By JOE STUDWELL
4 April 2005
(c) 2005 The Financial Times Limited. All rights reserved
As China’s economy shows signs of a modest slowdown from annual growth officially reported at more than 9 per cent in 2003 and 2004 – but which physical indicators suggest probably exceeded 10 per cent – it is time to ask whether this latest “China boom” has been qualitatively different from previous ones.
Those who believe China is continuing its march away from a state-driven economy cite hard evidence. The efficiencies of the export economy are a given. China will ship about Dollars 750bn (Pounds 400bn) of goods in 2005 (though much less on a value-added basis, as so many components are imported) and there is no structural reason why this headline figure cannot continue growing at 15 to 20 per cent a year. Imports, meanwhile, increased between 2000 and 2004 by almost four times as much as in the entire 1990s, an increment of Dollars 395bn versus Dollars 107bn. In recent years, Chinese imports have fuelled a global commodities bonanza and set world prices for everything from steel to palm oil.
Then there is the rapid expansion of private enterprise. A recent survey suggests that, for the first time since 1949, most registered companies in China are privately owned. On average, the businesses are tiny with mean registered capital of Dollars 145,000 and 14 employees. Fewer than 1,200 private companies have registered capital of more than Dollars 12m. Nonetheless, the growth of private enterprise is heartening.
The case for “changing China” is considerable, but cannot be separated from the financial story of a state that exercises a vice-like grip on banks, stock markets and bond issuance. Unfortunately, the most extreme statistical series in this latest period is not about trade or ownership but loans outstanding in the financial system. In just three years from 2002 to 2004, loans increased by 58 per cent, or Dollars 785bn. In 2003, new lending equalled almost one quarter of gross domestic product. This latest boom was driven by a credit binge. It was not supposed to happen.
Responding to the massive non-performing loans accumulated by Chinese banks in the 1990s, the government ordered they reduce their NPL ratios – bad loans as a proportion of total loans. The move was universally applauded. With hindsight, however, the focus on NPL ratios was a terrible mistake. That is because China’s banks are technically insolvent but enjoy high liquidity. To cut NPL ratios, they merely increased the denominator of the ratios: their loans. Lending rose rapidly, driving growth as a side-effect as NPL ratios fell from 28 per cent in 2002 to 13.2 per cent at the end of 2004.
Assisting the process were transfers of old NPLs, made before the recent credit drive, to newly-minted asset management companies. The largest banks shifted an initial Dollars 169bn worth in 1999-2000 and another Dollars 50bn last year. Critically, provisioning for NPLs from the past five years has been almost zero. The result is voodoo accounting. If, for example, one restores the Dollars 50bn transferred to AMCs in 2004, aggregate NPLs in the system went up, not down. A falling NPL ratio was purely a function of loan growth and the refusal to provision since 2000. Yet even the most prudentially savvy bank could not expand its new loan book by 50 per cent a year, as seen in China in 2002-2003, without incurring bad debts.
As an indicator, a 10 per cent non-performance rate on new loans by the 16 biggest banks in 2002-2004 bounces the NPL ratio back up to 20 per cent. There is reason to expect worse. Last October, the China Banking Regulatory Commission conceded that the default rate on Dollars 22bn of car loans extended since 2002 already exceeded 50 per cent. The AMCs have become dumping grounds not just for commercial bank NPLs but also for the “assets” of failed investment conglomerates, securities businesses and government infrastructure projects. The state makes the AMCs issue interest-bearing bonds for which it refuses to accept explicit liability. Separately, Beijing has raided tens of billions of dollars of foreign exchange reserves to shore up banks’ capital.
The endgame in these financial shenanigans is supposed to be the international listing of “cleaned up” state banks, something that has been promised to the markets since 2002 but never quite happens. The chairman of the first institution to be listed, China Construction Bank, is currently detained on corruption charges.
A new paradigm? The big picture in 2005 is that China’s economy has been incrementally, but not fundamentally, altered by this latest cycle. In China it is, in sum, business as usual.
The writer is editor-in-chief of the China Economic Quarterly and author of The China Dream (Profile Books/ Grove Press); for previous CEQ columns:
JOE STUDWELL. – Financial Times
By JOE STUDWELL