"China is one of the last great frontiers in finance,"
a banking executive told the Wall Street Journal recently.
Two statistics illustrate the potential: China's people deposit about
40 percent of their income in their nation's banks (one of the highest
savings rates in the world); less than 0.10 percent of them own a
credit card. But another figure indicates how rough the "frontier"
is likely to be: As much as half of existing bank loan debt is considered
"nonperforming"—not likely to be paid back.
At present, four large state-owned banks, with 120,000
branches and 1.4 million employees, control at least 60 percent of
China's $2.4 billion banking sector. The Big Four—the Bank of
China, Industrial and Commercial Bank of China, China Construction
Bank and the Agricultural Bank of China—are faced with immense
bad loan burdens; officially, the nonperforming loan (NPL) ratio is
about 22 percent. Independent experts say it's probably twice that—well
over $500 billion. The government has directed the Big Four to lower
their NPL ratio to 15 percent by 2005; few analysts believe that can
In addition, there are 112 smaller state-owned commercial
banks and over 30,000 rural credit cooperatives and urban cooperative
banks. Many of these banks, too, have substantial bad debt
problems, yet their lending has surged in 2003 and critics say credit
checks are lax.
There are 180 foreign banks in China. They currently
account for just 2 percent of the retail banking and foreign-exchange
market. But that situation should change quickly in 2007 when foreign
banks will gain fuller access to China's financial sector, a precondition
for China's admittance to the World Trade Organization. China's leaders
concede that foreign competition will bring much-needed market discipline
to the sector, but they also worry that the Big Four could collapse
if customers abandon them for foreign banks offering better service
and financial terms.
To ease the transition, China's bank regulators announced a pilot
project in September 2003 to establish five small Chinese
private banks. Experiments are also under way with interest
rate liberalization at rural credit cooperatives, in part to aid investment
in small and medium-sized businesses in China's least-developed regions.