PROGRESS, OF A SORT
A new look at China’s banks reveals some basis for optimism, but there is still a lot to worry about.
By Cesar Bacani

No prizes for guessing where China’s 50 largest banks cluster. Shanghai and the Yangtze Delta host 34% of their assets. Beijing, the capital, has 17%, while the Pearl River Delta, which borders Hong Kong, holds 12%. Another key finding of credit-rating agency Standard & Poor’s February 2006 study of China’s banking sector should not come as a surprise either. “Most banks,” says the report, “still lag those in other markets in corporate governance, risk management, internal controls, financial strength, and transparency.”

Even so, and this should be good news to the optimists on China, the level of non-performing loans as of end-2004 had fallen below 10% for national and city commercial banks, with that for the four reformed mega-banks – Industrial and Commercial Bank, China Construction Bank, Bank of China, and Bank of Communications – hovering just above that figure. The lone exception is second-largest Agricultural Bank of China, whose soured assets still account for nearly 30% of its total loans outstanding.

Also positive is the 73% loan-loss provision coverage at the listed national banks, among them China Minsheng Bank, China Merchants Bank, and Shanghai Pudong Development Bank. But other national and city banks may be flirting with disaster by provisioning at a low 30% of the value of the gross loan portfolio at risk of default, with the reformed mega-banks even lower at 15%. The Agricultural Bank of China has set aside money equal to only 5% of vulnerable loans. The government has yet to decide how to clean up the technically insolvent mega-bank’s dreadful finances.

The general improvement extends to the ratio of non-performing assets to shareholders’ equity, which has now fallen to near parity from a high of three times in 2001. This is due in part to government capital injections, the sale of non-performing assets, initial public offerings, and strategic investments by foreign institutions. Standard & Poor’s expects more progress, but it warns that “the government has succeeded in relieving only the symptoms of the sector’s malaise.” The more fundamental steps include insulating the banks from interference by central and local governments, and reforming the legal system. This patient is still in intensive care.