Ironically, selling bonds to domestic households and businesses will further weaken the financial sector by offering an attractive alternative to the low interest payments offered by banks. Given the option to own a higher yielding asset, funds will begin to move out of the banking system and bring what is effectively a "pyramid" scheme to an unhappy end.
But what of the transfers of NPLs to asset management companies in debt-for-equity swaps? Cleaning up the banks' books is a good beginning, but it requires a change in the business plan of the defaulted borrowers or a change in management. Unfortunately, none of these changes have occurred.
And then there are mounting troubles in the rural areas. A report in China's English-language Business Weekly indicates that the People's Bank of China (PBOC) will provide the country's rural credit cooperatives with just over 33 billion yuan (US$4 billion). According to the PBOC, the 40,000 rural credit cooperatives probably have overall negative net worth. This is discouraging news considering that from the first quarter of 1997 through March 2000, the central bank lent them a total of 30 billion yuan (US$3.6 billion).
Should there be erosion in confidence, the remote locations make them susceptible to bank panics that would wipe out their capital assets. This is of considerable concern since some urban-based credit cooperatives in major cities have already failed.
The limits of the half measures of China's modernization are rushing into view. Perhaps the only hope is to follow Taiwan's example for promoting growth in private sector employment through encouraging and rewarding individual initiative. The leaders in Beijing must take dramatic and bold steps to earn a place in the pantheon of Chinese heroes. Otherwise their inaction will cause its citizens to bear the bitter harvest of a slowdown in economic growth and a collapse of the banking system.
Christopher Lingle is Global Strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century. His E-mail address is: CLINGLE@eConoLytics.com.
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