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Tue, Mar 19, 2002 - Page 19 News List

Let's give China's economy the Enron test

Like the Texan firm, China is a massive, bureaucratic operation that's big on spin and small on transparency

By William Pesek Jr  /  BLOOMBERG , BEIJING

You won't find any Enrons here in China. That declaration Friday came from the very top: Premier Zhu Rongji (朱鎔基). Yet in arguing that there're no Enron-like time bombs in Asia's second-biggest economy, Zhu may have opened a can of worms.

For one can't help but wonder if he could say the same about China's entire financial system.

Even after 50 years in government, there're certain things about which the 73-year-old doesn't tire of speaking. One is China's debt, or the lack thereof. During his post-National People's Congress press conference, Zhu reminded the world that debt as a proportion of gross domestic product remains within safe limits. And at 16 percent of GDP, who could argue? Japan's debt, after all, is approaching 140 percent of GDP.

Trouble is, there's a gaping hole in China's we-have- negligible-debt argument. It ignores the fact that state-owned banks -- central government-run entities for which Beijing ultimately is on the hook -- have a whole lot of debt outstanding.

Beijing's debts are believed to be at least 70 percent of GDP. Worse, the banks are sitting on mountains of bad debt.

Beijing contends non-performing loans account for 26.6 percent of lending by its top four commercial banks, but private analysts think the figure is much higher, perhaps 50 percent. That said, it seems appropriate to give China's economy the Enron test. Is it a gigantic debt-crisis waiting to happen? Few serious observers think China's financial system will collapse anytime soon. It's still the world's fastest growing economy and its second-biggest recipient, after the US, of foreign direct investment. China's inclusion into the WTO is another plus that's likely to boost exports and investment.

Yet China boasts some Enron-esque qualities that warrant attention. Like the Houston-based energy company, China is a massive, bureaucratic operation that's big on spin, small on transparency. Its financial system has myriad problems covered up by impenetrable Communist-era accounting. It features loads of managers, regulators, auditors and credit raters who are either asleep at the switch or looking the other way.

How else can the nation's "big four" banks be technically insolvent, carry such low capital-adequacy ratios and run up a massive bad-debt book without triggering loud alarms? Some have raised flags. A recent book, China's Troubled Bank Loans, by Jianbo Lou examines the ``significant and increasing problem'' of bad loans at state-owned banks. The China Dream, by Joe Studwell, questions why Westerners, so seduced by its future market potential, have been so willing to ignore China's risks. And Makoto Ikeya, chief analyst at Rating & Research Information Inc, last October released a report titled ``Chinese NPLs: A Struggle Against Chaos.'' Some household-name think tanks also have taken a crack at the issue. The Brookings Institution's Nicholas Lardy has warned that "there's evidence that new non-performing loans continue to emerge at a prodigious rate." To Lardy, the question is this: How will China be able to bear the fiscal cost of restoring the banks to financial health and preventing households from suffering massive losses on their accounts? Beijing dismisses such questions. Its defense, and a powerful one at that, is that doubters are just picking on China -- again.

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