Andrew Higgins
As banks wobble and crash across Asia, a sparkling, futuristic structure is rising on the Avenue of Eternal Peace in Beijing. It is a grandiose declaration of confidence by China’s biggest commercial bank.
But the edifice stands on unsteady foundations. The Industrial and Commercial Bank of China (ICBC)is, by any reckoning, a wreck. It employs a staff of 500 000, has a loan portfolio of equally gargantuan dimensions and the reputation of being the world’s least efficient bank.
Its new headquarters is due to open in June, with rosetted Communist Party cadres and a state-of-the-art computer system to keep track of its money. The opening will coincide with the launch of the government’s “radical overhaul” to fix the flaw that, in the rest of Asia, has already turned boom to bust.
Dai Xianglong, the governor of China’s central bank, has set a timetable of just two years to create a “modern financial system” out of what the World Bank calls the “soft underbelly” of China’s entire reform venture.
Indonesia, Thailand, South Korea and even Japan have all been afflicted with a disease diagnosed as “crony capitalism” – the tendency to lend and invest on the basis of political and personal friendship rather than profit.
China suffers from crony communism, and in an attempt to rein it in, the central bank recently announced plans to close the branches it has in each of China’s 30 provinces and set up regional headquarters. The aim is to remove the bank and the commercial institutions it supervises from the influence of provincial leaders.
“Nobody knows the exact position of our banks. In some ways their problems could be even worse than those in other Asian countries,” said Fan Gang, a Harvard- educated economist. “They are state banks; they all have the same boss.”
Summoned for a crisis meeting, bankers have been told they stand in the front line of the country’s defences against Asia’s turmoil. As they met, Moody’s Investors’ Service downgraded to “negative” its outlook for a raft of Chinese banks. “The currency devaluations in South-East Asia pose a severe challenge,” vice-premier Zhu Rongji, China’s chief economic strategist, told the assembled bankers. “We must meet this challenge.”
The biggest challenge lies within China’s own borders. As a precaution against panic, Beijing is cracking down on credit co- operatives, trust companies and other small, local banks.
But the real problem lies with China’s
four mammoth state banks – ICBC, the Bank of China, the Construction Bank and the Agriculture Bank. Together they account for all but 10% of China’s bank assets and, burdened with $250-billion in bad debt, they are technically insolvent.
When unpaid workers at a bankrupt textile
factory in Sichuan staged a protest last summer, the authorities ordered the local ICBC branch to lend the factory money to cover back wages. The cash is unlikely to be repaid. Another branch reports that 80% of its loans have gone bad.
The disorder has burnt foreign banks, too. London’s Standard and Chartered is hunting for more than $8-million which vanished after its Shanghai branch transferred the funds to one of ICBC’s rural branches.
Chinese business journal Financial News
complained in a recent commentary that many bank loans “disappear like stones dropped in the sea”. Dai last week said 20% to 25% of all loans in China are now overdue, though he insisted that only 5% to 6% should formally be classified as bad debt. No matter how bad their books, China’s big state banks will not close.
Instead of stampeding to demand their
money, Chinese people are putting more than ever into their bank accounts. Deposits rose 18% last year, and China still has the world’s highest saving rate – up to 40%, compared with Britain’s 7%.
“For the moment China is not going to be the next domino,” said Fan, the Beijing economist. “We have more time than other Asian countries. But we have to make sure we use it.”