline of NPLs last year and in the
first half of this year was massive disposals at the
BOC, the CCB and the Bank of Communications, one of the
joint-stock lenders that is undergoing a major
restructuring.
The BOC and CCB, which were
chosen at the end of last year by the Chinese Government
for a pilot joint-stock reform and received a combined
US$45 billion recapitalization, sold nearly 280 billion
yuan (US$33.7 billion) in NPLs to a State-owned asset
management company in June.
Despite the massive
NPL disposals, the CBRC said its task of reducing both
outstanding NPLs and the NPL ratios at major banks this
year has got more difficult as the "loans to some
suspended or canceled projects will create a new batch
of bad loans."
The government has ordered tight
credit curbs and land controls this year on overheated
sectors such as steel, cement and aluminum, trying to
slow down the rapid growth in fixed investment and bank
loans starting from the latter half of last year.
A big number of steel and cement plants as well
as many other fixed asset projects like economic
development zones and shopping malls have reportedly
been ordered to stop construction.
Analysts have
expressed worries such administrative measures will not
solve the problem, although they have had some immediate
effect on slowing down fixed investment and bank loans.
The increase in non-performing loans was a
consequence of overheating investment since last year.
In 2003, total loans of China's banking system increased
by 21%, and the growth rate was even faster for many
joint-stock commercial banks. Most of the new loans went
to rapidly expanding manufacturing, real estate and
housing mortgage sectors.
The fast increase
lasted until the first quarter of 2004, and the
government began to intervene in the second quarter to
slow down the loan growth and limit excessive
investment. Statistics show that the loan growth fell
from 24% in August 2003 to 14% in June 2004. This figure
may also be misleading if the big amounts of
non-performing loans written off and auctioned by the
Bank of China and China Construction Bank were
considered. After adjustment for this factor, the annual
loan growth in June 2004 would approach 18%.
It
is not difficult to see that large quantities of loans
went to overheating industries in the past period. To
cool down the overheating industries, no new loans
should be granted to the industries. Accordingly, the
projects using bank loans, say the typical Tieben case,
a big steel project in east China's Jiangsu province
that has been stopped, may be halted. This single
project caused non-performing loans amounting to
billions of yuan.
Aside from administrative
intervention to cool down investment overheating,
systematic problem is probably a deeper rooted problem.
For a long time, China's banks, particularly the Big
Four State-owned banks, are to some extent
administrative organs, instead of being real commercial
banks, for which their operators are government
officials in real sense, instead of being bankers, and
their position is in real sense secondary treasury or
cashier of the government, instead of monetary financial
enterprises. If banks could not be independent from the
administrative system and administrative forces, it is
impossible to improve corporate governance.
Central bank governor Zhou Xiaochuan used to say
that the nature of the reform of state-owned commercial
banks is reform of state-owned enterprises. China's
reform of state-owned enterprises has undergone the two
phases of severing from the government, and
establishment of modern enterprise system. In the same
way, reform of the state-owned commercial banks will
first have to separate themselves from the government
and put an end to administrative intervention.
China has adopted mainly two approaches to
handle non-performing loans of banks: one is the
traditional approach of injecting capital and disposing
of non-performing loans, and the other approach is to
create new derivative products, i.e. letting in
strategic investors and selling non-performing assets in
packages. Nowadays, the second approach has made a
substantial progress. At the end of last year, Huarong
put on auction 25 billion yuan worth of non-performing
assets, attracting such bidders as Citigroup, JP Morgan,
Goldman Sachs, UBS Warburg, and Morgan Stanley. In
August this year, Cinda put on sale 15.7 billion yuan
worth of non-performing assets, attracting the
participation of Goldman Sachs, Merrill Lynch and Credit
Suisse First Boston.
Anyway, the best way to
avoid non-performing loans is to prevent them from the
origin. With regard to this, Chinese authorities seem to
have pinned the hope on share holding transformation of
banks. As the supervisor to state-owned banks, CBRC has
raised four gals and seven standards that serve as the
general requirements for the current reform of banks.
The seven standards cover very specific
requirements on non-performing assets rate and
non-performing loans rate. Authoritative sources in the
banking sector pointed out that share holding reform of
banks should be pushed forward gradually. It is believed
that the non-performing loans rate will be much lower in
two or three years.
The question is whether or
not the share holding transformation will work? Many
aspects are involved and it is difficult to answer this
question, but there is one clear point, that is, it's
not an easy thing to reduce the non-performing loans by
a great margin within a short period.
CBRC
Chairman Liu Mingkang said recently that banking reform
should not be isolated, and it depends on the general
environment whether or not it will succeed. Improvement
of general environment, however, is a gradual progress.
(Asia Pulse/XIC)
Sep 21, 2004
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