Miyakodayori 72

Japan nationalizes, while China privatizes

June 25, 2003

Both Japanese and Chinese banks are saddled with non-performing loans, and the need to reform the banking sector and dissolve anxieties over the financial system is common to both countries. Interestingly, though, they are taking contrasting approaches to address the issue. In Japan, drastic banking reforms have become impossible without the nationalization of banks. Whereas in China, authorities are considering the privatization of the four major state-owned banks after realizing that reforms will not proceed if they remain under government control.

In Japan, authorities have decided to inject some 2 trillion yen into Resona Bank in an effort to shore up its capital. As a result, the bank has effectively been nationalized, and will strive to rehabilitate itself under the leadership of the government. This is the third time public funds have been injected into the Resona group, after the infusions in 1998 and 1999 to the bank's predecessors, Daiwa Bank and Asahi Bank. Although Resona had already received state assistance (totaling some 1.1 trillion yen) through two previous infusions, which were accompanied by the announcement of rehabilitation plans, profitability failed to improve.

In light of these failures, tough conditions have been placed on the latest capital injection, such as the strict monitoring of management through the appointment of a chairman and directors from outside the bank, as well as more stringent inspections and monitoring by financial authorities. The rehabilitation program announced by the Resona group, after the public fund infusion was a foregone conclusion, includes such restructuring steps as the closure of 43 branches, 1,800 job cuts, and a 30 percent reduction in annual wages.

Concrete measures along these lines will be announced and implemented in the coming weeks. If the turnaround is successful, the price of Resona Bank shares will rise and the government will be able to recover the funds it injected into the bank by selling the shares it owns. As a precondition, Resona Bank must regain its ability to secure the rate of return expected by investors (what Professor Justin Yifu Lin of Peking University calls a firm's "viability") through its rehabilitation program. Yet, at the present stage it is uncertain whether the program will result in an improvement in profitability, as the new business model remains unclear and prospects for domestic economic recovery remain hazy. Should the efforts fail, Resona Bank will either have to disappear from the market in the form of bankruptcy or depend on further governmental assistance and support. In the case of the former, the money that has been injected into the bank so far will become unrecoverable, and in the case of the latter, the infusion of more public funds will become necessary. In either case, it will be a huge burden on taxpayers.

Meanwhile, in China, aiming to shift from a planned to a market-oriented economy, the four major state-owned banks (the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, and the China Construction Bank) have plans to go public. Non-performing loans at these banks now exceed 20 percent of their total lending, and it is clear that they lack "viability." In order to dispose of their non-performing loans, authorities injected some 270 billion yuan into the four financial institutions in 1998, and purchased some 1.4 trillion yuan worth of bad loans at book value and transferred them to four new asset management companies in 1999.

Nevertheless, these Chinese non-performing loans have continued to increase, and another injection of public funds to prevent a financial crisis seems to be inevitable. As this shows, such financial support from the government is necessary to get rid of the burdens of the past, but unless management at the banks is reformed and the increase in new non-performing loans is stemmed, the fundamental problems will not be resolved and history will merely repeat itself.

It is not enough to just revamp the management of China's state-owned banks to gain "viability"--changes to existing systems, such as the creation of a corporate governance structure that meets the needs of the market, are also necessary. The reforms must not stop at making state-owned banks go public; in the end, the government must relinquish all control over these financial institutions through privatization. This will reduce the negative influences of administrative intervention, while better monitoring of banks by financial regulators will become necessary to prevent illegal actions of bank management.

Author, C.H. Kwan
Senior Fellow
Research Institute of Economy, Trade and Industry (RIETI)

Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: araki-ichiro@rieti.go.jp
tel: 03-3501-8248 fax: 03-3501-8416

RIETI invites you to visit its English website
[http://www.rieti.go.jp/en/index.html].

The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).

June 25, 2003