On Nov. 1, People's Bank of China Governor Dai Xianglong (戴相龍)told an international forum in Beijing that in the future, foreign businesses will be able to purchase, at market prices, the bad assets of Chinese banks. The capital invested will be handled in the same way as direct investment by foreign businesses. This is a major development in the reform of China's financial system. It implies that foreign capital will march unopposed into the deepest region of China's economic structure -- the banking system. It also implies that the government's ability to control society with the device of bank loans will be weakened.
The development of this reform plan has proceeded in exactly the same way as China's other reforms over the last 20-plus years. Each has been the only possible solution in the face of a serious crisis. Dai made no effort to avoid mentioning this point.
In his speech, Dai also revealed the seriousness China's bad-asset problem. Four government-owned banks -- the Industrial and Commercial Bank of China (工商銀行), the China Construction Bank (建設銀行), the Agricultural Bank of China (農業銀行) and the Bank of China (中國銀行) have bad loans totalling 1.8 trillion yuan (about US$220 billion) or 26.62 percent of the total 6.8 trillion yuan in loans outstanding. However, as early as last year, Chinese economists estimated that the percentage of bad loans was actually over 40 percent. These loans threaten the security of the entire financial system. This high coefficient of risk in the financial system is one of the lurking dangers in the economy.
But China's economic worries aren't limited to bad loans. In the next five to 10-year period of economic transformation, in addition to the likely impact of WTO entry, China's internal economic worries include at least three items.
First, the expansion of domestic demand lacks the strength to continue. In recent years, China has used the device of fiscal expansion to stimulate domestic demand as much as possible. The authorities hope to increase consumption and thereby fuel economic growth. This strategy did indeed have a stimulating effect, but its results are not without limits. At present, urban consumption no longer has room to grow, and the rural consumption that could really fuel China's economic growth has always resisted growth. The average annual income of China's 800 million rural dwellers, a mere US$270, is less than one-third that of urban dwellers. No matter how the government promotes consumption, the effort is futile. But with sluggish rural consumption, the expansion of domestic demand can't continue for too long.
Second, the strategic advantages enjoyed by the coastal regions are disappearing. These regions account for more than half of China's GNP. One could say that the soaring economy throughout China was fueled by the extremely rapid economic development in coastal regions.
But following the rise of the yuan and the increase in the living standard of the coastal regions, the production costs of multinational companies in this area are also rising. The advantage of cheap labor resources originally enjoyed by the coastal regions is being eroded by Indonesia, Thailand and other countries that have suffered from financial crises. Once the multinational companies feel that unit production costs exceed the costs of moving their factories, the economic foundation of the eastern coastal regions will shift to Southeast Asia.
Third, social development limits the economy, a problem which poses perhaps the deepest threat of all. Not long ago, officials announced that the government would reduce its holdings in state-owned enterprises. The stock market fell sharply in response. But, despite efforts by everyone from Premier Zhu Rongji (朱鎔基) to the ministries in charge of financial policy to continue with the reform of state-owned enterprises, they ended up caving in to the political pressure to maintain social stability. This is a classic case of politics interfering with economics, and it unambiguously reveals that China still doesn't have a true market economy.
In a country with an embryonic market economy, any negative non-economic reactions resulting from social regulation will prompt economic turbulence. And social and political regulatory mechanisms are precisely what China currently lacks.
Wang Dan was a student leader during the 1989 Tiananmen Square demonstrations in Beijing.
Translated by Ethan Harkness
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