Beware Japan's banking nightmare, China is warned
forbes.com
By Alan Wheatley, Asian Economics Correspondent
SINGAPORE, Oct 18 (Reuters) - China's authorities are deluding themselves by counting on economic growth to gradually erode the mountain of sour loans crushing the country's banks, a prominent group of Asian economists said on Friday.
In a blunt verdict on Beijing's strategy for tackling what many see as the gravest threat to continued rapid growth, they said no country has successfully grown its way out of a morass of bad debt as huge as China's.
"Economic growth has slowed owing to a credit crunch and NPLs have risen to alarming proportions. Hence, comprehensive reform of banks can no longer be delayed," the report, written by economists grouped under the Asian Policy Forum network, said.
They said that without a quick resolution of non-performing loans (NPLs), the credit crunch could intensify -- much as it has done in Japan, where festering bad loans have helped condemn the country to 12 years of low growth and four years of deflation.
A "big bang" resolution of China's NPLs, which official statistics put at around 30 percent of gross domestic product, gets top priority in a seven-point plan that the forum has drawn up for the phased liberalisation of China's financial sector.
Masaru Yoshitomi, dean of the Tokyo-based Asian Development Bank Institute and one of the authors of the report, said it had been timed to influence debate within China in the run-up to the crucial Communist Party Congress starting on November 8 at which a new generation of leaders is expected to take power.
"They're looking for alternative policies, so we're giving them food for thought," Yoshitomi, whose institute serves as the forum's secretariat, said in a telephone interview.
He said China's finance ministry was rather neutral about the proposals while the central bank was more positive. "Who knows whether this kind of proposal will be accepted or not?" he said.
DON'T COPY JAPAN
China is not the only country with a creaking banking system that the institute has in its sights.
In a separate report, institute research fellow Heather Montgomery said Taiwan should learn from Japan's experience and heed the warning signs of banking weakness rather than hope for delivery from an improving economy.
"In Japan, expectation that the banking sector could 'grow out' of its problems provided to be unfounded and has only prolonged resolution of the problems," she wrote. "Policy makers in (Taiwan) should be well advised not to follow this example."
For Taiwan, read China. Beijing is pressing its banks to reduce non-performing loans by two to three percentage points a year, which would cut them to about 15 percent of total loans in five years.
But the forum said banks could not easily earn their way out of their bad-loan mess because required loan-loss provisions tended to exceed profits.
What's more, banks given specific targets for lowering NPLs tend to shun risk and buy government bonds rather than lend to viable firms, perpetuating the credit crunch and hence economic stagnation. This is already happening in China, the report said.
"Although this strategy has the advantage of lowering initial fiscal and political costs, its long-term effectiveness is doubtful. Japan's dysfunctional banking system during the 1990s serves as a vivid example of these shortcomings," it said.
The report went further: "Available empirical evidence is that no other country in post-war history has successfully grown out of a NPL problem of this magnitude."
Under the best of circumstances, a growing-out strategy would require some 13 years to reduce NPLs to five percent of total loans compatible with a viable banking system. "This implies significant uncertainties and risks sapping underlying potential economic growth in the interim," the report said.
Far better, it said, for China to emulate the United States, South Korea and Chile; when confronted with banking woes, those countries opted for a quick resolution and were rewarded with quicker growth that allowed them to claw back more of the initial bail-out costs, the forum said.
Could China afford to bail out its banks given its massive unfunded pension bills and other contingent liabilities?
Yes, says the Asian Policy Forum. If Beijing bought all the banks' bad loans by issuing bonds worth 40 percent of GDP at a real interest rate of up to six percent, the government's debt would not get out of control as long as the economy continued to grow at seven percent a year, the report said.
Copyright 2002, Reuters News Service |
