banking - China needs private banks to prevent crisis - Economist

 

Unless China wholeheartedly develops private banks, a banking crisis will be unavoidable, said renowned economist and CEIBS-professor Wu Jinglian on Friday in Shanghai. Wu spoke during the China International Conference on Finance on the urgency of reform in the banking sector.

 

Wu expects that the opening up of the banking sector in two years time, when foreign banks can also hold deposits in Renminbi, will have a profound impact on the domestic banks. “Domestic banks can no longer dilute their non-performing loans with the savings of the customers and they lose their current monopoly,” Wu said. He also expected that the fast aging populations would show lower savings rates than the past decade.

Too late, too little, was how the advisor of former Premier Zhu Rongji qualified the banking reforms in China. In the 1990s China bailed out the banks and set up four Asset management Companies (AMC’s) to deal with a portion of their non-performing loans. Wu: “But the banking system itself remained unchanged, so new performing loans could develop.” After a first decline non-performing loans were up to 22.6 percent again at the end of 2003 according to figures by the People’s Bank of China. Wu: “1.4 trillion renminbi worth of non-performing loans remained and most of them are unrecoverable.” Outsiders estimated the percentage was then double the official figure.

“Only in 2001 for the first time strict measures were taken and quota’s were introduced to reduce the non-performing loans,” Wu said. He doubts whether the banking system has structurally improved. Wu: “The banks are reducing their ratio of non-performing loans by getting in more deposits. That will not last because of foreign competition. Also, more loans are now long-term, so it will take longer to find out they will not perform. Recent scandals with companies like D’Long and Foshan show that new non-performing loans, sometimes billions of renminbi per time, still appear.”

What made China’s transition from a planned economy into a market economy more successful than the transition in the former Soviet Union and Eastern Europe is because China has effectively used the private sector as a tool for change. Wu: “When you restructure a state-owned industry without having any private capital available, you can only give your assets away. Nobody can buy it, and then it all goes to a small group of very powerful people.” Also the non-state sector in China created a pool of real entrepreneurs that could be used to reform the economy. Wu: “You need to have true entrepreneurs who know what it is to compete. When you have no entrepreneurs, it is hard to run a market economy.” Because the state assets were not turned over to a small group of wealthy people, reforms in China are much more supported by the society than in the former Soviet Union and Eastern Europe, Wu added.

Unfortunately, that valuable lesson has been forgotten in the banking sector and regulators are very reluctant to give a go ahead to private banks. “That is wrong,” said Wu.

He acknowledged that private banks could have problems, lack of capital reserves and a larger vulnerability. Wu: “But that is no reason not to develop private banks. We have delayed the reform of the banking industry too long. Our focus has been too much on the state banks, who were favored and subsidized by the tax money. That created too many moral hazards… All the bankers knew the state would have to come to their rescue whatever they would do.”

Wu fears that unless China unleashes internal competition by the non-state sector – like it has done in other sectors of the economy – real reform will be possible. “The owner of the equity is often an empty shell,” Wu complaints. “The banking reform is now done by the original management and that is a big problem. That makes reform very difficult, while it is very urgent.”