Since you asked about Fan Gang, Mish, here is an old article written by
him (dated in Aug. 2002) on the high amount of bad debt in China. He
made a valid point, and still relevant until today.
==============
(All data in the following were as of Aug. 2002)
When talking about the financial problem of China, there are usually
two issues: one is bad debt of China's banks, and the other is Chinese
government debt. The international economists usually separate the two
issues. This maybe is true in other economy, but in China, these two
issues should be considered together.
According to the latest data, bad debt owned by China's state banks
accounts for about 26-27% of China's GDP. If adding up the 140 billion
Yuan which has already switched under the debt Management Company, and
minus the amount sold already (10 billion Yuan), the total bad debt will
account for about 40% of China's GDP. As a result, China's bad debt can
be ranked as the highest in the world. Everyone is talking about the
bad debt problem in Japanese banks, but that is only between 6% and 11%.
What is interesting is that why the state banks of China still operate
as usual with such a high proportion of bad debt? And why there is no
ordinary Chinese worried about their savings, and still keep deposit
their money into the banks? The latest data indicated the total amount of
deposit in China has surpassed 8 Trillion Yuan, and Chinese economy
still grows at 7-8%, and there is no financial crisis.
As a result, we should look at the financial problem of China from a
broader point of view. To some degree, the bad debt in China can be
considered as the national debt. Because the state banks have the support of
the nation's reputation, as long as the state does no bankrupt, then
the banks will not bankrupt. Majority of the debt owed by SOEs. So to
certain degree, these debt are essential to keep the SOEs
operating. And the state subsidy to the SOEs does not go through the financial
means, but go through the state banks. From this aspect, these so-called
"bad debt" is actually quasi-national-debt. Thus, to clean up
this debt, it also requires the state involved.
On the one hand, China has THE lowest national debt among the world as
a nation, only accounting for 6% of its GDP. Even if among the
developing countries, which tend to have high national debt, China is among the
lowest.
The low national debt but high bank debt in China has contributed to
some historical reasons. From mid-1980s, China changed its system for how
to finance SOEs, from giving money directly to SOEs to giving loans to
SOEs. On the other hand, Chinese gov. adopted a very tight fanatical
policy, does sell national debt often. That is why China has a low
amount of national debt.
Thus, if considering bad debt of the state banks and the national debt
together, China's debt is not that high, even if adding up all the
foreign debt.
Looking back countries involved in the Asian currency crisis: short
term foreign debt accounted for close to 40% of S. Korea's GDP in 1997,
close to 30% of Thailand's GDP. This high amount of debt ratio is a
major reason for their currency crisis. By comparison, China has a foreign
debt ratio of 15%, and most of it is long term debt bet. gov. and gov.
. Short term foreign debt only accounts for 1% of GDP. While vast
majority of foreign debt in Asian countries involved in the currency crisis
were short term commercial debt.
All the bad debt, gov. debt, and foreign debt of China will eventually
have to be returned by the whole nation. The total amount of all three
accounts for about 60-70% of China's GDP. If excluding long term
foreign debt, the total is about 57-58% of GDP. So this amount is still
manageable.
This is exactly why the bad debt in state banks in China has not
caused major crisis. And even if there will be a crisis, it will be an
internal one, unlike the one in East/Southeast Asian countries, an
external one. As for the large amount of bad debt to cause the shrinking
of the loan, this is already happening in China. The deflation which has
been going on since 1996 in China is the result of it.
[My comment, I have never read any Western economist to point out
this cause of the deflation in China]
As for the external financial risk, from the economic point of view,
China is extremely conservative. The annual trade surplus of China is
>$20 billion, and FDI is growing, plus the increase of the total foreign
reserve, all these together is more than enough to deal with external
financial crisis. Generally speaking, for a developing country like
China, it seems unreasonable to keep such a large amount of foreign reserve,
but this is for the consideration of a financial insurance for the
nation.
This is Not to say the financial system in China is sound and no need
to reform, just to make the point that China will not have any
financial crisis in short term. And if all the problems remain unsolved, no one
can guarantee that China will not have a financial crisis in a long
run. The problems exit in banking sector, capital market, financial risk
management* So China should keep the pace of reform.
(As of 2002), non-SOEs account for 70% of GDP growth, but can only get
30% of loan. So the difference bet. the two is the 40% of bad debt. So
this unreasonable distribution should be changed.
So how to reform the financial sector in China. 1) to strictly control
the growth of the bad debt; 2) to keep the economic growth rate and
looking to the new sector for the investment; 3) speed up the banking
sector reform.
As a matter of fact, it is not that difficult to eliminate the bad
debt. If we can control the growth of the bad debt, even if the absolute
amount of the bad debt remains the same, and GDP grows at 8% each year,
7 years from now, bad debt ratio (for GDP) will decline by 50%, and 10
years later, bad debt will decline 70%. This reminds us, we should not
put emphasis on the bad debt, but should research on how to increase
the financial capital, and the flow of the capital. That is the key for
the financial reform.
For the original Chinese version:
china.org.cn |
