17 Mar How do you level the playing field with China?
Many economists in the Unites States are concerned with the increasing trade imbalance with China. They would like to slow things down and begin the process of leveling the playing field. Perhaps China’s economists’ can do the work for them!
As developing nations rush to play catch-up with more developed countries, huge loans are often doled out as favors, to friends in high places, and not necessarily for sound financial reasons. This occurred in Japan during the 1990s and it happened in the United States with the savings and loan disaster in the 1980s. There’s a lot of blame to be shared globally, and perhaps it’s China’s turn to be under the “loan” spotlight.
In late December 2003, the Chinese government injected over $45 billion dollars into its two largest banks to compensate for bad loans and prevent default. The funds were divided evenly between Bank of China and the China Construction Bank, two of China’s “big four” state-owned banks. Together, these four huge financial institutions control over two-thirds of the deposits, 51 percent of the total loans. It is estimated that 25 percent of business loans made by the largest banks in China result in non-payment and default by the borrower. However, many independent financial analysts think the true number is more like a third or even higher. Some financial analysts believe that only about 10 percent of China’s bad loans are reported and the actual default total might approach half a trillion dollars.
How could this happen in China? For decades its government made loans based on bureaucratic decisions and not commercial priorities with favorable return on investments objectives. Some funds supported bankrupt state enterprises and protected the legions of workers who depended upon them for their very survival. Other loans served as social policies by keeping cronies happy and voting for special interest. In other words, the graft, greed and corruption found in most other parts of the globe were alive and well in China.
China is in the process of cleaning up its financial act in order to take their institutions public on international stock exchanges. China Construction Bank is the most promising public offering this year and could raise between $5 billion and $6 billion, according to some investment bankers. Bank of China, the country’s largest foreign-exchange lender, would likely follow suit in 2005, and the amount of money they could raise could exceed the amount raised by Construction Bank.
The main reason for these institutions to going public is so China can transform its entire financial lending process, not simply to raise money. The hope is private banks will operate for the benefit of shareholders and that financial institutions will begin to lend productively and more prudently. What really separates China from the rest of the world is the percentage of money its citizens will save, which is estimated at about 40 percent of their income. Compare this with 2 percent savings rate of U.S. citizens’ and the huge financial opportunities for organizations to do business with China become clear. Global financial institutions like Citi Group and Bank of America are salivating at the chance to get a crack at this huge market!
Another thorny problem facing Chinese banks is they’re growing around 20 percent per year. This would be great news in most countries, but economists fear the Chinese economy is in serious danger of overheating. China is now a member of the World Trade Organization, and by the end of 2006 foreign banks will be allowed to do business in China using Chinese currency. More importantly, they can interact with Chinese households directly. This situation could end China’s dependence on the U.S. dollar and may slow down its growth. China could then be viewed as a trade-friendly global player. Once the country’s currency floats on the global exchanges, trade imbalances between China and the United States could improve. This might be viewed as a very small change, but it could catalyze other steps that could help level the playing field.
William Dollar is a Senior Contributing Editor for the Wisconsin Technology Network, and has his own consulting company at www.billdollar.com. You can also contact him at firstname.lastname@example.org.
The opinions expressed herein or statements made in the above column are solely those of the author, & do not necessarily reflect the views of Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.