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| Kathmandu, Saturday June 21, 2003 Ashadh 07, 2060. |
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Banking crisis imperils China
By GORDON C CHANG
Just as the epidemic of severe acute respiratory
syndrome is receding in China, concerns are rising about the health of the financial
system in the world’s most populous nation. A new loan scandal shows that China’s
dominant state banks are getting sicker, not stronger. The consequences could be serious
for an economy that relies on bank credit to expand.
At the center of the controversy is a $227
million loan from the Hong Kong unit of the Bank of China, one of the country’s
biggest state banks, to the Shanghai entrepreneur Zhou Zhengyi. The loan, now in default,
was reportedly approved by Liu Jinbao, the Bank of China’s Hong Kong chief, who was
suddenly transferred back to Beijing last month.
Zhou, listed by Forbes magazine as China’s
11th richest man, has been detained on suspicion of bank and tax fraud in connection with
his real estate transactions. The official probe was widened to include other property
developers in Shanghai. Now city officials say that they will review every major land sale
in the last two years.
Almost a dozen Chinese banks are believed to
have extended loans amounting to several billion dollars to Zhou’s companies for real
estate development. A substantial portion of the money may never be recovered. As a
result, the rating agency Standard Poor’s has downgraded the Bank of China’s
Hong Kong unit from "stable" to "negative." The agency said the fact
that the loan became problematic in less than a year raised questions about the adequacy
of credit approval controls. The loan was apparently granted in violation of internal
guidelines and sound banking practice.
The Bank of China was thought to be the most
modern of the country’s four large state lenders, and the bank’s Hong Kong
operations were supposed to be its best. On the basis of this perception, foreign
investors bought about $2.8 billion of the bank’s stock in an offering in July 2002.
Now China may be facing a huge banking crisis.
One wouldn’t know it from government pronouncements in Beijing. Officials there say
the Big Four banks are recovering fast. Official statistics show that about a quarter of
the loans in these mammoth financial institutions are nonperforming, meaning that no
interest is being paid. The real story, however, is worse. Despite two partial
recapitalisations in the last five years, at least 40 percent, and perhaps as much as 50
percent, of total loans made by China’s banks are questionable.
The condition of the banks is eroding largely
because Beijing forces them to finance the nation’s extraordinary growth. Some loans
are commercially viable, but many others are for projects on which the prospects for
repayment are, at best, uncertain.
Moreover, the central government directs banks
to extend credit to stimulate real estate development. China’s planners are creating
an asset bubble along China’s east coast, the country’s urban manufacturing
heartland. When the bubble bursts, the economy and ordinary people as well as the banks
will suffer. Thus Zhou’s bad loans are part of a much larger problem.
Officials investigating Zhou’s dealings
have reportedly been aware of the suspicious loans from the Bank of China for more than a
year, before the bank’s initial public offering of shares to investors last summer.
By selling a brewing scandal to an unsuspecting public, China has called into question its
good faith in commercial dealings. Foreign investors, whose money is needed to
recapitalise the banks, are bound to become wary.
Moreover, the probe of Zhou could implicate
political leaders in Shanghai, including former President Jiang Zemin and at least one
current member of the Politburo of the ruling Communist Party. If true, the investigation
may be part of a political struggle between Jiang’s faction and that of his
successor, Hu Jintao.
In the past, Chinese leaders fought among
themselves with disastrous consequences for the nation. The expanding investigation of
Zhou and Liu could have similar results as its spreads.
(The writer, a lawyer, is the author of The
Coming Collapse of China)
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