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23_asia east_4 - Non-Performing Loan of Chinas Banking...

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129 Non-Performing Loan of China’s Banking System Non-Performing Loan of China’s Banking System Huang Bihong .� ntr duct n Despite the phenomenal economic growth averaged 9 percent per year, China has one of the largest non-performing loans (NPLs) in the world. According to the China Banking Regulatory Commission (CBRC), China’s banking sector carries the NPLs of RMB 1,282.72 billion as of June 30, 2006, representing 7.53 percent of total loans. Of this daunting amount of NPLs, RMB 1,055.76 billion is with state-owned commercial banks (SOCBs), which accounts for 9.47 percent of total loans of SOCBs. This NPL figure does not include about RMB 396.36 billion of NPLs remaining on the balance sheet of four asset management corporations (AMCs), which were established in 1999 as decentralized vehicles to manage and dispose of NPLs they had purchased from the four state-owned commercial banks (SOCBs). Reforming the SOCBs is a top priority for the Chinese government. Among the reforms being implemented, NPL disposition is the primary task. This paper is aimed to describe the evolution of NPLs and analyze the root causes of NPLs in China. The rest of the paper is organized as: section II outlines the features of China’s banking system; section III describes the evolution as well as the current status of China’s NPLs; section IV analyzes the sources of NPLs; section V discusses the new challenges China’s banking sector facing in terms of NPLs and section VI concludes. .� h na ank ng�S tem The most phenomenal feature of China’s financial system is the dominance of its banking system. As indicated in Figure 1, around 75 percent of the capital of China’s economy is intermediated through banks in 2004, while in developed economies and emerging markets the share of bank deposits ranges only from around 20 percent to 50 percent. The banks play an even larger role in facilitating flow of funds. They garner the bulk of household savings and provided 95 percent of corporate funding.
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130 The size of China’s banking system is enormous with the assets equivalent to 160 percent of GDP at the end of 2004, which is disproportionally distributed among policy banks, state-owned commercial banks (SOCBs), joint stock commercial banks (JSCBs), city commercial banks (CCBs), rural commercial banks, urban credit cooperatives (UCCs), rural credit cooperatives (RCCs), postal savings, foreign banks and non-bank financial institutions (NBFIs). State-O ned� mmerc al� ank As indicated in Figure 2, state-owned commercial banks are in a dominant position in China’s banking system, which account for 52 percent of the total asset. The “Big Four” dominant state-owned commercial banks are: Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC) and China Construction Bank (CCB). They were transformed from state specialized banks into commercial entities during the 1994 banking reform which aimed to create a more unified and efficient banking system. Under the new system, each SOCB is held accountable for F gure�1� h na
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