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Debt Financing: Renminbi Loans
In the front page story on May 8 1997, The Wall Street Journal described the next major world economic crisis as deriving from banks, and projected that the biggest banking 'bust' would be seen in the PRC. This is based on an estimate by Hu Zhenyi of the Bank of China that one-fifth of the US$600 billion outstanding bank loans are bad. This figure is considered conservative and some researchers estimate double that figure for bad loans. Because banks are only required to set aside 1% of outstanding total loans to cover loan losses, it is clear that bad debts are not covered. It is believed that even the 1% figure is not being met. The difficult condition of PRC banks is confirmed by Nicholas Krasno of Moody's Investors Services who has been reported as saying that PRC banks are in bad financial health.
Following a long period of 'deferred realization of losses', the government financial authorities feel that the deferral cannot continue forever. It is getting more and more costly to prop up unprofitable state-owned enterprises with loans. China Law & Practice cites senior officials at the PBOC as stating that 20% (possibly as high as between 30% and 40%) state-owned banks' assets are non-performing. In other words, the level of bad debts exceeds the aggregate capital base of all the PRC banks. Although the laws are in place for banks to operate more autonomously, the history of bad debts taken on at the behest of the government may mean it will be some time before the new rational banking laws show an effect on the economy. Only the central government can bail the banks out. In December 1996, the China Agricultural Development Trust, a large non-bank owned by the Ministry of Agriculture, failed after participating in speculative investments. It was not bailed out. There are a number of non-banks, some of which may also be in bad financial condition.
Section I: Equity Financing
Chapter 1 - Capital Contributions to PRC Joint Ventures
Chapter 2 - Schedule for Capital Contributions
Chapter 3 - Asset Valuation
Section II: Debt Financing
Chapter 4 - Debt Financing: Renminbi Loans
Chapter 5 - Debt Financing: Foreign Sourced Loans
Chapter 6 - Granting Security in the PRC
Chapter 7 - Enforcement of Secured Loans in the PRC