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Monday, October 06, 2003

SO, someone found my commentary on the WSJ to be too optimistic. He pointed out that such rapid expansion in loans will lead to substantial increases in non-performing loans. I did come off as optimistic without really meaning to. Here is my reply:

There is no doubt that current lending practices will give the Chinese government a lot of grieve in the future. I myself am quite pessimistic about the long-term viability of the Chinese banking system. Having said that, there are some recent developments that might delay the impending crisis for a few more years. Although consumer lending is quite reckless these days, the credit risk has actually declined compared to the mid-90s. Just by spreading their risk to many small borrowers versus a few large SOEs, banks’ credit risk decreases. Moreover, the foreign exchange reserve has grown by leaps an bounds, which also bolsters depositors’ confidence in the liquidity of the system. I agree with you that the Chinese system is one giant confidence scheme. I just think that there is still enough confidence to go around.

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