5 million square feet of office space five times the

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Unformatted text preview: e feet of office space - five times the 2.7 million square feet in 199413. By late 1996, the bubble started to burst due to the over-supply. When the construction peaked in 1998, the vacancy rate of class A offices had reached almost 50% . Real estate prices slid to below 50% of their peak level15 . For commercial banks and other financial institutions with heavy exposure to real-estate construction and speculation, the bursting of the asset bubble further deteriorated their balance sheets. Underdeveloped Credit Culture As Mr. E Gerard Corrigan, a Managing Director of Goldman Sachs, defined in his speech sponsored by the Bank of China on March 1, 2001, credit culture is a broad and multi-faceted concept related to socially transmitted behavior patterns that define the relationship between lenders and borrowers. The core of the credit culture is that a creditor should not lend money unless the lender is highly certain that the resulting debt can be serviced and repaid in a timely fashion. Correspondingly, debtor should not assume the obligation to take on debt unless the debtor is reasonably certain that the debt can be serviced and repaid on a timely basis. In China's transitioning economy, credit culture is far from being perfect. On the creditor side, the SOBs are not used to their new, and vastly more important role. Lending was grounded more 13 Shalendra D. Sharma, Stability amidst Turmoil: China and the Asian Financial Crisis, 03/01, p. 6, Harvard Asia Quarterly 14 Shanghai Property Market Review, 05/02, Slide 8, "-Shalendra D. Sharma, Stability amidst Turmoil: China and the Asian Financial Crisis, 03/01, p. 6, Harvard Asia Quarterly in relationship (Guan Xi) rather than in the capacity of the borrower to repay, the objective review of cash-flow projections and the fundamental understanding of clients' business and their risks. Without adequate due diligence, bank officials often extended risky lending either under pressure from higher authorities or in pursuit of personal gains. On the debtor side, many Chinese enterprises still have not developed the habit of paying back loans promptly. Some of them even use loopholes in regulations and bank management systems to dodge their debts. According to a Xinhua News Agency's article " Credit System Emphasized" dated September 20, 2001, credit crisis has become part of social life and economic activities in recent years. The manufacturing and selling of fake goods, swindling contract and dodging of loans remain incessant after repeated prohibition. Cash transaction remains dominant in commercial and trade activities. The ratio of the Chinese enterprises that had bad loans is up to 30% 6 China has not established a credit rating system, which is a tool to price risk and thereby increase the transparency of the borrower. A credit rating system is especially crucial for financial institutions, as they need to assess the records of enterprises that have shown a tendency to default. "...
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