February 1, 2006｜China
Economic Research Institute, Liaoning Academy of Social Sciences
In order for financial institutions in China’s northeastern region to play a more useful role in the “Northeastern Development Strategy”, the problems currently being faced with regard to the vast number of nonperforming loans must first of all be resolved. There are no reliable data available, but estimates based on relevant materials suggest that outstanding loans at major financial institutions throughout the country stood at RMB13.7 trillion at the end of 2003, with the three northeastern provinces accounting for RMB1.35 trillion, or 9.8% of the nationwide total. At the same time, the balance of nonperforming loans nationwide is RMB2.44 trillion, with the three northeastern provinces accounting for RMB310 billion, or 12.7% of the nationwide total, but although the share of nonperforming loans at major financial institutions nationwide is 17.8%, the figure is 23% in Northeastern China, 6 points higher than the national average (of the three provinces, the problem is particularly serious in Heilongjiang and Jilin provinces, with the share of nonperforming loans rising to 30%), and the problem of nonperforming loans in this region is grave even when considered on a national scale.
It is hoped that the number of nonperforming loans that the old industrial bases in Northeastern China have accumulated as a result of various past problems will be reduced, but under the current circumstances, the disposal of such loans seems not to be progressing as well as had been hoped and is being constrained by various factors. The China Huarong Asset Management Corporation and the China Cinda Asset Management Corporation successively announced that that they would solicit funds at home and overseas, and start to dispose of some nonperforming loans in Northeastern China, but the amounts in both cases are in excess of RMB10 billion and the outcome of their disposal attempts does not seem promising. Huarong’s Harbin office began to offer for sale RMB5.8 billion of loans, equivalent to about two-thirds of the total amount of nonperforming loans to be disposed of, and RMB200 million of spot commodities, but as of this point in time, it has only sold about RMB100 million via auctions, etc. Similarly, the Changchun branch of Cinda is behind in its disposal of RMB7 billion of nonperforming loans.
The inability to reach an agreement on the disposal price is the biggest factor contributing to the lack of progress in disposing of nonperforming loans. Since its establishment, Cinda has been disposing of the relatively good loans first of all, but because the quantity of these has gradually declined, the speed at which the remainder is auctioned off is also decreasing. The nonperforming loans purchased by the four big asset management companies are mainly unsecured loans or bad loans that are four years old or more, but only 7% of this is accounted for by real estate lending, which is easy to recover, with the majority consisting of loans relating to manufacturing industry.
At present, asset management companies are suffering the dual pressures of time and profit. 2006 is the final deadline for the disposal of nonperforming loans, but it appears that the northeastern region still faces many hundreds of billions of renminbi of nonperforming loans. At the same time, it is rumored that nonperforming loans have been traded at a price cheaper than their market price. The hundreds of billions of renminbi of nonperforming loans should be disposed of, but China’s annual budget for amortizing bad loans is just RMB50 billion, so it would still fall far short of what is needed, even if the entire budget was used for nonperforming loans in Northeastern China.
From the perspective of the northeastern region, in order to relieve the burden on companies, it would of course be preferable for as many nonperforming loans as possible to be disposed of, but at the same time, from the perspective of the central government, it will be impossible to amortize nonperforming loans without a bigger budget. This would mean that the government would have to cut expenditure in other areas. Moreover, if Northeastern China were granted preferential treatment, there would certainly be objections from other provinces, so the central government must think carefully about its approach.
Policy and financial support on the part of the central government is no more than strength from outside, and in order for the economy of a region to prosper and develop, it must not be dependent on preferential policies. The issue that the three northeastern provinces must resolve is how they can improve the development capacity of the region itself through the utilization of the preferential policies granted by the state.
[Translated by ERINA]