companies were used to resolve the problem-loan crisis in the banks highlights perhaps the most important part of the banking system: the perpetual “put” the PBOC has extended to the AMCs. In fact, this “put” extends beyond the AMCs to the entire financial system and weakens any reform effort that might be undertaken. It is the Party’s shield against financial catastrophes. In the name of “financial stability” the Party has required the PBOC to underwrite all financial cleanups, of which there have been many—from the trust-company fiascos of the 1990s, the securities bankruptcies of 2004–05 to the banks—at a publicly estimated (and probably underestimated) cost of over US$300 billion as of year-end 2005 (see Table 3.6 ). 7 With this option available to them, bank management need care little about loan valuations, credit and risk controls. They can simply outsource lending mistakes to the AMCs, perhaps on a so-called negotiated “commercial” basis, and the AMCs will be almost automatically funded by the PBOC.
TABLE 3.6 Estimated historical cost to the PBOC of “Financial Stability” to FY2005
Time Period
Amount (RMB billion)
Use
1997–2005
159.9
Re-lending to closed trust cos., urban bank co-ops, and rural agricultural co-ops to repay individual and external debt
1998
604.1
Re-lending to the 4 AMCs for first-round acquisition of bank NPLs
From 2002
30.0
Re-lending to 11 bankrupt securities companies to repay individual debt
2003 and 2005
490.2
Huijin recapitalizes BOC, CCB, and ICBC
2004–2005
1,223.6
Re-lending to 4 AMCs for second-round acquisition of bank NPLs
2005
60.0
Additional lending to bankrupt securities companies to repay individual debt
2005
10.0
Re-lending to Investor Protection Fund
Total
2,577.8
US$ billion
315.5
Source: The Economic Observer , November 14, 2005: 3; PBOC Financial Stability Report 2006: 4; Caijing , July 25, 2005: 67
The new Great Leap Forward Economy
Added to the still unresolved loans of the 1990s, the US$1.4 trillion lending binge of 2009 will inevitably lead to correspondingly large loan losses in the near future (see Figure 3.7 ). The borrowers and projects are the same as in the previous cycle—infrastructure projects, SOEs and local-government “financing platforms, which will be discussed further in Chapter 5. But this time, their scale of borrowing is much, much larger; the press has even taken to referring to this as “Great Leap Forward Lending,” harking back to Mao Zedong’s ill-considered Great Leap Forward of 1958–1961. In early 2010, the regulators and Party spokesmen have taken the line that such investments will pay off over time. This is being echoed by brigades of analysts the world over, but the implication is well-understood by the Party itself. As one official put it simply: “In the near term, there will be no cash flow.” In other words, a large portion of these loans, over 30 percent of which reportedly went to localities, are already in default. Can the demise of the AMCs as originally called for in 1999 really be expected when their use has proven to be so great? To what extent can the Ministry of Finance continue to issue its IOUs?
FIGURE 3.7 Incremental bank lending, 1993–2009
Source: PBOC, Financial Stability Reports, various
Against this background, it is not surprising that questions have been raised about the PBOC’s ability to continue to write the check for the Party’s profligate management of the country’s finances. It is interesting that the PBOC made public its own balance sheet for 2007 and that discussion around a recapitalization was rumored at about the same time (see Table 3.7 ). 8 This may well explain, at least in part, the use of IOUs written by the MOF for the Agricultural Bank of China restructuring. The 2007 figures show that the central bank is leveraged at nearly 800 times its own capital.
TABLE 3.7 PBOC balance sheet, 2007
Source: PBOC, Financial Stability Report, 2008
It should not be
TABLE 3.6 Estimated historical cost to the PBOC of “Financial Stability” to FY2005
Time Period
Amount (RMB billion)
Use
1997–2005
159.9
Re-lending to closed trust cos., urban bank co-ops, and rural agricultural co-ops to repay individual and external debt
1998
604.1
Re-lending to the 4 AMCs for first-round acquisition of bank NPLs
From 2002
30.0
Re-lending to 11 bankrupt securities companies to repay individual debt
2003 and 2005
490.2
Huijin recapitalizes BOC, CCB, and ICBC
2004–2005
1,223.6
Re-lending to 4 AMCs for second-round acquisition of bank NPLs
2005
60.0
Additional lending to bankrupt securities companies to repay individual debt
2005
10.0
Re-lending to Investor Protection Fund
Total
2,577.8
US$ billion
315.5
Source: The Economic Observer , November 14, 2005: 3; PBOC Financial Stability Report 2006: 4; Caijing , July 25, 2005: 67
The new Great Leap Forward Economy
Added to the still unresolved loans of the 1990s, the US$1.4 trillion lending binge of 2009 will inevitably lead to correspondingly large loan losses in the near future (see Figure 3.7 ). The borrowers and projects are the same as in the previous cycle—infrastructure projects, SOEs and local-government “financing platforms, which will be discussed further in Chapter 5. But this time, their scale of borrowing is much, much larger; the press has even taken to referring to this as “Great Leap Forward Lending,” harking back to Mao Zedong’s ill-considered Great Leap Forward of 1958–1961. In early 2010, the regulators and Party spokesmen have taken the line that such investments will pay off over time. This is being echoed by brigades of analysts the world over, but the implication is well-understood by the Party itself. As one official put it simply: “In the near term, there will be no cash flow.” In other words, a large portion of these loans, over 30 percent of which reportedly went to localities, are already in default. Can the demise of the AMCs as originally called for in 1999 really be expected when their use has proven to be so great? To what extent can the Ministry of Finance continue to issue its IOUs?
FIGURE 3.7 Incremental bank lending, 1993–2009
Source: PBOC, Financial Stability Reports, various
Against this background, it is not surprising that questions have been raised about the PBOC’s ability to continue to write the check for the Party’s profligate management of the country’s finances. It is interesting that the PBOC made public its own balance sheet for 2007 and that discussion around a recapitalization was rumored at about the same time (see Table 3.7 ). 8 This may well explain, at least in part, the use of IOUs written by the MOF for the Agricultural Bank of China restructuring. The 2007 figures show that the central bank is leveraged at nearly 800 times its own capital.
TABLE 3.7 PBOC balance sheet, 2007
Source: PBOC, Financial Stability Report, 2008
It should not be
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