Financial experts are expressing grave worries about the solvency of China's banking system, which may have a bad-loan problem several times as bad as Japan's.
The head of China's central bank said recently that 25 to 30 percent of all bank loans were not being repaid. On Thursday, the credit-rating agency Standard & Poor's estimated that the situation may be twice that bad, with half of all loans classifiable as nonperforming. And the agency found signs that the banks were busily making matters worse.
Without a robust banking system, it will be increasingly difficult for China to sustain rapid growth, attract foreign investment and develop the modern economy it needs to provide jobs and maintain social stability at a time of widespread disillusionment with the Communist ideology that united the country for 50 years.
Standard & Poor's warned on Thursday that Chinese banks appeared to be trying to prop themselves up by issuing new loans at a furious pace, in many cases financing vaguely described projects with little discernible effect on China's overall economic output. This approach could yield even more bad loans, and may be creating a financial bubble of wasteful and mismanaged overspending of the kind that led to crises in many other East Asian nations in the late 1990s, according to Terry E.H. Chan, the ratings agency's director for Chinese and Southeast Asian financial institutions.
"Is the bubble building?" Chan asked at a news conference here on Thursday. "We are concerned. Where is the money going?"
Though a few privately owned and foreign banks have gained small footholds, China's banking system is dominated by four giant commercial banks, all state-owned. Questions have arisen periodically for a decade about the banks' viability, mainly because of the evident pressures on them to make uneconomic loans for various political reasons.
Beginning in 1999, the Chinese government sought to resolve these concerns by relieving the four big banks of US$170 billion worth of bad loans -- 12 percent of loans outstanding -- and then writing off the loans or reselling them, following the same general approach that worked for the US after the savings and loan crisis.
But those efforts do not appear to have succeeded, Chinese and Western officials now say. Dai Xianglung, the central bank governor, said in a recent speech that even under the most generous accounting rules, one-quarter of the loans left on the books of the country's banks were nonperforming. New, more stringent rules being introduced will push the figure above 30 percent, other Chinese regulators have said.
The banks are gradually earning profits to offset the bad loans, Dai said in his speech. He called on the banks to get the bad-loan number down to 15 percent within five years.
By comparison, the highest estimates of the bad-loan situation in Japan, where banks have been in desperate straits for a decade and are very slow to write loans off, put the size of the problem at 15 percent or less of outstanding loans.
In the US, banks are much more aggressive about writing off loans on which they are not receiving interest payments. At banks with assets of more than US$1 billion, just 1.5 percent of loans were more than 90 days overdue on Dec. 31, according to data from the Federal Deposit Insurance Corp.
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