Will China Avoid Japan-Like Debt Nightmare?

W. Pesek

Will China Avoid Japan-Like Debt Nightmare?
William Pesek Jr.
Chinese regulators entered 2004 with rarely seen enthusiasm to repair the rickety banking system.

First, Beijing said it used about a 10th of its foreign exchange reserves, $45 billion dollars, to bail out its second- and third-largest lenders. The money will boost the capital adequacy of two banks it plans to take public this year or next.

Next, the Ministry of Finance, according to the New York Times, is preparing to write off its $41 billion stake in the two banks, Bank of China and China Construction Bank. The hope is to jumpstart the disposal of non-performing loans. China is sitting on a bad loan problem than is worse than Japan's.

China has done more to revive its banks in the first two weeks of 2004 than it did in the previous two years. In any economy's development, there are pivotal moments that offer hints for the outlook. Beijing's move to accelerate its bank-repair efforts is such a moment, and investors shouldn't miss it.

Yet Beijing will need to get far more ambitious, both with funds and reforms. The problem isn't one of capital, per se, but the nature of the four biggest banks.

`Achilles' Heel'

``China's `commercial banking system' is the Achilles' heel of China's economy,'' says Donald Straszheim, president of Straszheim Global Advisors. ``Their banks are not banks. The four big banks, state-owned, dominate the industry and are merely lending arms of the government.''

Regulators have considerable heavily lifting to do. And it's possible all this is merely an effort to dress up banks so investors will find them more attractive. China isn't renowned for its transparency, and its track record on bailouts isn't good.

That said, there's reason to applaud Beijing's efforts -- and to give it the benefit of the doubt, at least for the moment. Here are three reasons why.

One, it's heartening to see China get serious about one of the biggest obstacles to becoming the superpower that is its potential. Regardless of how cheap its labor and land costs are, China will only thrive if its underlying financial system is sound. ...Continued