Published June 1, 2005 | June 2005 issue
Some things about China's economy seem never to change: Gross domestic product continues to grow at breakneck speed: 9.5 percent last year. Exports still soar: 25 percent growth in 2004.
But other things shift most decidedly: In November 2004, after nearly 20 years at the People's Bank of China, Ping Xie (our December 2003 interview subject) was tapped to lead the Central Huijin Investment Company, the government's management arm for two of the country's largest state-owned banks, the Bank of China and the China Construction Bank. Xie's assignment signals major change ahead for China's banking sector.
Context is key to understanding the promise and challenge of the new job. China has one of the world's highest personal savings rates, close to 40 percent, and the bulk of those savings are deposited in its four large state-owned banks, including the two now overseen by Xie. But China's Big Four also hold a crushing burden of bad loans that threatens the stability of the banks and the nation's financial system. The government reports the “nonperforming” loan ratio is about 22 percent; independent analysts peg it as high as 50 percent.
Late in 2003, the Ministry of Finance moved $45 billion of reserves into Central Huijin, which invested roughly half in each bank, essentially transferring ownership of the banks from the Ministry to Huijin. The Ministry later announced that it would write off $41 billion of the banks' bad loans. And in 2005, both banks are expected to be listed on the Chinese stock exchange.
New ownership and recapitalization will help, but Xie's primary task will be to revamp financial practices and management culture at the two banks under his control, ensuring that bad loans are cleaned up and new loans are sound. But because much of the nation's infrastructural and industrial growth has been fueled by loose lending, tighter bank lending practices are certain to cause substantial economic disruption and political fallout.
Further context: In 2007, as a condition of its accession to the World Trade Organization, China will open its banking sector to foreign banks, allowing them to compete for the nation's credit markets and its deep pockets of personal savings. Even without this prospect of foreign competition, China's state-owned banks would be facing tough times, but Xie's appointment suggests that the central government is serious in its desire to establish sound practices in the banking sector. As an experienced banker, as one of China's most respected economists and as an outspoken critic of financial mismanagement, Xie is exceptionally qualified for the task.