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Unformatted text preview: espite the tremendous
contribution they made to output and employment, private enterprises account for only 27 percent
of loan balances11.
NPLs are the most conspicuous outcome of capital misallocation by the system. Despite the
low operating efficiency of SOEs, SOCBs provide loans to SOEs with little regard to their ability
to repay its loans, under the perception that the ultimate loss will be borne by the government. In 11 Mckinsey Global Institute, “Putting China’s Capital to Work: The Value of Financial System Reform”, 2006 Non-Performing Loan of China’s Banking System 145 certain instances, banks simply extended new loans to insolvent SOEs, so that they could use the
new funds to fulfill existing debt obligations. At the end of 2001, the total liabilities to equity ratio
for China’s SOEs stood at 158 percent. SOEs in the construction, real estate, food, and textiles
industries were among the most highly leveraged, with total liabilities to equity ratio in excess of
350 percent. When adjusted for unhealthy assets, the total leverage ratio of locally-administered
SOEs escalated even further, from 252 percent to 632 percent. The continuous losses of the SOEs
and the unremitting credit support that they received from banks resulted in mounting bad loans
in China’s banking system. As a result, the NPL ratio is much higher in those provinces where
SOEs concentrated than that in the coastal provinces like Zhejiang as SOEs traditionally account
for a small share in these provinces. Weak�Corporate�Governance
During the transition from planned economy to market economy, the state ownership of China’s
economy has declined significantly over last two decades. However, the banking system still
has the highest level of state ownership in the world. The government still firmly controls the
banking sector. Besides the four SOCBs, state-controlled banks totally accounted for 90 percent
of bank assets in 1990, which fell only slightly to 83 percent in 2004. The level of state ownership
of Chinese banking system is much higher than that of Eastern Europe’s transitional economies.
In Hungary, state-owned bank assets accounted for 81 percent of total bank assets in 1990, but the
ratio declined dramatically to 8 percent in 2004. In Poland, the ratio of state-owned bank assets
also fell tremendously from 80 percent in 1990 to 20 percent in 2004. In Czech Republic, the ratio
of state-owned bank assets was 78 percent in 1990 but it decreased considerably to 3 percent in
With such a large share of state ownership, Chinese banks commonly lack modern effective
corporate governance mechanisms. The boards of Chinese banks had no clear roles and exercised
little authority over management or operations of the institutions. Moreover, there are no
explicit guidelines for the type and structure of board committees, the qualification and mix of
directors, or the role and rotation of auditors. For those banks being prepared for foreign IPOs
or having made IPOs, the regulators have made effort to improve governance requirements. The
independent outside directors have been appointed. However, these directors are still a minority
at SOCBs. Most banks still lack clear decision-making structures with lucid accountabilities that
run throughout the organization, making it challenging for boards to control risks effectively.
As a part of banking r...
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This document was uploaded on 03/12/2014.
- Spring '14