As reported in an IHT article in The New York Times online, the Bank of China has raised $9.7 billion dollars as it prepares to go public on the Hong Kong stock market next Thursday, making it the world’s largest initial public offering of the last six years. The piece is a good one to check out if you have an interest in the state of the Chinese economy or China and the WTO– the banking system is emblematic of a lot of what is wrong with the Chinese economy today– massive corruption, cronyism, insolvency, and over-involvement of state owned enterprises and the state itself. And yet people are flocking to invest in this bank, just as they did when China Construction Bank went public last October and as they are planning to when the Industrial and Commercial Bank does later this year. (These are three of the big four state-owned banks.) Why?
As Enzio von Pfeil, chairman of the Hong Kong-based Commercial Economics Asia puts it in the article, “With this huge China craze emerging, the funds are piling in simply because these are big Chinese companies. They are doing it because everyone else is doing it. It is typical herd behavior. It can’t be because of the quality of the banks.”
It is true that quality of the banks leaves a lot to be desired. Per order of the WTO, China must open its financial system to foreign banks by the end of 2006. China has made progress towards cleaning up the banking system, but based on the current situation there is still some question as to whether bankers there understand the connection between levels of risk and profitability, and the size of the loans handed down. The Bank of China claims to have lowered its percentage of bad loans from 5.5 percent in 2004 to 4.9 percent in 2005, but that is still a lot of money down the drain. According to official figures from the China Banking Regulatory Commission, China still holds $133 billion in commercial banks’ bad loans; 9.8 percent of all commercial bank loans in China are non-performing. That’s on top of $283 billion the government has already paid in bailouts.
But by overlooking all the questionable business ethics and mismanagement, perhaps the “herd” has pinned its hopes something else: China’s continued growth. And why not? The world looks at China, a country with a hideous corruption problem, an on-fire economy, a restrictive political climate, and a consistently terrible human rights record, and continues to pour in the cash. Growth is the great eraser; it inspires confidence and soothes consciences. I can only hope that China does better with cleaning up its banks than it has with, say, getting rid of those (still) ubiquitous pirated DVDs.
Published Date: May 25, 2006