The 1997-1998 Reforms[111]
The SOE Bankruptcy Law of 1997, which preceded the abolition of the credit plan, seemed like an initial step in the right direction. If only profitable enterprises were to remain open, the share of profitable investments available to the banks looked set to rise as demand from inefficient borrowers fell away.
Unfortunately, although the 15th Party Congress boldly defined new bankruptcy laws, enforcement remained an open question and no regulatory body was established to implement the law. Closing SOEs remained a very difficult and unpopular step because of the wide range of welfare support provided to their employees. As a result, SOEs have, in practice, typically been pushed to either go public or merge with healthier counterparts.[112] Nevertheless, the rate of reduction in total SOE employment did accelerate after 1997 (Bajona and Chu, 2004, p. 9), with employment falling by approximately 40% - or 45 million - between 1996 and 2006 (Bergsten et al., 2006, p. 24). However, the intended liberalizing effects of the ensuing January 1998 lifting of the credit plan were rudely interrupted by the Asian financial crisis. The government demanded huge increases in lending to help offset the negative effects of the crisis, launching the Fixed Asset Investment Program that involved boosting the allocation of funds to SOEs through the SOCBs (Lardy, 1999, p. 19). At RMB 1 trillion, the 1998 loan targets, for example, were 25% above 1997 levels (Lardy, 1999, p. 20), thereby rather negating any real freedom for the SOCBs to get their own liability ratios under control.There were some important increases in SOCB operational freedoms under the 1998 reforms, however, and bank managers were permitted to cut costs by laying off excess employees and closing redundant branches. Whereas previously the government always dictated the assignment of officials to bank posts, more and more control over hiring began being delegated to the banks directly.
The banks were also able to make some headway in controlling their cost inefficiencies and improving profitability. Another significant development was the restructuring of the People’s Bank’s branch network, with its former thirty-one major branches being cut back in November 1998 to just nine high-level offices controlled from Beijing. This was intended to make the People’s Bank “less vulnerable to provincial government pressure on provincial branches to expand bank credit to fund local projects” (Chiu and Lewis, 2006, p. 200), thereby, in turn, easing the pressure on the corresponding local SOCB branches.[113] Finally, in 1998, the NPL classification changed from the old four-level Chinese standard to a five-level accrual basis, similar to the international standard. This change eventually allowed for greater transparency in the market, even though it took some time for the SOCBs to retroactively report NPL data using the new classification. BOC, for example, initially reported its December 1999 NPL ratio at just 15% under the old system before disclosing the 39% ratio arising under the new system (Asian Banker Journal, June 19, 2001). The new system was not fully implemented until July 2001 (Guo, 2004, p. 277).In 1998 the Ministry of Finance issued RMB 270 billion ($US 32.5 billion) in special bonds to recapitalize the SOCBs. This recapitalization effort, in itself, however, did nothing to stop the source of the nonperforming loans.
As a result, the capital infusion that brought the banks closer to the 8% international standard for capital adequacy had to be followed by further substantial recapitalizations in 2003 and after. The 1998 bond recapitalization worked to raise total bank capital from RMB 208 billion to RMB 478 billion, while the 2003 infusion added another RMB 370 billion. At that time, $US 45 billion of China’s official foreign exchange reserves were drawn upon to further recapitalize BOC and CCB in preparation for their IPOs. Yet another $US 15 billion in foreign exchange reserves was employed in recapitalizing ICBC in 2005. NPLs totaling RMB 705 billion were transferred to AMCs in May-June 2005 and, with essentially the full book value of the NPLs being replaced by new cash or by claims on the AMCs or the government itself, the total cost of the latest bailout likely exceeded $US 80 billion (see Podpiera, 2006, p. 8).