China and the Challenge of Economic Globalization by Hung-Gay Fung Pei Changhong Kevin H. Zhang

Author:Hung-Gay Fung, Pei Changhong, Kevin H. Zhang [Hung-Gay Fung, Pei Changhong, Kevin H. Zhang]
Language: eng
Format: epub
ISBN: 9781280912443
Goodreads: 16810532
Publisher: M.E. Sharpe
Published: 2005-01-01T00:00:00+00:00

Second, four government asset management companies (AMCs)—Oriental (Dongfang), Cinda, Huarong, and Great Wall—were established in 1999 to manage bad debt. Table 11.1 shows the four AMCs, mainly financed through government bonds and affiliated with the Big Four. Most of the NPLs (US$170 billion) will be transferred to government asset management companies, while the remainder of the funding requirement will be dealt with through capital infusions. The government has taken numerous moves to tackle the NPL problems by issuing RMB 1.4 trillion of government bonds to fund these initiatives. So far, the AMCs have disposed of about 30 percent of the total loans in their portfolios, while the cash recovery rate from the loan disposal ranges from about 10 percent (Great Wall) to 31 percent (Cinda). Third, the China Banking Regulatory Commission and its local branches have been set up since late 2002 to strengthen lending oversight. Fourth, the government issued new banking rules for the Big Four to reduce NPLs, such as a 3–4 percent decrease in the NPL ratio and a RMB70 to RMB80 billion drop in NPL amounts. The government has also mandated a five-level loan classification system to increase the transparency of bank operations. Last, the Law on Banking Regulation and Supervision, passed on December 27, 2003, provided a legal framework to govern bank lending activities. The banks have also made their own efforts to address this problem. They have established strict credit and lending management rules, installed new procedures for lending, and set their own quotas for NPL reduction.

These measures appeared to be working, at least on the books. As of June 2003, the NPL balance for the Big Four was 22.9 percent, a decline of 4.02 percent from the beginning of the year; the balance of other state-owned banks was 9.34 percent, a decrease of 3.51 percent. But critics argue that this progress with the NPL ratio was not due to the improvement of the operating system or governance structure, but to the drastically increasing size of outstanding loans (People’s Daily, September 17, 2003). That is, the NPL ratio’s numerator decreased far less than the increase in the denominator. At the end of August 2003, the total outstanding loans reached RMB 16.31 trillion, a 23.9 percent rise from the previous year, leading some to argue that the economy is overly hot. To exacerbate the situation, close to 60 percent of these loans are either intermediate- or long-term loans (Sina, October 21, 2003, http://finance.sina.com), which is similar to the situation in the Thai banking system before the 1997 Asian financial crisis and may conceal the actual NPL problem.2 Mortgage loan balances, in particular, grew from RMB310.6 billion at the end of 1998 to RMB2.13 trillion as of November 2003, jumping almost sevenfold within five years. The banks doled out RMB426.4 billion in mortgage loans in the first three quarters of 2003 alone, which may fuel an overheating real estate sector. On the deposit side, only 43 percent of all deposits are in fixed-term savings accounts, and

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