Market opening threatens the viability of China’s tens of thousands of financial institutions. At the top of the banking hierarchy are the big four state commercial banks – Bank of China, the Industrial and Commercial Bank of China (ICBC), China Construction Bank and the Agricultural Bank of China (ABC). They are the only banks with nationwide branches and they account for 70 per cent of financial transactions in China. Collectively, they have well over 100,000 branches at home and a few overseas.
Despite the separate existence of three state policy banks established in 1994, the big four lend to central and local government priorities far more than is healthy, which has led to the problem of excessive corporate debt and non-performing loans (NPLs). Four asset management companies (AMCs), set up in 1999, have taken Yn1,400bn in nonperforming assets off the banks’ books as part of the drive to rebalance their accounts. It remains unclear how much is left; Chinese accounting falls short of international norms and books may not give an accurate picture. NPLs are probably still accumulating fast as bank lending continues to be influenced by government instruction. There is strong reluctance to recover debt from defaulting state-owned enterprises (SOEs), for example, through bankruptcy proceedings. State industry takes about four-fifths of all loans.
There is only a limited advantage to be gained by transferring the problem to AMCs. They were only able to repackage and offload a small proportion of their holdings to domestic and foreign investors in November and December last year. They cannot stand as a permanent sink for domestic bank bad debt. Furthermore, contingent liabilities in the financial system are high, not least where the state has recapitalised the top banks by hundreds of billions of yuan in recent years. The problem of NPLs goes to the heart of the credibility of the domestic banking system.
After the big four come about 10 national commercial banks and 90 city commercial banks. They share many of the problems of the top four. Credit co-operatives also play a crucial role in capital intermediation, but are troubled. China’s 42,000 or more rural credit co-operatives are the only port of call for farmers unable to offer collateral or guarantees required by the banks. The ABC, once a major provider of financial services to rural China, has withdrawn from lending to farmers because of poor risk. There are also about 3,000 credit co-operatives in the towns and cities. Credit co-operatives lend into a high risk, low return environment, but one of crucial political importance for the government. The rural economy remains the country’s largest employer at a time of mounting unemployment.