Thursday, January 08, 2004
As a political scientist, I think the question of whether government incentive to steal from the cookie jar has changed is a key issue. I am skeptical that government incentive has changed significantly.
Essentially, the state banks have served top leaders extremely well to fulfill a number of policy and political objectives. In the 80s, banks were used to fuel rapid development on China's East Coast and sustain the SOE sector. In the early 90s, it was mainly used to bail out failing SOEs. In the past few years, it was used for developing Western China and sustaining growth. But behind these policy objectives, banks were also used for political purposes, to buy factional loyalty for various top leaders. I conducted a statistical analysis of provincial level lending and found that factional allegiance gave provinces extra loans throughout the reform era ( I am happy to provide the paper to those interested). Thus, bank loans, like fiscal pork in the US, continue to serve an integral policy and political role.
True, international investor interest in the state of the Chinese financial sector has placed some constraints on the government's ability to intervene in the banks. But I think the current strategy is actually to trump up a couple of "showcase" banks for investors, while continue to use ICBC and ABC for policy purposes. The ABC is a great example of this. Despite being one of the Big 4, little has changed in the policy role of the banks. The PBOC continues to bail out the bank on a yearly basis through "relending" operations. There are concrete plans now to form a regional bank just for the Northeast to deal with SOEs and other policy and political objectives. So, rather than the entire financial system reforming, the Chinese government is segmenting the market.
Also, as the total bank deposits grew rapidly, the Chinese government and politicians now need a smaller percentage of bank resources to fulfill policy and political goals. If anything, I think this goes a long way to explain why banks do better today. Western Development, for example, used up something like 600b RMB in banking and fiscal resources. This would have been a large % of bank resources ten years ago, but it is no longer such a big figure today. Thus, I am skeptical that the incentives have changed, but I am open to correction from those of you who have more regular contacts with Chinese officials.