On Jan. 6, China's State Adminis-tration of Foreign Exchange published a press release on reforming state-owned commercial banks, saying that the State Council had injected foreign reserves into the Bank of China (BOC) and China Construction Bank (CCB) as part of an experimental "share-holding system" reform. It appeared that Beijing had decided to tackle the longstanding thorny issues of banking reform and the yuan's exchange rate.
The BOC, the CCB, the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC) are known as China's "Big Four" state-owned banks. Due to government policy, they have long supported many poorly-managed state-run enterprises, thereby incurring an excessive number of bad loans and endangering the overall financial system. Last November, the credit ratings agency Standard & Poor's gave the ABC a credit rating of "BBpi," expressing reservations about the bank's ability to keep its promise to make its financial information public.
China's financial problems are quite serious. Given the amount of "unpublished information" known only to the Chinese authorities, the problems could be big enough shake the nation's foundation.
Writing off bad loans would open a Pandora's box for many of the state-owned banks -- whose debts far exceed their assets -- and would trigger a national financial storm. Therefore, Beijing was forced to delay its handling of the problem because it lacked the money to cover up the bank deficits. But at the end of last year, China's central bank, the People's Bank of China, quickly and quietly transformed the so-called "overseas assets" -- China's foreign reserves -- into shares in the BOC and the CCB, turning the money into "domestic assets" of the central bank.
According to the related Chinese government agencies, Beijing has allocated as much as US$45 billion this time, the equivalent of NT$1.5 trillion. Moreover, the ABC, the ICBC and some other banks are all scheduled to have their "capital adequacy ratios" increased. Beijing's strong remedy has helped the outside world realize the seriousness of the problems with China's financial problems.
Disregarding the outside world's doubts, Beijing appears determined to save its banking industry by using its foreign reserves. Since this use of the reserves may also lessen the pressure on the yuan it has suddenly become an economic strategy widely praised by the Chinese media and academics.
But can the reserves really be a cure-all? Data on the foreign reserves, published last year by the PBC, show that even though Beijing had spent US$45 billion, the total of the reserves only dropped by US$17.1 billion between last November to December. In other words, China's international income increased US$27.9 billion during that period -- while the fundamental problem remained unresolved. The energy behind China's accumulation of foreign exchange remains unchanged, and the pressure on the yuan to appreciate still exists.
After the US$45 billion was injected into state-owned banks, most of it was transformed into yuan for either deposit reserves or bank loans. Thus, through the process of remittance, these US dollars will be re-sold to the PBC as foreign reserves. This will be equal to a massive injection of 372.1 billion yuan. The bank loans also will cause a "multiplier effect" through credit expansion, accompanied by strong inflationary pressure.
So despite the policy change, China's foreign reserves have increased while the pressure on the yuan remains strong.
Whether Beijing's move will improve the management of its state-owned banks' or lead to inflation is unclear.
Ni Bo-chia is a doctoral candidate in China studies at National Sun Yat-sen University.
TRANSLATED BY EDDY CHANG
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