With one of the world's fastest-growing economies, China seems to have mastered the move to capitalism with surprising speed. But its financial sector is still struggling to cope with the waste from decades of socialism.
For years, banking decisions depended not so much on credit-worthiness as on personal ties to government officials and even bribery. China's banks ended up lending hundreds of billions of dollars worth of yuan to unsound enterprises, usually state-owned, that soon defaulted.
China's government took a big step three years ago to start cleaning up this mess, setting up four asset management corporations -- modeled after the American government agency that handled the savings and loan bailout -- to take over and dispose of US$170 billion of the banks' worst loans. These focused on essentially hopeless deadbeats, who had failed to repay anything since at least 1995, and sometimes even longer.
But now the cleanup is proving less ambitious than promised, and is falling far short of its goal of helping push China further toward a market economy.
Crippled companies
Many of the loans, instead of being sold for cash, have simply been converted into stock in the bankrupt companies, allowing even the most inefficient to stay in business under government ownership.
Moreover, the asset management companies are being forced to compete against the state-owned banks themselves, at least one of which has told potential buyers it may cover as much as half the cost of acquiring assets now being auctioned off here and in other Chinese cities.
The loan problem lies at the heart of one of China's biggest economic problems these days: Its financial system often fails to channel capital efficiently from savers into productive investments. The result is that scarce investment capital and other resources remain tied up indefinitely in businesses so unproductive that the finished goods they produce may be worth even less than the raw materials they use.
The next generation
Zhu Rongji, China's prime minister and an advocate of financial reform, has personally championed the sale of nonperforming loans. But Zhu is expected to retire in the next few months; Chinese financial experts in Beijing say that progress on this front will be a bellwether in the months ahead of how committed the next generation of leaders will be to continued economic reforms.
Fred Hu, a Goldman Sachs economist who is informally advising China's Finance Ministry on the asset management corporations, said that continued delay in disposing of bad debts could cost China enough to retard its growth rate by as much as 2 percentage points in the coming years.
"The progress has been very, very slow, almost at a snail's pace," he said. "It has taken too long, and that has translated into lost opportunities."
One big problem is that banks were so sloppy in issuing many of the loans that collateral was not properly registered or titles of ownership not checked. This makes it almost impossible for buyers to take the borrowers to court to force settlements.
"We went through and did an incredible amount of work and said `whoa,'" said one investment banker, who insisted on anonymity. "Seventy percent of the documents had massive defects in them."
An even bigger problem is that many state-owned factories occupy what is now prime real estate in downtown areas. But these factories, many of them unproductive money losers dating back to the 1950s, have work forces and well-connected managers local officials are reluctant to antagonize by allowing loan buyers to foreclose, bulldoze the factories and erect higher-value buildings like first-class office complexes or shopping malls.
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