Saddled with bad loans, China's critically weak banking system risks stifling
its rapid economic growth and reform process, Standard and Poor's pointman for
Asia-Pacific ratings warned.
Michael Petit, the global ratings agency's managing director of Asia-Pacific
corporate and government ratings, said "the most visible weakness" of China's
banking system was the extent of its problem loans, which the agency estimated
at 500-650 billion dollars at the end of 2005.
In contrast, China's official figure is about half the agency's estimate at
225 billion dollars, he told a congressionally-mandated panel hearing on China's
financial system and monetary policies.
Given both the dominance and weakness of the banking system, "the risks China
faces in setting down a liberalizing path are in making a misstep," he
cautioned.
"Its reform program needs to be carefully coordinated and implemented in a
sequenced approach to avoid any unwanted disruption to its economic system,"
Petit said.
The size of China's bad loans has been a source of controversy.
Global auditing firm Ernst and Young in May estimated that the Chinese
financial system was exposed to 900 billion dollars in bad bank loans but later
retracted its opinion.
The withdrawal came after China's central bank said the report, which claimed
the NPLs stood at 358 billion dollars for the big four state-owned commercial
banks alone, "seriously distorted" the actual situation.
Fitch Ratings had said in May that China's banking system still contained
about 476 billion dollars in nonperforming and problem loans.
"Although no one can know for sure, China's banks and instrumentalities are
probably sitting on a trillion dollars of doubtful loans at this moment," Gordon
Chang, a China expert and author of "The Coming Collapse of China," told the
hearing of the US-China Economic and Security Review Commission.
He warned that "a bank failure in the next few years is possible, if not
likely" and that China's banks, "almost without exception, are hopelessly
insolvent from a balance sheet point of view.
"Chinese banks are blowing up their balance sheets at unprecedented rates,"
he said, adding that banking failure would "almost certainly lead to a collapse
of the economy" and cause the political system to be even more fragile.
Chang also said that China was burdened by too much debt.
Beijing claims that China's debt to gross domestic product ( GDP) ratio is
only 18 percent but Chang said it was a staggering 81 percent, based on his
"conservative" calculations.
Petit of Standard and Poor's said China's overly rapid loan growth suggested
"vulnerability to an eventual economic slowdown and to the emergence of a new
wave of problem loans."
But he hastened to add that the Chinese government had the wherewithal to
prop-up its banking system through additional capital infusions or purchases of
troubled loans, if needed.
Even so, China's "critically weak banking system" placed a "massive
contingent fiscal cost on the government," he said.
Petit noted that "overlap" between the Chinese government -- the main
shareholder in the banking sector -- and banks and borrowers and the frequent
rotation of Chinese Communist Party members through them was "inimical to the
creation of arms-length relationships."
It is "likely to inhibit the creation of effective corporate governance
practices alongside a culture of commercial banking," he said.
A 2005 survey by the Chinese central bank showed that more that 80 percent of
non-performing loans could be attributed to such conflicts of interest and
directed lending, he said.