Banks also extended loans at the request of local

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Unformatted text preview: the "request" of local government officials to fund their favorite projects. In many cases, these projects were not approved by the central government and thus no central bank funds had been provided for these lending. Banks had to finance these loans from deposits taken from the public. Because the policy lending is not a result of normal commercial bank decisionmaking, there are always higher default risks associated with these loans. Through 1991, about 42% of the SOBs' lending was policy lending. About four-fifths of this lending was financed by borrowing from the central bank and the remaining fifth was financed from the deposits.' "Loan for Grant" (Bo Gai Dai) is a new financial reform policy issued in 1984. The new policy was to use interest-bearing loans to replace direct grants to SOEs, thereby shifting the financing responsibility for SOEs from the fiscal budget to SOBs. The impact of the new policy was Nicholas R. Lardy, China's Unfinished Economic Revolution, 1998, p.85, Brooking Institution Press, Washington D.C. reflected in the dramatic lending growth of SOBs. Total loans outstanding by all types of financial institutions grew from RMB 190 billion in 1978 to RMB 6.1 trillion in 1996 as a result 2. Due to the lack of other investment options, most households put their savings into banks. The household savings in China have risen significantly since 1978, increasing from 2% of gross domestic product (GDP) in 1978 to 22% in 19943. The financial system, the big four SOBs in particular, heavily relied on household deposits as a source of funds for lending to enterprises. The SOBs, therefore, built up enormous liabilities to households. Currently, the big four SOBs account for about 70% of domestic credit and hold over 70% of household deposits4 . Since 1993, the quasi-monobank system has been gradually transformed into to a quasi-market system. The People's Bank of China and the four SOBs were reorganized to reduce local governments' intervention. The Central Bank Law and Commercial Bank Law were enacted to provide a legal and regulatory framework for the operation of the banking system. The relending policy was abolished in 1993. In 1995, three policy banks, the Import and Export Bank of China, the Development Bank and the Agriculture Development Bank, were set up to take over the policy lending. Despite the establishment of three policy banks, the SOBs were still carrying a heavy percentage. of risky loans from the policy lending. Nicholas R. Lardy, China's Unfinished Economic Revolution, 1998, p.78, Brooking Institution Press, Washington D.C. 3 World Bank, The Chinese Economy: Fighting Inflation, Deepening Reform, p. 14 4 John P Bonin, Dealing with the Bad Loans of the Chinese Banks, p. 701/2001, Department of Economics, Wesleyan University 2 CHAPTER THREE: CAUSES OF CHINA'S NON-PERFORMING LOANS Triangular Relations among SOEs, SOBs and the Fiscal System During the pre-reform period, China's SOEs had little economic independence. Accounting for 8...
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This document was uploaded on 03/12/2014.

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