Standard & Poor's is far from alone in its assessment of China's problems. Wei Yen, vice president for Chinese banking at Moody's Investors Service, also say that the bailout has failed. But he was less pessimistic than Standard & Poor's about the potential for Chinese banks to grow their way out of their problems by finding creditworthy new borrowers.
Yen said the four main commercial banks had made considerable progress in centralizing control over lending and in imposing strict risk controls. The goal of these measures is to insulate local branch managers against pressure from local politicians and factory bosses to make ill-considered loans.
"We don't dispute that the Chinese banking system has terrible problems, but if you take a long-term perspective and look at what they have done in the last five or six years, it's tremendous," Yen said, adding that Moody's would soon release its own report.
In the Mao Zedong era, Chinese banks were not businesses in the Western sense. They were conduits for distribution of state subsidies to local enterprises, and for collection of taxes and other contributions to national revenue from those enterprises. How much borrowers received had little to do with how much they repaid.
Beijing tried to put the banks on a commercial footing in 1994 by setting up three new institutions to take over the job of financing big state-owned enterprises, the ones that employed so many people that for the sake of social and political stability they could not be allowed to fail. The commercial banks were supposed to stick to making loans strictly on the financial merits from then on. But they do not appear to have done so.
China plans to open up its banking sector to international competition over the next five years as part of its entry to the WTO, which will put more pressure on domestic banks. Foreign banks now have less than 2 percent of all deposits and loans in China.
The four big domestic commercial banks -- the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China -- are in various stages of preparing to sell minority stakes to public shareholders, in the hope of raising money to offset their bad loans.
The Bank of China is furthest along, and it had been expected to issue stock this year in China, Hong Kong and possibly New York. But its plans have been set back by several scandals in the last five months involving allegations of fraudulent loans to friends of bank managers.
Chan of Standard & Poor's predicted that the level of bad loans at Chinese banks would discourage international investors from buying any of their shares.
Moody's and Standard & Poor's usually agree on most credit ratings, but they have sharply divergent assessments of the four big banks. Moody's puts all four at Baa-1, three grades above the minimum to qualify as investment grade. But Standard & Poor's does not rate the Agricultural Bank at all, and rates the other three at BB+, a speculative rating four notches below Moody's.
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