China's new guard faces banking mess

When China's new guard under President Hu Jintao (胡錦濤) formally takes the reins of power at the close of the National People's Congress tomorrow, they will have to guide an economy along a road rife with dangers.

Although China has so far avoided the ills of a recessive world economy, Hu and his new team could quickly become heirs to an unravelling of China's economic miracle, analysts said.

"China's economy is losing growth momentum and is in need of policy stimulation," said Huang Yiping, an economist at Salomon Smith Barney.

Despite China's stupendous growth, the problems that the new leadership must confront have changed little since outgoing premier Zhu Rongji (朱鎔基) became China's top economic manager five years ago.

Among the most serious challenges that Hu and his new Premier and economic chief, Wen Jiabao (溫家寶), appointed yesterday, must tackle are an inefficient state sector that is still raking up massive losses.

China's banking system, which by Western accounting standards is insolvent, is weighed down with non-performing loans estimated to be in the hundreds of billions of dollars.

China faces more joblessness -- officially forecast to increase by 0.5 percent to 4.5 percent this year -- while an almost runaway gap between rich and poor is brewing social discontent in its hinterland.

Crucial to the Hu-led team's success will be the maintenance of China's strong economic growth rates while keeping a lid on these major structural problems, experts say.

China has set an official growth target of seven percent for the year, a figure it has been long assumed Asia's second-biggest economy would easily exceed.

Chinese leaders believe the growth rate must be maintained at this speed to not only keep the economy expanding, but also to contain unemployment, said Joseph Cheng, an analyst at the City University of Hong Kong.

To ensure the economy is on target this year, Beijing announced it will prime the fiscal pump by issuing 140 billion yuan (US$16.9 billion) in long-term government debt. But these new loans will ratchet up China's budget deficit to about 320 billion yuan (US$39 billion), an increase of 3.2 percent over last year.

"It is positive because it does stimulate the economy, but the cost is a high deficit," said DBS Bank analyst Chris Leung.

The government has little choice but to funnel cash into the economy as the country continues its two-decade-long transition toward a market-based economy, experts say.

Fiscal policy is also beholden to a new guard that will spend many precarious months trying to consolidate power.

"To hold back is difficult, Hu and Wen have presented a political image that they care about the common person, and so it's not a wise time to make [financial] cuts," Leung said.

China's banks have been trying to overhaul their accounting books by auctioning off non-performing loans at steep discounts, but real change has been slowed by the fear of the political repercussions in forcing defaulting state corporations out of business.

To guide the economy toward firmer footing officials will have to press forward with privatization. The private sector already makes up more than 33 percent of China's output.

"The new government is likely to accelerate the pace of privatization in the coming years, but how quickly it may proceed is still not clear," Huang said.