banks, bad idea,
By Joe Zhang,
At the end of the 1990s, China's banks faced a rising tide of bad debts, and Beijing came to the rescue. Financial insiders still see that move as necessary, wise and courageous. On the contrary, bailing out the banks was a bad idea. It would be a mistake to repeat the trick.
Then, as now, China's lenders had lent too much. Between 1984 and 1997, their loans grew 24 percent per annum. It couldn't continue forever. In 1998, as non-performing loans started to increase, the growth rate fell to 15 percent, and then 8 percent and 6 percent in the next two years. By that point, bad loans in the banking system were close to 30 percent of total lending.
If Beijing had done nothing, this credit slowdown could have forced a loan contraction, or even a recession. That would have been a blessing in disguise: it would have ushered in much-needed improvement in the quality of credit allocation.
Sadly, the necessary adjustment never happened. China's authorities instead set up four asset management companies - Cinda, Orient, Huarong and Great Wall - to take over the 「toxic」 loans, and between 1999 and 2005, they took out around 2 trillion yuan (roughly $300 billion at today's exchange rate) of bad assets. They did this at 100 cents on the dollar, without forcing the banks to take a haircut.
This had two side-effects. First, it gave everyone false hope that the banks had suddenly become solid and that there would be future bailouts