NCPA - National Center for Policy Analysis

Reforming China's Banking System

December 9, 2003

China's new rulers are about to take on the reformation of the state-run banking system and the crony Socialist system for allocating capital, says Marsha Vande Berg. They are taking steps to repair the balance sheets of major banks, which are swamped by billions of dollars in loan payments that are past due.

Some argue that the situation is not so grave because the government guarantees much of the bank debt and has considerable assets to make good on bank liabilities. However:

  • Loans currently on the books of the state owned banks exceed $1 trillion and about 25 percent are non-performing.
  • Failure to clean up the banks' balance sheets could damage the confidence of foreign investors who poured $52 billion in direct investments into the Chinese economy in 2002.

Therefore, reform is a necessary step to strengthen China's burgeoning economy. Business as unusual will undermine China's long-term growth prospects, state-owned banks continue to direct valuable capital to state-owned enterprises, however inefficient, says Vande Berg.

Source: Marsha Vande Berg, "Can China Fix its Banking System? Reformers at the Brink," Milken Institute Review, Third Quarter 2003.

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