China began the structural reform of its banking system in 1978 with the creation of state owned specially banks (SOSB) from the monobanking structure. Over time, these SOBS grew to be among the largest 50 banks in the world. However, as owner, the government dictated the terms of lending, so that these large four SOSB, together having 80% of market share, were financing the state owned enterprises (SOEs) More than two and half decades of policy lending has left the SOSBs burdened with bad debt on loan portfolios. The government has recognized the need to restructure these insolvent banks by setting up bad debt agencies with a narrow purpose to work out or sell bad debts. China's newly appointed governor of the central bank, Zhou Xiaochuan, recently told that China would take a "gradualist" approach to reforming its banking system, which means one step at a time, although the pace of change is anything but slow.
In a recent McKinsey Quarterly report Matthias M. Bekier et al. suggested the way to fix the China’s banking system. See also The Economist's View.
I think, China's window of opportunity for bank reform is closing rapidly. Recapitalizing the banks, identifying the bad loans, and spinning them off to the AMCs is the easy part of reform. But these moves are not sufficient to cure the banking sector's ills. As an exit strategy for recapitalizing the banks, Beijing must also act decisively to create an environment in which AMCs can sell off bad loans to recoup their losses. All this will involve fundamental reforms to the legal system, institutional framework, and corporate culture. Again at the same time, China needs to reform the capital market both to fuel the growth of the private sector and resolve the political ownership of the banking sector. With less political intervention and more credible financial data, banks will have a better chance to run loan books on a commercial basis. Such market discipline is a prerequisite for the ultimate success of banking reform.
2 comments:
China’s banking system is not in a immediate danger of collapse but faces serious problem. The banks were not to mobilize saving for investment, but agencies of channeling, state subsidies to state owned enterprise with soft budget constraint. The big four wholly owned banks by the state dominated the banking sector. The government is estimated to pumped as much as $60 billion into three biggest banks to write of their loan. As a result the NPA came down to 13.2%at the end of 2004 compare to 18% a year before
This shows the level of interference of the state in the sector. To save the Chinese banking it will require decontrol but at the same time it will be important to see that how and in what time the state is ready to reduce its control from the state owned bank.
The solutions are widely pointed out in the recent McKinsey Quarterly report Matthias M. Bekier et al.
The solutions given by the Matthias M.Bekier are good and well expected. But problem for china is to implement those. Given that the financial & capital market is not very developed the Country.
The bank lending would have to expand by about 15%a year for china to meet its target of 7 to 8 percent annual growth of GDP and the Chinese banking system is capable 5 to 7 percent which is far below the required levels
I think the entire problem has risen because of too much controlling. If it continues in the near future it will be tough time for china. What they need to do is to reduce stare control and introduce effective corporate governance.
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