Beijing Scene, Volume 5, Issue 2, March 26 - April 1


A senior Chinese banker says that a complete write-down of bad debts in the countryís state banking system will cost the government some •500 billion (US$60 billion) during the next five to 10 years.

Fang Xinghai, general manager of the Coordinating Committee at the China Construction Bank, calls the figure an estimate, and says it does not include provisions for new bad loans that may emerge during the write-down process at each of Chinaís four largest state commercial banks.

Still, Fangís figure marks one of the first times a senior mainland banker has put a price tag on a bailout of Chinaís state banking system. Years of politically linked lending have rendered the countryís four state commercial banks technically insolvent, and fueled fears that a financial crisis may be lurking in the banking system, which remains virtually closed to foreign competition.

Though specific figures arenít available, estimates say that nearly 20 percent, or some US$200 billion, of all outstanding loans at the four banks are non-performing. Some of those loans include credits that were offered years ago to state enterprises that have since been declared bankrupt and no longer exist, bankers say.

The massive overhang of bad debt has stifled new, higher-quality lending by the state banks and acted as a drag on new economic growth. The banks themselves continue to function largely due to the central governmentís pledge to keep them solvent.

Fang says he doesnít believe Chinaís non-performing loan problem will turn into a crisis and spark bank runs. But he says the problem needs to be addressed before it gets any bigger.

Fang says resolution of the bad loan problem will begin this year, when the China Construction Bank sells some •200 billion in bad loans, or 80 percent to 90 percent of its total, to the Xinda Asset Management Co.

Xinda is a newly created institution set up specifically to purchase CCBís bad loans, repackage and then resell them at the highest price possible.

And Xinda will be capitalized through a special bond offering guaranteed by the Ministry of Finance, which will also regulate the bad-debt agency. He says the bonds will be held in custody by the central bank, the Peopleís Bank of China.

North Korea Nukes
The United States and North Korea agreed to a deal that will allow US inspectors access to a long-suspected underground nuclear site, defusing for the moment a serious confrontation over North Koreaís nuclear ambitions.

The deal allows the inspectors to make multiple visits to inspect the facility at Kumchangri, beginning in May. The pact removes the biggest obstacle to carrying out a 1994 accord under which North Korea agreed to shut down two nuclear reactors in exchange for a package of international aid.

Secretary of State Madeleine Albright characterized the agreement as "an important step… toward stopping the proliferation of weapons of mass destruction." She says the United States refused North Korean demands for food aid in return for allowing the inspections.

Albright also announced that the United States and North Korea had agreed to resume talks in Pyongyang on March 29 about North Koreaís missile-development program. That has been another area of US concern, especially since August, when North Korea fired a three-stage missile over Japan into the Pacific Ocean.

US intelligence officials suspect out-of-work scientists from the former Soviet Union are helping the North Koreans develop advanced, long-range missiles that could disrupt the military balance in northern Asia and eventually even threaten the continental United States. US officials say Washingtonís objective in those talks will be to persuade the North Koreans to curtail missile development and agree not to sell missiles to other countries, especially what the United States considers "rogue" governments.

US officials say that in return for the new agreement, North Korea would benefit only by a private program to improve its potato yields.

Computer Industry vs. Congress
The US computer industry is on the offensive, countering recent disclosures of technology leaks to China by unveiling a lobbying coalition of high-tech giants and a study that shows US computer-export controls are fast becoming outdated.

Some of the biggest names in the computer industry - including Hewlett-Packard, Intel, Sun Microsystems, Apple, IBM and Compaq - have formed the Computer Coalition for Responsible Exports. And this week they plan to blitz Capitol Hill with slick plastic information packets designed to look like laptop computers, dropping off copies of the industry-funded study and a primer on computer export policy to every member of Congress.

"Do I believe that some of the concerns about China may lead some segments of Congress to want to impose more export controls? I believe thatís possible," says David Rose, director of import-export affairs for Intel. "But I think itís incumbent on industry to ensure that the Congress is properly educated, so in the end the United States doesnít cut off its nose to spite its face."

The coalition supports export controls on such sensitive technology as high-end supercomputers to protect US national security, but objects to controls on computers that are commercially available.

The Clinton administrationís loosening of restrictions on the export of high-powered computers to certain countries, such as China, has come under increasing fire, particularly from Republicans in Congress. Last yearís news that China improperly acquired sensitive rocket technology from US aerospace companies has been followed in recent weeks by allegations that a Taiwan-born scientist passed nuclear weapons secrets from the Los Alamos National Laboratory in New Mexico to Chinese officials.

Itís all come at a horrible time for the computer industry, which had been planning to push for a further loosening of export restrictions, which are designed to prevent high-powered computers from being used to develop nuclear weapons and for other military uses by nations such as China. The industry argues that those restrictions have become outdated in the face of rapid technological advances. The current regulations require special approval for the sale of computers that operate at speeds higher than 2,000 MTOPS (million theoretical operations per second) to China and about 50 other suspect countries.

Computer industry officials point out that some new business computers - a server with two Pentium III chips - already exceed that level.
"If you think youíre going to strictly police the ultimate use and destination of those type of systems, youíve got to wonder if itís doable," says Dan Hoydysh, co-chair of the Computer Coalition for Responsible Exports.

Right to Privacy
Chinaís parliament offered a ringing endorsement of Prime Minister Zhu Rongjiís economic reforms and gave a boost to the private sector by giving it a special place in the Communist constitution.
But as lawmakers voted on the final day of the 11-day National Peopleís Congress, they also offered a mild rebuke to the national budget tabled earlier in the session. And, as usual, they signaled their unhappiness about rising crime and corruption.

Almost 99 percent of the 2,821 delegates voted in favor of Zhuís annual work report. The report insists China will not retreat from tough reforms, including the closure of money-losing state enterprises, despite the pain of unemployment and a hostile environment caused by the Asian economic downturn.

It also promises a crackdown on crime and corruption but urges local officials to use restraint when handling unrest.

Lawmakers passed a number of constitutional amendments, including one elevating the private sector to an "important component" instead of just a "complement" to the socialist economy.

Private businesses have been viewed with suspicion ever since the 1949 Communist revolution. The amendments recognize their role in creating jobs and underpinning a slowing economy. Another amendment enshrined the rule of law in China.

The budget presented earlier by Finance Minister Xiang Huaicheng called for record deficit spending to prime the economy for 7 percent growth.

Xiang says the deficit will rise 57 percent to a record •150.3 billion (US$18.15 billion) as the government pours money into infrastructure.

In all, 188 delegates voted against the budget and 153 either did not vote or abstained, a total of almost 12 percent of the delegates.
Delegates also showed their anger at rising crime and corruption by giving a tough passage to reports on the work of the Supreme Court President and Chief Prosecutor. Just more than 22 percent of delegates voted against or abstained in voting on those two documents.

However, last year almost 45 percent of delegates gave a thumbs-down to the chief prosecutorís report and 25 percent withheld support for the supreme court president.

The NPC also passed a new contract law that will unify a hodge-podge of rules and regulations now in place.

Chinaís parliament has never rejected a Communist Party proposal, although secret voting has emboldened delegates who are anxious to send powerful signals to the government and party.
Private businessmen hailed the constitutional changes.
"After the changes, private enterprises will be protected and their status will be fixed," says Zhang Jian, chairman and president of Broad Air Conditioning Co Ltd., a private firm in Hunan province.

"Private companies will be able to set long-term development targets. In the past, the status of private firms was not clear and everyone worried whether or not their profits were protected."

On the contract law, Zhang says: "This will better regulate the economic activities of all types of enterprises and create a fair, competitive market environment for companies."

Alexandra Conroy, senior analyst with ING 2 in Shanghai, says private business will be helped by the move.

    Previous Stories...

March 19 - 25, 1999


cartoon FYI In Short