First the bankrupt or nearly bankrupt soes use the

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Unformatted text preview: became NPLs. It is estimated that the NPLs generated due to the economic overheating of 1992/93 is over RMB 200 billion10. In the transition from planned economy to market economy, the competitiveness of SOEs declined comparing with private enterprises. A lot of SOEs were bankrupt or at the verge of bankruptcy during this stage and could not pay the loan to the bank. This resulted in more than RMB 300 billion of NPL. Such a large amount of NPL is caused by four factors. First, the bankrupt or nearly bankrupt SOEs use the banking loan to pay the social security benefit to the employees, which accounts for around one third of the of NPLs. Second, the government used bank loan to save those SOEs at the verge of bankruptcy, which also accounts for around one third of the NPLs. Third, the bankruptcy of SOEs generated around one sixth of the NPLs. Forth, the statedowned banks themselves made the rest one sixth of NPLs due to the lack of risk management skills. 8 Data source: China Statistical Yearbook 9 Data source: China Statistical Yearbook 10 Data source: Zhao Yi (2001) 138 研 究 所 年 報 Stage IV: 1999-now: Due to a series of aggressive banking reform measures taken by Chinese government, both the amount and the ratio of NPLs of SOCBs started to decline at this stage. The amount of NPLs decreased from RMB 2,400 billion in 1999 to RMB 1,072.48 billion in 2005 and the ratio of NPLs declined sharply from 32.56% in 1999 to 10.49% in 2005. The daunting amount of NPLs has made SOCBs operate at very high risk and actually be technically insolvent, as their nonperforming loans far exceed their equity. These institutions are still highly liquid only because the large retail deposit base continues to expand as a result of a robust economy and thrifty consumers whose savings equal to 40 percent of China’s GDP. A s the promise Chinese government made at the entry to WTO in December 2001, China committed to open up its domestic banking sector to full-fledged competition from foreign banks at the end of 2006. At that time, foreign banks will be able to open their own branches, take RMB deposits, and pretty much have full access to the mainland’s tremendous volume of household savings. The emergence of foreign banks will challenge the local banks from a business perspective and will intensify demands for market regulation, emphasis on corporate governance, prevention of corruption, and increased transparency. This transition heightened the need for a speedy resolution of the pervasive NPL problem in the financial sector. Moreover, after the Asian financial crisis, great attention has been given to the non-performing loans of financial institutions. Therefore, resolving the NPL issue has become the primary objective of China’s banking reforms. Since 1998, the Chinese government has carried out a variety of measures to reduce the NPL burden. These included the direct recapitalization of the SOCBs as well as the transfer of NPLs from the banks to AMCs...
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