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Authors: Carl Walter, Fraser Howie
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is.
FIGURE 2.5 Selected international and Chinese banks by total assets, FY2008
Source:The Banker and respective annual reports
This gets to the true heart of the issue. Understanding how the Chinese banks were relieved of their problem-loan burdens leads to a clear understanding of their continuing weakness. The data in Figure 2.6 show an impressive and factual reduction in total non-performing commercial bank loans over the seven years through 2008. In 1999, the NPL ratio (simply put, bad loans divided by total loans) of the Big 4 banks was a massive 39 percent just before spinning off the first batch of bad loans totaling US$170 billion in 2000. From 2001 to 2005 ICBC, CCB, and BOC spun off or wrote off a further US$200 billion. In 2007, ABC, the last of the major banks to restructure, spun off another US$112 billion, making a total among the four banks of around US$480 billion.
FIGURE 2.6 Non-performing loan trends in the top 17 Chinese banks, 1999–2008
Source: PBOC, Financial Stability Report, various; Li Liming, p. 185
It is thought that the bulk of these bad loans originated in the late 1980s and early 1990s when bank lending flew out of control, as it did in 2009. If that is the case, this nearly US$480 billion in bad loans was equivalent to about 20 percent of China’s GDP for the five-year period from 1988 to 1993, the year Zhu Rongji applied the brakes. A more important point, perhaps, is that the banks silently carried these NPLs for a further five years before anything was about them and another 10 years went by before they were said to be fully worked out (but not written off).
The US savings-and-loan crisis of the 1980s may help put China’s NPL experience into some perspective. The Federal Deposit Insurance Corporation (FDIC) has calculated that during the 1986–1999 period in the US, the combined closure of 1,043 thrift institutions holding US$519 billion in assets resulted in a net loss after recoveries to taxpayers and the thrift industry of US$153 billion at the end of the clean-up in 1999. 6 In other words, the recovery rate achieved was over 60 percent. In contrast, the commonly noted rate in China after 10 years of NPL-workout efforts is considered to be around 20 percent.
This vast difference in recovery rates on comparable amounts, together with the dramatic decrease in NPLs shown in Figure2.6, raises a host of questions. If, in fact, the NPL rates of Chinese banks have now improved to such a degree, is it because they are lending to better companies that have the capacity as well as the willingness to repay, or did their original SOE clients simply start to pay again? If the latter is the case, why were the previous problem-loan recovery rates so low? A significant change in client base can be ruled out: Chinese banks overwhelmingly lend to SOEs and always have, largely because they are viewed as reliable, unlike private companies. In retrospect, this attitude seems to be mistaken.
The Party tells the banks to loan to the SOEs, but it seems unable to tell the SOEs to repay the loans. This gets at the nub of the issue: the Party wants the banks to support the SOEs in all circumstances. If the SOEs fail to repay, the Party won’t blame bank management for losing money; it will only blame bankers for not doing what they are told. Simply reforming the banks cannot change SOE behavior or that of the Party itself. Improved NPL ratios over the past 10 years, therefore, suggest a dramatic improvement in the willingness of SOE clients to meet their loan commitments, the selection of investment projects that actually generate real cash flow, or some other arrangement for bad loans.
THE SUDDEN THIRST FOR CAPITAL AND CASH DIVIDENDS, 2010
If it is true that lending standards have improved significantly, perhaps there is no need to be concerned about the after-effects of the 2009 lending binge; the quality of Chinese bank balance sheets will remain sound and the level of write-offs manageable.
FIGURE 2.5 Selected international and Chinese banks by total assets, FY2008
Source:The Banker and respective annual reports
This gets to the true heart of the issue. Understanding how the Chinese banks were relieved of their problem-loan burdens leads to a clear understanding of their continuing weakness. The data in Figure 2.6 show an impressive and factual reduction in total non-performing commercial bank loans over the seven years through 2008. In 1999, the NPL ratio (simply put, bad loans divided by total loans) of the Big 4 banks was a massive 39 percent just before spinning off the first batch of bad loans totaling US$170 billion in 2000. From 2001 to 2005 ICBC, CCB, and BOC spun off or wrote off a further US$200 billion. In 2007, ABC, the last of the major banks to restructure, spun off another US$112 billion, making a total among the four banks of around US$480 billion.
FIGURE 2.6 Non-performing loan trends in the top 17 Chinese banks, 1999–2008
Source: PBOC, Financial Stability Report, various; Li Liming, p. 185
It is thought that the bulk of these bad loans originated in the late 1980s and early 1990s when bank lending flew out of control, as it did in 2009. If that is the case, this nearly US$480 billion in bad loans was equivalent to about 20 percent of China’s GDP for the five-year period from 1988 to 1993, the year Zhu Rongji applied the brakes. A more important point, perhaps, is that the banks silently carried these NPLs for a further five years before anything was about them and another 10 years went by before they were said to be fully worked out (but not written off).
The US savings-and-loan crisis of the 1980s may help put China’s NPL experience into some perspective. The Federal Deposit Insurance Corporation (FDIC) has calculated that during the 1986–1999 period in the US, the combined closure of 1,043 thrift institutions holding US$519 billion in assets resulted in a net loss after recoveries to taxpayers and the thrift industry of US$153 billion at the end of the clean-up in 1999. 6 In other words, the recovery rate achieved was over 60 percent. In contrast, the commonly noted rate in China after 10 years of NPL-workout efforts is considered to be around 20 percent.
This vast difference in recovery rates on comparable amounts, together with the dramatic decrease in NPLs shown in Figure2.6, raises a host of questions. If, in fact, the NPL rates of Chinese banks have now improved to such a degree, is it because they are lending to better companies that have the capacity as well as the willingness to repay, or did their original SOE clients simply start to pay again? If the latter is the case, why were the previous problem-loan recovery rates so low? A significant change in client base can be ruled out: Chinese banks overwhelmingly lend to SOEs and always have, largely because they are viewed as reliable, unlike private companies. In retrospect, this attitude seems to be mistaken.
The Party tells the banks to loan to the SOEs, but it seems unable to tell the SOEs to repay the loans. This gets at the nub of the issue: the Party wants the banks to support the SOEs in all circumstances. If the SOEs fail to repay, the Party won’t blame bank management for losing money; it will only blame bankers for not doing what they are told. Simply reforming the banks cannot change SOE behavior or that of the Party itself. Improved NPL ratios over the past 10 years, therefore, suggest a dramatic improvement in the willingness of SOE clients to meet their loan commitments, the selection of investment projects that actually generate real cash flow, or some other arrangement for bad loans.
THE SUDDEN THIRST FOR CAPITAL AND CASH DIVIDENDS, 2010
If it is true that lending standards have improved significantly, perhaps there is no need to be concerned about the after-effects of the 2009 lending binge; the quality of Chinese bank balance sheets will remain sound and the level of write-offs manageable.
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