Monday, February 21, 2005

Well, back to my favorite topic, non-performing loans. According to the SCMP piece below, Chinese banks actually had a net increase in NPL amount, although the ratio fell in 2004. The only reason official figures report a drop in both NPL ratio and absolute NPL amount is that 50 billion USD was transferred from the foreign exchange reserve to the BOC and CCB to help them write-off NPLs. Without the write-off, China's NPL would stand at 2.18 trillion RMB, which is "just" 16% of GDP . China had high growth this year and now has a GDP of some 13.65 trillion RMB.

However, this NPL figure only includes the 16 largest banks in China and does not include NPLs in the smaller city commercial banks and all of the rural credit cooperative. To be fair, all of the NPLs in those institutions together are unlikely to surpass 0.5 trillion RMB. The other issue is false reporting by branch banks. Because of intense pressure to reduce NPL ratio, many branch banks have falsified NPL ratios or have hid them by rolling over loans. No one really knows the magnitude of this problem, but the problem might well add another 10% to China's NPL ratio.

Nonetheless, even with all of these problems, the Chinese banking sector has clearly made enormous progress in dealing with the NPL problem. The combination of rapid credit expansion, conservative lending policies, and tough over-sight by the CBRC has reduced NPL ratio from an official level of over 30% to 13.2%. Estimated NPL as a percentage of GDP has fallen from roughly 50% to now no more than 30%. In hindsight, the creation of the CBRC turned out to be a right decision. Basically, you can't trust the PBOC to monitor banks since they have multiple objectives (growth, low inflation, financial stability). They willingly sacrifice prudent lending practices if it would serve another goal. By creating a bureaucracy with the sole mission to decrease NPL, you create incentive for a subset of actors to pursue this goal in order to get promotion. Thus, Liu Mingkang turned out to be a zealous advocate of the NPL reduction cause.

The only troubling prospect on the horizon is what will happen to all of these long-term fixed asset loans. Basically, banks have switched from specializing in short-term working capital loans to SOEs to long-term fixed asset loans for government projects and real-estate in the past six years. A lot of these long-term loans are still "healthy," but will they stay this way?

South China Morning Post
Monday, February 21, 2005

Regulator takes state lenders to task on bad-loan figures
Officials say mainland banks have made no real progress in cleaning up their act

MARK O'NEILL in Shanghai

Prev. Story | Next Story
Since China's banking regulator published last year's non-performing loan (NPL) statistics for state-owned banks last month, state media have been crowing about a historic policy success.

They call it a "double reduction" in bad loans: a drop in the absolute amount of outstanding bad loans and in the NPL ratio, adding that, as it was the third year of "double reduction", there is hope the NPL problem has finally been solved.

A closer look, however, reveals that the situation last year was actually worse than the previous two. The ratios fell only because of significant one-off disposals of bad loans in May and June and a rise in overall lending.

In short, the patient is better because the symptoms have been masked, not because the illness is being cured. Many fear the NPL figures will get worse this year as companies and projects fail in a climate of tight money.

And not all of officialdom is cheering last year's NPL statistics. China Banking Regulatory Commission (CBRC) deputy chairman Shi Jiliang made a critique of the state banks just three days after the results were released on January 13.

"The Bank of China [BOC] and China Construction Bank [CCB] have shown some preliminary progress, but their task ahead is very onerous ... the state banks have the same defects as state companies, with low efficiency, poor internal management and `everyone eating out of the same pot'.

"They have an enormous amount [of work] to do to change their true nature, stop a worsening of their assets and change from being state banks into real commercial banks," he told an international seminar in Beijing.

"If we analyse the figures coolly and include the assets from the two banks that were transferred and use the original specifications, then the NPL amounts rose to some extent. This is certainly a matter of great concern."

The CBRC has good reasons to be unhappy. Since its foundation in 2003, it has made the improvement of risk management its top priority. Its chairman, Liu Mingkang, has been constantly on the road at home and abroad, preaching the virtues of good lending practices and corporate governance. He has overseen the drafting of regulations and establishment of a risk-control committee within the banks.

The worse than expected NPL figures are thus a big disappointment. China still has Asia's biggest NPL volume after Japan.

The CBRC figures showed the outstanding amount of NPLs of the 16 major banks at the end of last year had fallen by 394.6 billion yuan from a year earlier but still totalled a staggering 1.71 trillion yuan. The NPL ratio fell from 17.8 per cent at the end of 2003 to 13.2 per cent. The big four state banks' NPLs alone fell from 1.92 trillion yuan to 1.57 trillion yuan, a drop from 20.4 per cent to 15.6 per cent.

What the CBRC should have added was last year BOC and CCB transferred more than 470 billion yuan in bad assets to their asset management companies (AMCs). In short, the mountain of NPLs would have exceeded two trillion yuan without the transfers.

Some of the braver domestic media said figuratively that the emperor had no clothes.

"This fall in NPLs is in some sense playing with numbers," said an angry commentary in the China Business Post. "In speaking to the public, especially those not in the financial community, we should be frank and transparent."

It also noted that the recovery rate of NPL loans by the four AMCs which took the bad loans from the banks was only 20.2 per cent last year, which meant that the government and the public would have to cover the remaining 80 per cent. "So, is the reduction in NPL ratios anything for the taxpayer to be happy about?" the commentary asked.

The issue then is less the NPL ratio than whether the banks have changed their nature and are being run as modern financial institutions, making loan decisions for commercial and not policy reasons, doing risk assessment and holding officers responsible for their decisions.

The banks argued they were the victims of the government's decision in April to cool the economy, which translated into orders to reduce lending to the cement, steel, car, aluminium and other sectors.

As it was a blanket order, it meant they had to stop lending even to projects and companies they considered promising. So, a loan they had extended to a project that had not been completed and to which they could no longer lend became an NPL.

They also complained that local governments forced them to lend money for priority projects - especially infrastructure - so it was unfair to judge them by the same criteria as foreign privately-owned banks. In short, they are saying the NPL problem is not one for which they should be wholly blamed and that they are victims of China's hybrid half-planned, half-market financial system.

Great blog. I handle commercial finance as well.
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Thursday, February 10, 2005

The 21st Century Economic Report, a periodical based in China, carried a very interest report on the National Audit Agency (NAO) abandoning its planned audit on the China Securities Regulatory Commission (CSRC). The stock market has not done well lately, and some in the government fear that more financial scandals would further depress the market. That might be true, but I think the decision to abandon the audit is also indicative of the increasing tension between Wen and Huang Ju, who is the vice-premier in charge of finance.

The series of financial scandals that came out recently probably did not make Huang look good, even though these scandals are a product of lax regulation in the previous administration, when Wen was the vice-premier in charge of finance. Since last April, the stock index has been on a free fall, some of which can be attributed to the bad choice of Shang Fulin as the head of the CSRC. Wen is probably trying to kill two birds with one stone with the recent series of audits on financial institutions. On the one hand, it can improve his image as an honest premier dedicated to get rid of corruption in Chinese financial institutions. On the other hand, it would make Huang Ju, a Jiang crony, look incompetent or even corrupt.

Huang Ju, unfortunately, seems to be falling into Wen's trap in this instance. Instead of jumping on the auditing band-wagon and encouraging audits on the CSRC, he seemed to have exerted his influence to stop the audit, and now the abandoned audit is all over the news. Why? Perhaps there is in fact so much dirt in the CSRC that he figured not having an audit was better than having an audit. Also, the mysterious appointment of Shang Fulin to the CSRC suggests that he had a strong backer, who is probably Huang Ju. In this case, Huang would be reluctant to sacrifice Shang Fulin in the course of the audit, since Shang is one of the few technocrats Huang can count on.

审计署放弃审计证监会? 21世纪经济报道  2005-02-05 14:42:36
  特约记者 李红兵  北京报道  
“在王小石的问题曝光后,高层就已经责令证监会内部自查,现在,这些自查报告已经直接送到国务院了。”  2月2日,本报记者从国家审计署金融审计司获悉,原定2005年审计中国证监会的计划,已经正式取消。  同日,记者也从中国证监会机构监管部得到证实:审计署前期进驻证监会的审前调查人员也已经全部撤出。  


“按照署里原先的计划安排,2005年将是一个不折不扣的金融审计年。”审计署金融审计司一位官员对记者说。  按照相关审计法规的授权,金融审计司的主要职责是:负责审计中国人民银行、国家外汇管理局(含分支机构)及其在京下属单位、中国证监会及其所属证券交易所的财务收支;负责审计国家政策性银行、国有商业银行、国有保险公司、中国国际信托投资公司、中国光大(集团)总公司及其分支机构和其他中央国有金融机构的资产、负债和损益状况等。  2004年,全国18个地方特派办在审计署金融审计司的统一牵头下,已经对华融、信达、长城和东方4家资产管理公司及其分支机构进行了审计,共发现案件线索38件,涉案金额67亿元。同时,各地方审计机关还在金融审计司的统一协调下,对全国871家城市商业银行和农村信用社以及证券公司进行了审计。  对这些金融机构审计揭露出的问题令人触目惊心。因此,审计署下决心要在2005年把对金融机构的审计对象提高级别,从更高层次、更高级别上揭露金融机构在内部运行和管理方面存在的问题。  

“也正是在这样的设想下,审计署最终决定,2005年将首次把中国证监会、银监会、保监会(以下简称‘三会’)三家正部级金融机构确定为审计对象。”审计署科研所的一位人士对记者说。  该人士同时表示,按审计署的工作程序,一般是先由各司局根据上年度和已经审计出的问题自主确定下一年度的审计对象,之后再上报审计署,由审计长办公会议集体讨论决定形成最后决定,再由审计署办公厅通知具体司局执行审计。  根据这一程序,审计署内部早在去年11月左右就确定要在今年审计上述金融“三会”。审计署的相关官员也证实了将进驻证监会的消息。
  然而,对证监会的“审计风暴”却迟迟没有降临。  直到2005年1月初,由李金华审计长亲自主持召开的全国审计工作会议在厦门召开时,才突然传递出了2005年金融审计“风向”有变的信号。  在这次会议上,李金华在报告中部署了2005年的金融审计工作任务:“今年,审计署除对银监会、保监会的财务收支进行审计外,还将组织对农业银行的资产负债损益审计,地方审计机关也要积极推进对地方金融机构的审计。”  
人们注意到,这是审计署最高官员首次在正式场合发出的放弃审计证监会的信号。  “审计决定在经过审计长办公会议集体决定后一般很少更改或取消,尤其是在审前调查组已经派出、审计工作事实上已经展开的情况下,取消审计计划的情况更是前所未有。”上述审计署科研所的一位人士说。  而这一切,正如风暴的独有属性那样,来去突然。  
证监会自查报告已上报  而很明显,自始至终,处于风暴口的,除了审计署,还有证监会。  2005年2月1日,《国务院关于推进资本市场改革开放和稳定发展的若干意见》即“国九条”出台1周年前夕,沪综指和深成指已经分别跌落至1189点和3045点附近,这是自1999年以来的最低点。  也正是在这一时刻,转机似乎来临。  2月2日,“国九条”出台1周年,股市随即上演了绝地反击:这一天,沪深股市大幅暴涨,沪综指由1189.50点涨至1252.50点,上涨63.57点,涨幅之大,两年来从未有过。  “在这个时候审计证监会,如果审计出几个大案,谁能承受得起?股市将怎么办?”2月2日,包括张卫星、皮海洲、侯宁等在内的市场人士均向记者表达了类似的看法。  审计署科研所的一位人士介绍,自证监会成立以来,还从未接受过审计署的审计。而证监会信息中心的一位官员透露,“在王小石的问题曝光后,高层就已经责令证监会内部自查,现在,这些自查报告已经直接送到国务院了。”  “毫无疑问,如果真正审计起来,这次审计将是对审计署的一个挑战。”2月2日,审计署科研所的一位人士对记者直言不讳地表示。  审计署权限难匹配  实际上,从证监会的收入构成来看,对证监会的审计,审计署明显缺乏权限。  根据著名的市场投资人士皮海洲的分析,证监会的收入来源主要有三大块:一是印花税,这部分钱在上缴国库后再以国家财政拨款的形式拨给证监会;二是审核费,在递交上市申请的时候由申请上市的公司缴纳,这部分费用明面上是明码标价,但现在的问题是相当多的企业为了顺利过关,暗地里会有一些情况;三是罚款收入,现在一般的罚款标准大约在5万—50万之间不等,这部分收入按理应上缴国库,但问题是罚款标准的主观性太大,缺乏客观量化的标准。  上海证券交易所研究中心总监助理施动晖还对记者透露,证监会每年还能获得一笔收入可观的监管费,这笔费用从A股、B股、封闭式基金以及债券交易市场上的买卖双方同时收取,由上交所、深交所代收后上交给证监会。其中,A股市场的监管费按成交金额的0.004%收取,债券的监管费按成交金额的0.001%收取。  据施动晖推算,以2004年上交所A股市场2.6万亿的成交金额计算,仅上交所代收的这笔每年的监管费收入,已十分庞大。  但是,根据审计署的职责和权限,只负责审计国家预算和财政拨款这部分资金的使用情况。

Apparently the Chinese Ministry of Finance (MOF) and the Ministry of Commerce (MOC) are engaged in another fight, which is over whether the tax for foreign firms in China should be raised or not. http://www.eobserver.com.cn/ReadNews.asp?NewsID=12285
The fight between MOF and MOC is easy to understand from their respecitve ministry interest. What's interesting is that many local governments don't want to see the tax raised, for fear of losing FDI inflow. But if they can share the increased fiscal revenue with the center, what do they complain about? This raises the question: what exactly is the formula by which the higher authorities evaluate the performance of local officials? People like Bo Zhiyue have argued that local officials' career promotion is directly related to their economic performance. This may be true, but is certainly too crude. That local officals don't want FDI taxes being raised suggest that there are more concrete criteria (e.g., FDI inflow) with which local performance is judged. Any thoughts?
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Wednesday, February 02, 2005

A reporter friend of mine asked me why we see blatant local non-compliance with central policies. Well, the answer is complicated, but I gave her a very boiled-down version. All crticism is welcomed. There are several perspectives on this, and to be brief:

1. local governments tend to listen to the center, since the communist party demands obediance. Disobediance is due to the center's incomplete ability to monitor localities. Huang Yasheng's _Inflation and Investment Control in China_ argues this.

2. local governments would not listen to the center if they perceived divided opinions on an issue in the center. This is because their expectation of being punished for not complying is much lower. Lieberthal, Susan Shirk, and I subscribe to this view.

3. a third view argues that local governments actively lobby and even pressure the central government to change its policies. Of course, this happens, but much less so from the late 90s onward. This is because the central government now holds the most lucrative revenue sources, which it uses to pressure local governments into compliance.

So, the bottom line is that if there is a blatant case of non-compliance, the first thing you should suspect is that someone in the central government in fact agrees with the violator in the local government or is the factional patron of the violator. I suspect that the recent case of the Three Gorges company building the dam in Guizhou despite central order against has something to do with the fact that 3Gorges Co. is still under the control of former Premier Li Peng. Another issue of grave concern is land confiscation in many localities. Cash strapped local governments in many places are confiscating peasants' land and compensating them with very little money in order to sell the land to developers. In this case, the center's interest in preserving social stability is just dead against local interest to raise cash, so central inability to police all of the thousands of local governments might be the main explanation. But we saw signs earlier in 2004 that Jiang Zemin in fact supported rampant real estate development in the Jiangnan region, despite Wen's call for caution.

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