"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 happen.
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.