China At The Edge of Financial Crisis: Central Bank Governor


2004.08.16
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HONG KONG–China’s central bank governor has warned that the country is “at the edge” of a financial crisis as bad debt levels continue to rise. Speaking at a financial conference last month in Shanghai, People’s Bank of China Governor Zhou Xiaochuan said he was pleased to hear that other experts had also recognized the scale of China’s bad debt problem.

“I believe that while large-scale commercial banks are working hard, according to certain classification, their bad debts have already exceeded 40 percent, so we are at the edge of a financial crisis,” Zhou told delegates at the conference in early July. “It’s not as though you can avoid or predict it if you so desire.”

Other top financial scholars and policymakers underlined his warnings during the same session.

Wu Jinglian, deputy director of the Committee for Economics Affairs of the Chinese People’s Political Consultative Conference and chief economist of the State Council Development Research Center, said China had two years in which to put its financial house in order.

In a keynote speech titled “The Urgency of China’s Financial Reform,” Wu said there were two years left in the five-year transitional period following China’s accession to the World Trade Organization (WTO). At that time, China has to open up its entire Renminbi (local currency) banking industry to foreign-owned banks, posing enormous challenges to the struggling financial system.

The creation of the China Banking Regulatory Commission (CBRC) in April 2003 gave official recognition to the scale of the problems besetting China’ banking system.

Bad loans made by banks to cronies in government departments and state-owned enterprises continue to proliferate in spite of a government bailout in 1999, and the creation of asset-management companies (AMCs) to dispose of U.S.$169 billion in bad debt.

Estimates of the total level of bad debt throughout the banking system vary, but overseas ratings agencies have estimated it as high as 50 percent. The big four state-owned commercial banks continue to report increases in non-performing loans, in spite of several years of guidelines from central government urging prudence and professionalism.

“The main challenge the deregulation of foreign-owned banks poses to Chinese banking system is that if the deposits are captured by foreign-owned banks, resulting in state-owned banks’ loss of these rare assets,” Wu told the conference. “Then a financial crisis may appear.”

Wu said the Chinese financial system still contained black holes, and the apparatus that causes them still exists. He lashed out at the use of the country’s fledging financial markets as a sort of state-sponsored bonanza for enterprises and government officials.

“China’s use of the stock market to finance its state-owned enterprises has made it a financing tool that tilts in their favor,” Wu said.

He said the state used such tactics as giving out news to stimulate the market, restricting the number of investors, and splitting shares to inflate the issue price of companies that have privilege of forfeiture so they can raise funds from floating shareholders.

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