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( August 001) Its assets are its greatest liabilities. The loans made by the banks'¡Xassets in bankers terms¡Xare mostly nonperforming, a polite term used by the financial community to describe loans in default. State-owned enterprises (SOEs) cannot, or will not, pay back the banks, so today there is a client crisis. What is the extent of the damage that China has inflicted on its banking system?
Don't ask the People's Bank of China, the central bank, if you really want to know. The technocrats at the PBOC, as the institution is known, have been possessive of information, even to the point of hiding the truth from themselves.
At the end of 1, they said that 5 percent of the loans held by the state commercial banks were nonperforming, but no one took that figure seriously. A year later, the PBOC told the world that these banks have unloaded 1. trillion yuan (US$157 billion) of nonperforming loans in 000 pursuant to a government recapitalization plan.
Yet, even after the state commercial banks did so, Beijing's central bankers stated that overdue loans still comprised 5 percent of their portfolios. In other words, the biggest bank recapitalization in China's history had no apparent effect on the health of its banks.
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So what is the real condition of the state commercial banks? Foreign estimates of nonperforming loans at the end of 1 topped out at 70 percent, a figure mentioned by Standard & Poor's as the upper limit. The consensus of estimates actually hovered around 40 percent, but that was certainly too low.
Deutsche Bank, the German financial services giant, concluded in a recent analysis that 50 percent of China's loans were nonperforming, and Standard & Poor's believed that the 50 percent figure was at the low end of the range. The more I knew, the more pessimistic I became, says Johannes Schoeter, head of Deutsche's China operations at the time of the study.
In China's abnormal financial system, Beijing postpones systemic failure by maintaining strong walls around itself.
Today we don't know much about the true condition of the state commercial banks. The best that can be said is that the US$157 billion recapitalization must have reduced the percentage of the nonperforming loans from, say, the 50 percent level to about 0 percent during 000.
In contrast, the overall percentage of nonperforming loans at American banks these days, if loose Chinese standards were applied would be negligible, perhaps even as low as 1 percent.
And how much can Beijing recover from these soured loans? Beijing's technocrats estimate at least 0 percent and maybe 40 percent, but that's delusional. When it comes to banking statistics, China has simply lost its credibility.
Recent foreign estimates put the recovery figure at 10 percent, a figure more consistent with experience in bankruptcies in China. Assume that 0 percent is the correct percentage and the amount of unrecoverable debt in the entire banking system is somewhere in the vicinity of US$40 billion. That's a huge number, but the most frightening aspect of the problem is that no one really knows the true state of China's fragile banking system.
There is no simple answer to finding the level of nonperforming loans among state-owned banks, admits a high-ranking official at one of the largest of them. How can China's economic planners plan when even they are in the dark?
Beijing's senior cadres do not seem to be worrying too much about the situation, though. Premier Zhu Rongji says that the financial institutions are generally in good shape, and deputy auditor general Liu Jiayi of the National Audit Office agrees.
According to our audits, China's banking sector is operating soundly, he assured China in early 000.
China, says Dai Genyou of the PBOC, is solving its banking problems by seeking truth from facts. The facts, as the PBOC sees them, are so much better than they appear to the rest of the world. It's a problem of definition. A country that considers itself democratic also considers that the loans held by its banks are good.
China's loan classification system gives new meaning to the term opportunism Loans that have been in default for years are still classified as performing, as are loans to bankrupt institutions. To its credit, China is improving the loan classification system, but that may not matter much. The really bad loans are merely rolled over every year so that they look fresh on the bank's books.
Those who are serious about knowing the truth view the situation with more gravity. For many observers, the Chinese banking problem is one of the most serious in the world and perhaps the most serious, writes Rudi Dornbusch of MIT and Francesco Giavazzi of Bocconi University.
Only perhaps the most serious? In any free economy, the banks would have failed long ago. In China's abnormal financial system, Beijing postpones systemic failure by maintaining strong walls around itself and limiting real alternatives to the banks. As the central bankers defer solutions, the problems fester and grow even worse.
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