The Size and Efficiency of Chinese Banks and Financial Markets
China’s banking system is very important in terms of size relative to its stock markets, with its ratio of total bank credit to GDP (1.11) higher than even the German-origin countries (with a weighted average of 0.99). However, when we consider bank credit issued (or loans made) to the Hybrid Sector only, China’s ratio drops sharply to 0.24, suggesting that most of the bank credit is issued to companies in the State and Listed Sectors. Moreover, China’s banking system is not efficient: its overhead cost to total assets (0.12) is much higher than the average of French-origin countries (0.05), the next highest group of countries.
Now let us have a detailed look on the specific features of the major field of banking business: acquired deposits and given loans. Likewise in other Asian countries, household savings in China have always been high. The economical growth, with its sharp increase in personal incomes and limited investment opportunities, enforced even further growth of bank deposits of individuals with the 2001 figure reaching USD 800 billion.
The comparison between sources of savings shows that household savings in metropolitan area account for more than 50% of total savings, while deposits from enterprises (including firms from all sectors) show to be the second important source.
The structure of given loans, however, has quite the opposite picture. Overwhelming amount of bank loans goes to manufacturing industries with many SOEs, whereas the amount of credits given to TVEs, privately and collectively-owned firms, and joint ventures (the last three columns) is much less. The structure of loans does not change over the last years, which creates a huge imbalance in the distribution of funds.
Researchers have argued that the imbalance between loans made to the State Sector and the Hybrid Sector reflects the government’s policies of wealth transfer from the Hybrid Sector to the State Sector via state-owned banks, among other channels. Brandt and Zhu (2000) argue that the employment and investment growth in the inefficient State Sector have been supported by the government in the form of cheap bank credits and money creation (or inflation taxes). With aggregate data between 1979 and 1993, they find that an average of 84% of all new credits from the state banking system is allocated to the State Sector; more than one-third of the loans were “policy loans” financed by policy banks and/or the PBOC, which were generally not repaid.
It has been widely claimed in the West that the ‘‘Policy Loans’’ extended by China’s state-owned banks to unprofitable state enterprises threaten a crisis in its banking system and may do great damage to the entire economy (see Gordon 2003). Policy loans were made and continue to a much lesser degree to be made to keep unprofitable enterprises from going bankrupt. They are a large fraction of outstanding loans of China’s banking sector, as much as 42% according to He (2002) and Ma and Fung (2002), and the likelihood that a material fraction of these loans will be repaid is small.
In recent years, the Chinese government has taken active measures to reduce the NPLs and improve the efficiency of the banking sector. Four state-owned asset management companies (AMCs) were formed with the goal of assuming the NPLs accumulated in each of the “Big Four” state banks and liquidating them. The liquidation process includes asset sales, tranching, securitization, and resale of loans to investors. A critical issue that affects the effectiveness of the liquidation process is the relationship among AMCs, banks, and distressed or bankrupt firms: since both the AMCs and the banks are state-owned, it is not likely that the AMCs would force the banks to cut off (credit) ties with defaulted borrowers (SOEs or former SOEs) as a privately owned bank would do. Thus, as the old NPLs are liquidated, new NPLs from the same borrowers continue to surface.
The problem of NPL, however, does not make a sharp problem for China’s government. Comparing to such countries as the United States and Japan, the ratio of total government debt to GDP is not crucial. The widely agreed international precaution line for a country’s treasury debt is 60%.
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