| 作者 |
 Good analysis of china's borrowed growth |
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| 所跟贴 |
Good analysis of china's borrowed growth -- BigSwingingD - (21134 Byte) 2003-9-04 周四, 04:15 (1171 reads) |
BigSwingingD
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作者：BigSwingingD 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Turning China's Growth Illusion
Into Reality
By WEIJIAN SHAN
China's growth is simultaneously real and unreal. Real, because a high savings rate and capital controls mean that the country is investing in production capacity, particularly by the state-owned sector. Unreal, because these factories are inefficient, and thus their construction is a tremendous waste of scarce resources. Does this mean China is heading for a financial catastrophe, and if so how can it avoid such a crash?
The true cost of inefficiency may be hidden in China, but it is huge and still growing. The state-owned sector only contributes to less than 30% of China's industrial output but accounts for more than half of the country's fixed asset investments. The price is paid in the accumulation of bad loans in Chinese banks.
Standard & Poor's estimates that it will cost some $518 billion, or more than 40% of China's GDP, to clean up China's banking system. These costs plus the equity write-off of those companies which will go bankrupt without continued funding from banks translate into years of negative growth. China's growth therefore can be regarded as being borrowed at a very high cost -- which will need to be repaid sooner or later.
The second of a two-part series on the Chinese economy.
See the first part, China's Borrowed Growth.
Suppose China lifts capital controls and allows the yuan to become freely convertible. It will likely trigger a capital outflow. That will endanger state-owned banks as well as highly leveraged but unprofitable state-owned companies. Even if the government bails them out, banks will no longer be able to finance unprofitable firms. Not only will the wings of China's growth be clipped, it will not fly again until both banks and firms are made truly competitive on their own.
Can capital controls sustain China's "borrowed growth?" The answer is no, because its high savings rate will likely decline in about 10 years time, if not sooner, for two reasons.
First, Chinese baby boomers, born in the 1950s and '60s, will begin to retire. The one-child policy begun in 1980 means that the ratio of the number of workers supporting pensioners will drop off a cliff. As China's pension system is substantially underfunded, the aging of the population will mean less savings and more withdrawals.
Second, Chinese may be culturally frugal, but this is starting to change. The younger generation consumes more, saves less and has even learned to consume on borrowed money. No country can sustain a household savings rate of more than 40%, and China will not be an exception.
Furthermore, China has joined the World Trade Organization. Under the WTO framework, China has committed itself to letting foreign banks conduct local-currency business without restrictions, beginning in 2007. Foreign banks are unlikely to fund inefficient producers. Unless China's own banks adopt sound banking practices, it will become difficult for them to compete for deposits. Therefore, the game will be over for inefficient producers.
Finally, China has committed itself to full convertibility of the yuan, without which many of China's economic ambitions will not be realized. For example, Shanghai has long aspired to be an international financial center. But it will not succeed until China allows the free flow of capital across its borders, a prerequisite for any international financial center.
So does this mean that the Chinese economy will eventually collapse, when the payback time inevitably comes for the "borrowed growth?" Yes, if China's economic policies continue to favor, protect and subsidize inefficient firms through its already weak banking system. It will just be a matter of time.
However there are reasons to be cautiously optimistic. To be sure, the Chinese economy is not healthy, contrary to popular perception, and requires urgent treatment. However, anyone who considers the Chinese economy to be terminally ill should consider how much sicker it was 25 years ago, when reforms began. China was a closed, Soviet-style command economy, but now its products compete in world markets. The Chinese economy is more viable and dynamic today than at any time in its history.
In the past two decades, successive Chinese leaderships have not just thrown stimulus measures at the economy to maintain growth; they have also pushed for reforms. As a result, the Chinese economy is far more efficient -- at least on the production side, if not on the resource-allocation side -- than when reforms began in 1978. As recently as 1991, a U.S. manufacturing worker was 40 times more productive than his Chinese counterpart. By 2000, that gap had narrowed to only 10 times. Chinese labor productivity has increased four-fold in the past decade.
China's achievements in structural reform have been considerable, putting Japan to shame. And Beijing seems to be picking up the pace, as shown by the decision at last year's Communist Party Congress to privatize the vast majority of state-owned firms, shut down the hopeless ones and clean up banks.
Reform of the banking sector is the most fundamental of all reforms. Without sound banking practices, banks will continue to create bad loans and breed inefficient corporate customers, state-owned or private. It comes as no surprise that most of China's private companies are poorly run, in addition to being subscale and speculative. In fact, more than 70% of all bank loans made to small- and medium-size companies eventually become bad. Most of the bank scandals in China involve unscrupulous private entrepreneurs. As a result, banks are reluctant to lend to private firms as they tighten credit approvals. Lending on the basis of creditworthiness is the ultimate way to improve corporate efficiency as companies will be forced to focus on cash flow in order to access bank capital.
Realizing that the WTO clock is ticking, Chinese policy makers have turned their attention to cleaning up banks. A number of important measures have been taken. A large amount of nonperforming loans have been transferred to several government-financed asset management companies, which have successfully sold initial batches to foreign buyers of distressed debts. Banks have been ordered to have their books audited by international auditors and to reduce and reveal bad-loan numbers.
However, much more needs to be done. All Chinese banks are woefully undercapitalized and to recapitalize them will stretch government finances. While it is possible for banks to reduce bad-loan ratios by quickly growing their loan books, or the denominator of the ratio, the challenge is how to prevent new loans from turning bad as they near maturity. To do so, banks must build a culture of lending on the basis of cash flow as opposed to collaterals, relationships or policy guidance.
This is a lot harder than adopting the risk-control procedures of the best international banks, as it requires training and proper incentive systems. But all will fail if the government continues to interfere in lending and personnel decisions because of perceived political and policy necessities. There is so far no sign that the government is prepared to relinquish those powers.
The good news is that banking regulation is expected to tighten and substantially improve, with the establishment of the new banking regulatory commission. Both the governor of the central bank, Zhou Xiaochuan, and the top banking regulator, Liu Mingkang, are tough-minded bankers-turned-regulators of impeccable integrity with intimate knowledge of international best practices. They can get the job done.
The challenge to Chinese banks is to find creditworthy companies to lend to. There has been an explosive growth in retail lending. Although there are more bad credits than good ones among domestic firms, China is blessed with a large "foreign funded" sector which operates side by side with the inefficient state-owned sector and has already transformed China into a dual economy. China has brought in $400 billion to $500 billion in cumulative foreign direct investment in the past 10 years, more than the rest of Asia combined. Foreign firms are responsible for 65% of China's three-fold increase in exports in 10 years. Most foreign-funded firms are well-run and competitive, and highly creditworthy.
But most of them will tell you that China is a very tough market. In the two decades before 1997 Asian crisis, well-capitalized American and European firms had gone through a process of downsizing and "core-competence" building to improve their competitive edge. Ironically, it was precisely during this period that they collectively lost significant market share to highly leveraged and over-diversified Korean chaebol and Japanese keiretsu whose competitiveness was largely derived from access to cheap financing by their home banks. Similarly in China, bad-banking practices will continue to breed incompetence and inefficiency, which crowd out creditworthy companies, at the expense of both the banks and the economy. To date, few foreign firms compete successfully in China's domestic market and most only set up factories in China to make products for export.
However, there are signs that market forces are in the process of correcting this distortion. As the pressure to reduce bad loans intensifies and regulation tightens, Chinese banks have begun to favor foreign firms, which report a surge in lending by Chinese banks to them in the first half of this year. The leveling of the playing field in bank lending will go a long way toward addressing the distortion in resource allocation.
If the Chinese economy looks surreal, it is. China is like a world champion on performance-enhancing steroids, financed by banks wasting household savings. This cannot continue indefinitely. Only by freeing itself from bad habits will China be able to grow sustainably and compete like everyone else without the crutch of capital controls. To be sure, getting there will involve pain. But the heavy costs of "borrowed growth" compound by the day. The sooner China gets started, the better for its future.
Mr. Shan is a partner of Newbridge Capital, a private equity firm.
作者：BigSwingingD 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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