-Caveat Lector- from: http://www.stratfor.com/asia/commentary/0010272240.htm Click Here: <A HREF="http://www.stratfor.com/asia/commentary/0010272240.htm"> China: Struggling over Massive Bank Debt</A> Send this page to your friend China: Struggling over Massive Bank Debt 2240 GMT, 001027 The People�s Bank of China has released statistics on bank debt that are more pessimistic than previous official statements. According to Xie Ping, the bank�s director of policy research, Chinese financial institutions will need to write off an estimated 2.5 trillion yuan ($300 billion) in unrecoverable loans. This sum is equivalent to 31 percent of annual gross domestic product. The comments are significant for several reasons. First, they suggest Beijing is abandoning efforts to minimize the scale of China�s forthcoming bank bailout. The 31 percent of GDP is in the same general ballpark as some independent observers estimate. More pessimistic analysts think 50 percent may be closer to the truth. The bank also seems to acknowledge the ongoing transfer of bad loans from the Big Four state-owned banks to specialized �asset management companies,� or AMCs, will do little to reduce losses. The AMCs were to recoup part of the value of the loans through debt-equity swaps, management reforms, or outright asset seizures. Xie now estimates the final recovery rate will be no more than 15 percent, in line with results of past bankruptcies in China�s state sector. Less convincing is the apparent optimism about China�s ability to finance a 2.5 trillion-yuan bailout. Xie suggests central and local government subsidies would cover 60 percent of the cost. Financing another 30 percent would be through note issuance � whether through the printing of money or issuing of government bonds remains unclear � and the Big Four banks would directly bear the remaining 10 percent loss. Whether taxpayers can cough up three-fifths of the cost of a bailout is unclear. This would come to 1.5 trillion yuan, or just over the entire fiscal revenue projected for the central government in 2000. If the expense spreads over several years, as the central bank suggests, Beijing would still need to push through a massive increase in total tax collection to make the plan feasible. Raising taxes might not seem like a difficult task for China, but in the mid-1990s Beijing struggled to keep the state�s share of GDP from sliding below 10 percent. The last few years have seen a slight rise in tax revenue, but this reflects growth in customs revenue that followed the anti-smuggling campaign launched in 1998. Continued growth will be much harder to maintain, particularly since import duties will fall sharply after China�s accession to the World Trade Organization. Even more dubious is the underlying assumption China can freeze its bad-loan burden at current levels. The most recent statistical evidence suggests the problem is getting worse. Official GDP growth figures for this year have been surprisingly strong, but a closer look shows much of it has come from a sharp increase in fixed-asset investment, particularly in real estate. In the first nine months of 2000, actual investment in real estate rose by an astonishing 30.8 percent over the same period in 1999, reaching a total of 340.9 billion yuan ($41 billion). Since most Chinese cities have huge stocks of vacant housing, offices and retail space, it�s a safe bet lenders will never recover much of the money lent to finance additional construction. New developments will likely worsen the recovery rate on previous loans by further depressing the real estate market. Even disregarding the likelihood of bad loan growth in other sectors, this trend suggests the banks� financial condition is still deteriorating rapidly � making the PBoC�s cleanup plans largely academic. Beijing faces a stark choice. Will the government attempt to proceed with the bailout, even though it will lack the surplus revenues for things like further economic reform, infrastructure projects, or military spending? ASIA Intelligence Center Indonesia Hotspot China/Taiwan Hotspot ASIA Economy Center ASIA Global Intelligence Update Archives Country Information About Stratfor | Contact Us | Subscribe to the GIU | Site Map | Search Home | Global | Asia | Europe | Latin America | Middle East | Russia & CIS Hotspots | Global Intelligence Update Webmaster � 2000 Stratfor, Inc. All rights reserved. ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, All My Relations. Omnia Bona Bonis, Adieu, Adios, Aloha. Amen. Roads End <A HREF="http://www.ctrl.org/">www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance�not soap-boxing�please! 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