HONG KONG -- Fifty years ago this week, as the
swept to power, China's banking and debt markets began their dash from Shanghai to the capitalist haven of Hong Kong. The sad thing today is that while lending to China from Hong Kong has dried up, credit for deserving companies is no easier to come by on the mainland.
China may not be the orthodox Communist bastion it was until
reforms began in 1978, but its banking system has hardly evolved at all from the days of the
"The entire financial system is geared up to support companies that cannot create new jobs and it lacks the skills to make good loans to the companies that can create the jobs needed to save reform," said
, an overseas unit of the huge Japanese brokerage, in a bleak report.
Is there a bright side to a banking system with nonperforming loans of more than 50% and a contingent liability to the government of 40% to 80% of GDP? If there is, it is that the government recognizes that it's in a mess.
Getting out of its jam without a massive program of money-printing and the consequent devaluation of the yuan, however, seems unlikely.
Take the first of four asset management companies modeled after the
Resolution Trust Corp.
of the 1980s savings-and-loan restructuring in the U.S.
Xinda Asset Management
is designed to package and sell off bad loans from one of China's big four state-owned banks, the
China Construction Bank
. But the problems only begin with the question of who would buy loans that are probably never going to be recovered.
"I don't see the legal structure in place to do the types of securitization that they are talking about. Securitization has never been done in China. Obviously, we have problems with the bankruptcy law, so liquidation is somewhat problematic," says Nicholas Lardy, a Chinese banking expert with the
So the government will probably need lots of cash to write off these loans, as well as to finance its massive $1.2 trillion infrastructure spending program designed to boost domestic demand. The problem today is that prices are falling amid slowing growth, industrial overcapacity and rising unemployment.
As in Japan, another country with a big trade surplus but a populace that refuses to spend its savings, government debt is becoming a bothersome issue. Lardy estimates that real government debt in China is well over 100% of GDP. "There is no country that has been able to finance outstanding stock of total debt anywhere near that size with revenues that are only 10% to 12% of GDP," he says.
In addition, because foreign companies have such a rotten track record at making money in China, utilized foreign direct investment fell by 9.7% in the first eight months of this year, compared to the same period in 1998. Contracted FDI fell 20%. Worse still, China's overall trade surplus fell by 65% in the first half of this year, as cheaper exports from the rest of Asia and a crackdown on smuggled imports sliced into one of Beijing's best arguments against devaluation.
Foreign bankers are unlikely to pick up some of the slack. Foreign bankers used to lend plenty of money to Chinese companies, because there was always the understanding (never on paper, of course), that the government would make good on all delinquent loans.
That understanding, however, evaporated with the $4 billion bankruptcy of
Guangdong International Trust and Investment Corp.
, a provincial investment company, in January. The government did not put foreign bankers at the head of the line, prompting credit for Chinese firms to dry up across Hong Kong.