Wednesday, June 15, 2005

Replying to an earlier comment about Zhu and Wen ("This is rather beside the point of this particular posting. But judging by some of your previous posts, you see the hand of Zhu Rongji in some of the Wen administration's moves. In a recent Asia Society event in LA, William Overholt remarked that Zhu's work in cleaning the red ink from China's banks is but half-done. After Zhu left the premier's post, bad debts are accumulating again. How do you compare Wen and Zhu's skill in dealing with banks?")

Zhu and Wen definitely have different styles. While Zhu is hard-hitting and wants to solve the problem right at this minute, Wen takes a more circumspect approach. In a way, their styles are products of different times. When Zhu first became Premier, the Chinese banking sector was really in a bad way. Zhu then implemented a series of policies that both bolstered the power of the central government and provided short-term but effective fixes to the NPL problem. Setting up AMCs to buy NPLs at face value was precisely such a move (for more details, please see my article in December 04 issue of China Quarterly). Now, even though there are new NPLs, I am fairly convinced that the situation is not as dire as it was in the mid-90s, especially when calculated as a % of GDP. The government's willingness to auction NPLs as opposed to directly selling them to AMCs at face value is a sign of that. Another thing that the Wen administration did right was to split the PBOC into two parts (see an earlier posting on this issue), with the CBRC focusing on the NPL problem. This gave the CBRC the sole mission of controlling NPLs, whereas the PBOC had conflicting missions. The banking problems confronting Wen is still daunting, but much more manageable and does not require the drastic measures that Zhu took. Wen, however, seem willing to experiment with new measures, such as the foreign exchange injections to recapitalize banks and, ultimately, listing the banks. These moves can now be done in a carefully planned fashion, not the over-night moves that Zhu was famous for. However, if some exogenous shock causes the banking problem to worsen significantly, a hard-hitting style might become necessary again.

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