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of the shares and was chosen by a controlling group of shareholders to run operations. Non-Performing Loan of China’s Banking System 147 Chinese government is willing to provide funds to state owned banks. It will not only lessen the
profit pressures of the banks, but will also create moral hazard, with which the banks will take
risky operations. Moreover, high levels of state ownership make it difficult for banks to escape
the political influence from the local governments and to reduce bloated bank payrolls. Even
worse, the gold-plated corruption, reckless lending, misappropriation and fraud have actually
plague China’s dysfunctional banking system. According to CBRC, during the first half of 2005
the Big Four SOCBs handled 98 criminal cases of fraud among bank employees. The official
Chinese Xinhua News Agency recently reported that CBRC punished 6,826 bank officials in 2005
for illegal actions or outright financial crimes. China Construction Bank disclosed in its October,
2005 offering prospectus that it experienced more than 100 cases of fraud and embezzlement by
employees between 2002 and 2004. Operational�Weakness
Despite the efforts made by the Big Four SOCBs to upgrade management oversight and
lending skills in recent years, Chinese banking system as a whole still have several operational
First, most banks don’t have good internal credit-assessment capabilities. Under the planned
economy, most of loan was directed or ordered by the government to fund the project or SOEs.
Under such environment, loan officers were not required to develop good credit-assessment
skills. It is actually no need for banks to develop credit scoring tools or to keep good records of
borrowers’ credit histories under the circumstances of extensive policy lending. Although the
government intervention on lending has been greatly reduced since the banking reform of 1994,
banks still make lending decision based on incomplete data with insufficient analysis in many
parts of China, partly due to the poor quality and unreliability of many companies’ financial
statements. With poor credit-risk-management skills, when a major bank reviewed its lending
portfolio in one region, it would find that for 60 percent of the loans, it couldn’t determine which
industry had received the loan, what collateral was provided for it, or even who had made the
In order to overcome the operational weakness, some SOCBs have made great effort to improve
the skills of their loan officers; some SOCBs have required provincial or regional approval for
larger loans. However, in small banks, loan officers still make loan decisions according to past
experience and hierarchical approvals, instead of rigorous analysis of companies.
Second, the banks commonly lack external information on the credit histories and the financial
condition of potential borrowers, including corporations and consumers. Under the environment
of extensive policy lending in the past, banks do not collect the good-quality information on 148 研 究 所 年 報 borrowers’ credit histories and financial performance. Moreover, China has neither independent
credit rating a...
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This document was uploaded on 03/12/2014.
- Spring '14