Shoring up China’s banks

The Chi­nese gov­ern­ment revealed this week that it had com­plet­ed the first phase of a sec­ond re-cap­i­tal­iza­tion of its four biggest state banks in an attempt to prop them up against their expo­sure to about bil­lion of non-per­form­ing loans. The banks bad­ly need the cap­i­tal injections—which are in the form of loans drawn on China’s $400 bil­lion hard cur­ren­cy (for­eign) reserves—to raise their cap­i­tal­iza­tion ratios above the curent 8 per­cent min­i­mum “recommended(link to BIS website)”:http://www.bis.org/bcbs/aboutbcbs.htm by the BIS. The state banks rep­re­sent 60% of lend­ing in Chi­na. Even if they com­ply with the con­di­tions appar­ent­ly attached to the loans, their shaky con­di­tion remains a major risk for the econ­o­my. Accord­ing to “press reports(link to Finan­cial Times story)”:http://www.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1073281063652&p=1012571727102 the bil­lion already divid­ed between the Bank of Chi­na and the Chi­na Con­struc­tion Bank come with sev­er­al con­di­tions relat­ed to gov­er­nance includ­ing cri­te­r­i­al for future per­for­mance by both the banks and senior staff. The Agri­cul­tur­al Bank and the Com­mer­cial Bank of Chi­na are next in line for sim­i­lar cap­i­tal injec­tions. In 1999 the Chi­nese gov­ern­ment put bil­lion into the crum­bling banks and direct­ly reduced some $170 bil­lion in bad loans.  Assum­ing that the total injec­tion this time is about $100 bil­lion, it rep­re­sents less than half the offi­cial lev­el of expo­sure to bad debt. The raid on for­eign reserves to fund the trans­fers means that the Chi­nese author­i­ties have weak­ened the case for a Ren­min­bi reval­u­a­tion at the same time as shoring up the bank­ing sec­tor. But they’ve used real mon­ey: will they get val­ue? Even with these mas­sive trans­fers, his­to­ry sug­gests it would take extra­or­di­nary efforts to man­age the banks back to prof­itabil­i­ty and good per­for­mance. Sim­i­lar bail-outs of the Japan­ese banks in the late 1990s didn’t work. Also, giv­en China’s very high rate of growth and the past per­for­mance of the banks, it’s very like­ly that the banks con­tin­ued to use the last funds injec­tions to lend to “risky com­mer­cial ventures(link to NY Times sto­ry on China’s invest­ment bubble)”:http://www.nytimes.com/2004/01/18/business/yourmoney/18china.html. Both the Bank of Chi­na and the Chi­na Com­mer­cial Bank are sched­uled to list on the HongKong stock mar­ket next year.

Resource

An excel­lent overview of (among oth­er things) the risks for the Chi­nese econ­o­my of the under­per­form­ing state sec­tor, and the con­sol­i­da­tion of those risks in the accounts of the state banks, can be found in “Chi­na Embraces the World Market(link to DFAT East Asia Ana­lyt­i­cal Unit)”:http://www.dfat.gov.au/publications/catalogue/china_embraces_world_market.html, ava­iable for down­load from the Aus­tralian Depart­ment of For­eign Affairs and Trade.

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