There are two things to know about the banking system in China. First, the major state banks, the so-called Big Four, are insolvent. Second, the effort to bail them out is not working. Everything else is simply detail.
The crisis in the Chinese banking system is perhaps the most serious in the world today. The cause is not hard to understand. The Big Four, over the course of just a decade, have squandered the savings of a great people at the direction of Beijing. Senior technocrats tried to reform state-owned enterprises (SOEs) by replacing direct subsidies from the central treasury with loans from the four largest banks -- the People's Bank of China (
The theory was sound: Wean sick SOEs off grants and make them self-sufficient. In practice, the plan was a disaster -- state enterprises knew they didn't have to pay back the banks. So they didn't. In an economic system divorced from economic reality, banks effectively became gift givers. They essentially vacuumed cash from small savers and disgorged it onto state enterprises at the direction of thousands of officials.
The massive transfer of assets from the banks to the SOEs is a matter of indifference to government technocrats. After all, the state owns both. It is, however, a matter of concern to others -- hundreds of millions of China's savers. Year after year they sock away a sum equal to about 40 percent of GDP. That puts them atop world rankings for thriftiness. The Chinese are not just "squirrels," as they have been called, but world champion squirrels. At the end of last year, household savings, according to official statistics, amounted to the equivalent of US$894.1 billion, up 14.7 percent from the year before and 24 percent from 1999.
The Chinese can deposit, but can they withdraw? Today, the Big Four, which hold somewhere in the neighborhood of 60 percent of the deposits and make about 66 percent of the loans in China, are insolvent. Perhaps no one has a good understanding of the situation. "There is no simple answer to finding the level of nonperforming loans [NPLs] among state-owned banks," admitted a high official at one of them. Before the last partial recapitalization, which began in 1999, the best guess as to the percentage of NPLs was 50 percent.
Beginning in 1999 the central government recapitalized the Big Four by taking US$157.0 billion of nonperforming debt off their books. Afterwards, the People's Bank of China, the central bank, said that NPLs constituted about 25 percent of the Big Four's portfolios. That figure is taken as gospel by some analysts today, but we have to remember that the central bank before the recapitalization also said that the percentage of NPLs was 25 percent. In other words, we were led to believe that the biggest bank recapitalization in Chinese history had no effect on the balance sheets of the Big Four. When it comes to statistics, China's central bankers have lost credibility.
In fact, almost all the estimates of these loans were correct. You could justify any percentage depending on the standards used for classifying loans. Beijing officials allowed commercial bankers to adopt the loosest standards. In the last few years classification rules have been tightened, but today devious techniques allow even the worst loans to appear sound. The Big Four have continually "rolled over" troubled loans so that they appear on their books to be altogether new ones.