Unformatted text preview: on Aug. 18, 2006. While these measures have managed to
curb over-investment and slow year-over-year GDP growth, the excessive credit expansion has
resulted in an increase in NPLs at major banks during 2004.
With these cooling-down measures, the bank credit was reduced and the price of real estate
fell. The huge buildup of property loans has turned to be piles of new NPLs in the system. It is
estimated that the new NPLs resulted from property loans might amount to RMB 649.4 billion
by 200715. The figure reported by Moody’s indicates that default rates on loans to developers are
already ranging from roughly 8% to 12%16. Figure�5,�Selling�Price�Index�of�Houses,�1999-2004
(preceding year = 100) 112 109.7 110
100 100 101.1 104.8 102.2 98
94 1999 2000 2001 2002 2003 Source: China Statistical Year Book, 2005
14 “Interest rise aims at cooling property sector”, China Daily, Dec. 1, 2004 15 Estimated by Li Hailin, CEO, Dongdu International Group 16 Banking on China’s Reform, Mckinsey Quarterly 2004 Non-Performing Loan of China’s Banking System 151 Figure�6,�Shanghai�Selling�Price�Index�of�Houses,�1999-2004
(preceding year = 100) 140 120.1 120
100 98.6 104.4 107.3 2001 2002 115.9 80
0 2000 2003 2004 Source: China Statistical Year Book, 2005 VI.�Conclusion
In the last few decades, China has established a huge banking system which intermediates
around 75 percent of the nation’s capital and has made China’s financial depth double in the last
decade. However, during the transition from planned economy to market economy, a large volume
of non-performing loans has been generated, which has threatened the sustainability of the
banking system. Chinese NPLs is mainly the result of extensive policy lending, low efficiency of
SOEs, weak corporate governance and poor operation skills of the banks, and the business cycles.
Chinese government has taken a lot of measures to solve NPLs, including transfering NPLs to
asset management companies, recapitalizing the SOCBs, establishing the CBRC, incorporating
strategic investors, initial public offerings, and so on.
Although NPL ratio of SOCBs has been reduced significantly, Chinese banks continue to make
astounding numbers of questionable loans atop the existing pile with the economic overheating
initiated in 2002. The Chinese regulators must, therefore, go beyond merely fixing the “stock”
problem of NPLs in the financial system and confront an additional source of instability: a flow of
new bad debt. Any failure by regulators to control these bad lending practices may put China’s
future prosperity at risk.
To control the creation of new bad loans, i.e. the NPL “flow” problem, the regulators must
introduce better corporate-governance practices to curb the ability of influential organizations
and people to meddle in the lending decisions of banks, improve their risk-management practices,
and limit fraud. Banks must recognize their new problem loans more rapidly and must adapt 研 究 所 年 報 152 and manage their loan portfolios by the lights of explicit, world-class credit-risk-management
guidelines and strictly enforce compliance. Reference
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