Academic journal article Chicago Journal of International Law

WTO: Time's Up for Chinese Banks-China's Banking Reform and Non-Performing Loan Disposal

Academic journal article Chicago Journal of International Law

WTO: Time's Up for Chinese Banks-China's Banking Reform and Non-Performing Loan Disposal

Article excerpt

This year's hottest topic in global capital markets will probably be the overseas listings of China's "big four" state-owned commercial banks.1 International investment banks and a considerable number of prestigious international law firms are currently joining forces to shape another golden image of China's economic ascent. Equally striking is the less dazzling side to this tale-that the overseas listings will keep China's banks from collapsing after December 11, 2006, when China, in order to abide by its pledges in the World Trade Organization ("WTO") accession agreement, will have to open its banking market to foreign competition.

China's state banking system has been struggling with a staggering amount of bad loans, which are estimated at around 40 percent of total outstanding loans.2 In theory, if foreign banks will be conducting local currency business in China, the massive deposit base that has been supporting China's de facto bankrupt banking system will shift elsewhere.3 In order to prepare its banks for this tough challenge, China has been pushing these banks to seek overseas listings.4

This Article will briefly examine several issues underlying the hottest financial news in this year's global market. In particular, the Article will ask how such large non-performing loans ("NPLs") have come to exist in the Chinese banking system, how the Chinese economy has managed to grow despite its many flawed and vulnerable banks, and how the Chinese have resolved the NPL problem. Finally, the Article will discuss how effectively the NPL disposal scheme has worked thus far, in the period before the upcoming overseas listings.

I. INTRODUCTION

Why was China able to survive the Asian financial crisis that began in 1997? A high-ranking Chinese official has given a concise but clear answer: how could we lose this game if we did not even attend it?5 However, the Chinese government was shocked by the pervasive banking failures that occurred in neighboring countries, including Thailand, South Korea, Indonesia, and Malaysia. The reason for China's concern was understandable: the Chinese banking system's ratio of bad loans to total outstanding loans was even higher than that of the aforementioned Asian countries prior to the 1997 financial crisis.6 Surprisingly, estimates revealed in 2005 indicate that this is probably still the case.7

Pinpointing the actual amount of China's NPLs is a task that has stymied many top economists and investment analysts. According to the Chinese government, the official number was approximately $240 billion in the middle of 2003,8 a total representing less than half of the number estimated by international organizations and economists. The real figure, as estimated by recent studies, ranges widely from $410 to $815 billion due to the lack of complete, reliable official statistics.9 Studies also show that NPLs have been increasing at the rate of $150 billion per year since 2000.10

Furthermore, the high concentration of financial assets in China's economy fosters a lack of diversification and competition, thereby increasing financial risks. Without a modern capital market, most Chinese households save their money in banks. The savings rate in China is around 40 percent, the world's highest. Eighty-five percent of total household financial assets were in the form of bank deposits in the 1990s, accounting for at least 70 percent of total domestic savings as of 1997.11

If the huge amount of NPLs eventually causes a financial meltdown, it will also undoubtedly trigger a political crisis in China.12 China's state banking system has amassed 70 percent of total household savings and provided around a million job opportunities.13 Meanwhile, the weak financial market has resulted in bank loans accounting for more than 80 percent of total corporate financing, with state-owned enterprises ("SOEs") supplying nearly 80 percent of these loans.14 SOEs essentially borrow money from people through state banks to maintain their inefficient businesses while thrifty Chinese people live by working for SOEs. …

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