Austere lending environment

More recent editions of the almanac allow for comparisons that help gauge the success of Zhu’s efforts, and the results are not encouraging. Aggregate lending figures for end-1999 do show one striking change over the previous six years: the total loan-to-deposit ratio of the big four banks has fallen sharply, from 1.14 times to 0.83 times. This indicates that despite several cuts in interest rates over the past few years, the lending environment is now substantially more austere than in the recent past. The slowdown in credit creation has been very successful in stabilising China’s macro-economy; the soaring prices of the early 1990s are now a distant memory, leaving the country instead with a Japanesestyle deflation problem.

Repeating Lardy’s regional comparison of lending behaviour, however, reveals some anomalies. Credit conditions are still much looser in some provinces than in others but, with a few exceptions, the favoured provinces by 1999 were in the west, and not the northeast.

Of the five provinces with loan-deposit ratios exceeding 1.0 at end-1999 (Tibet, Ningxia, Qinghai, Jilin and Hubei), the first three are in the far west and the last in central China. In the northeast, only Jilin has enjoyed continued easy access to bank loans, even as its neighbours, Liaoning and Heilongjiang, faced a dramatic credit squeeze. Not surprisingly, Liaoning and Heilongjiang have faced severe labour unrest in recent months, with both provinces experiencing mass protests by tens of thousands of angry laid-off workers and unpaid pensioners.

The sharp rise in credits to Hubei, which in absolute terms enjoyed a larger ‘excess’ of state bank lending relative to the national average than any other province, almost certainly reflects spending on the Three Gorges Dam, as well as related infrastructure projects such as the development of new towns for transmigrants. Shanghai has also been one of the largest beneficiaries, with heavy state investment flowing into the Pudong New Area.

In relative terms, however, the three provinces ‘most favoured’ by the state banks appear to be Tibet, Ningxia and Qinghai. Tibet’s number one ranking, in particular, represents a startling reversal from end-1993, when the region reported the lowest loan-todeposit ratio of any Chinese province. The 1993 figure most likely reflects the absence of industrial SOEs, as well as the large military garrison that Lardy speculates may have maintained local bank deposits that were large relative to Tibet’s subsistence economy.

Between 1993 and 1999, however, bank loans outstanding in Tibet rose more than 19- fold, while total bank lending nationwide slightly more than doubled. The region is now absorbing massive credits for infrastructure projects, some of which are so recent that they do not appear in the end-1999 credit figures. The Xining-Lhasa rail link, a national-level infrastructure project, only began construction in the summer of 2001 and is not expected to be completed for another five years.

Unfortunately, loans for many projects in Shanghai, the far west and the upper Yangtze region may be as problematic as the SOE credits they helped to displace. The Three Gorges Dam, whose electric power now seems unlikely to find purchasers at breakeven prices, is only the best known of several troubled projects.

Elsewhere in the country, plans for a cross-country pipeline to carry natural gas from Xinjiang to Shanghai have so far failed to attract foreign equity participation, in part because the project will cost more than the alternative of importing liquefied natural gas by tanker. Likewise, a long-running conflict between Shanghai and Ningbo over the location of east China’s leading deep-water port was recently resolved in Shanghai’s favour – despite the city’s inferior natural harbour conditions, which will require billions of yuan in unnecessary dredging expenses. Most recently, geologists have suggested that the Xining-Lhasa rail link is technically unfeasible due to the high risk of major earthquakes on the Tibetan Plateau.

Like the Three Gorges Dam, however, such projects may go forward even in the face of expert criticism. The rapid growth of China’s fixed asset investment, which rose by 24.5 per cent year-on-year in the first two months of 2002, has become the strongest driver of the economy as consumer spending stagnates. With senior leaders firmly committed to maintaining 7 per cent GDP growth for the full year, the infrastructure spending spree is likely to continue for some time.