Wednesday, May 10, 2006

The China Bubble

I remember reading a post on Samizdata quite some time ago whose basic message was the following: the Chinese banking system is extremely corrupt and just as delicate; what we are witnessing now is the Chinese Bubble, and it will soon burst.

A report from Ernst & Young covered in The Autralian says the situation is worse than previously thought.

According to Ernst & Young, the accounting firm, bad loans in the Chinese financial system have reached a staggering $US911 billion, including $US225 billion in potential future NPLs in the four largest state-owned banks.

This equals 40 per cent of gross domestic product and China has already spent the equivalent of 25-30 per cent of GDP in previous bank bail-outs.
(NPL = Non-Performing Loan - a bad loan.)

Of course, reform is unlikely in a one-party state because the main losers would be ... the one party.
Systemic economic waste, bank lending practices, political patronage and the survival of a one-party state are inseparably intertwined in China. The party can no longer secure the loyalty of its 70 million members through ideological indoctrination; instead, it uses material perks and careers in government and state-owned enterprises (SOEs). That is why, after nearly 30 years of economic reform, the state still owns 56 per cent of the fixed capital stock. The unreformed core of the economy is the base of political patronage.

Government figures show that, in 2003, 5.3 million party officials held executive positions in SOEs. The party appoints about 80 per cent of the chief executives in SOEs and 56 per cent of all senior corporate executives. Recent corporate governance reforms, Western-style on paper but not in substance, have made no difference. At 70 per cent of the large and medium-sized SOEs ostensibly restructured into Western-style companies, members of party committees were appointed to the boards. Painful restructuring appears to have spared this elite. China has shed more than 30 million industrial jobs since the late 1990s but few party officials have become jobless.

(via Dinocrat)

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China Law Blog said...

Ernst & Young recently retracted its report and admitted it was wrong. Ernst & Young actually said the Chinese banks' figures were accurate, not the ones E&Y previously disseminated. I kid you not.

NoolaBeulah said...

How very curious. What is going on there then?