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A SENSE OF ASIA

A tale of two banking systems


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By Sol Sanders
SPECIAL TO WORLD TRIBUNE.COM

Sol W. Sanders

October 9, 2002

It reminds one of that old favorite animated cartoon device: the dog chases the cat over the cliff but neither falls until one looks down and sees that there is nothing under them.

The banking systems in both Japan and China have reached that stage. In Japan, the banksÕ nonperforming debt is seen, especially by foreigners, as the culprit in the 10-year hiatus in the worldÕs most phenomenal history of economic growth. In China, where bloated, bankrupt dinosaur state companies have a blank check on the banks, the problem threatens the whole modernization process.

The comparison is, of course, immediately open to the charge of apples and oranges.

Japan is, after all, the worldÕs second largest economy, the only non-European society to have made it into the modern world ø and how!. Furthermore, its banking system ø however different from those in the U.S. and Europe ø has long been integrated into the world financial system. In fact, JapanÕs inveterate savers have provided the world with much of its liquidity for expansion over the past 25 years ø and at bargain prices. And there is the possibility that a fundamental rationalization of the Japanese banking system could have profound repercussions in the rest of the world if government uses those savings to pay off the bad debts and refinance the banks.

China's Finance Minister, Xiang Huaicheng, said he expects the Chinese government will have to pay off more bad debts in the country's banking system despite previous promises that a $169 billion bad debt write-down in 1999 was to be the last. Yet huge new debts have appeared on the Central BankÕs ledger to the four major Chinese banks, calling them by new names, which in turn continue to pump loans into the government enterprises. The public welfare system in 26 of 31 provinces was in deficit in 2001with the deficit is rising every year. ÒIn the past four years [the government] increased fiscal revenues, laid off one-sixth of employees at state banks and shut one-third of their branches,Ó Joe Studwell, editor of China Economic Quarterly, has written. ÒBut it is difficult to see how a government can be so sure of paying its bills when its attitude to accounting leaves it with no idea of how big its debts might be.Ó Nonperforming debt in China may be as much as 50% of all bank lending. And as Studwell says, it could be that in the few short years since China opened its economy, its debt has climbed to 50% of the annual GDP.

There is a suspicion, too, in Japan that one of the reasons why the banks are so opposed to a bailout of their nonperforming loans with public money is that the amount is still vastly underestimated at the official $520 billion. Still Prime Minister Koizumi has reiterated his determination to finally grapple with the problem, naming a notoriously Òhard landingÓ advocate, Heizo Takenaka, who had been economics minister, to the additional role of head of the Financial Services Agency, the Japanese agency somewhat modeled on the U.S. savings and loan bailout mechanism. Takenaka, in turn, named Takeshi Kimura, head of KPMG Financial, a former central banker, to head the task force, which is supposed to report back to the Prime Minister in a few weeks. Kimura is notorious in Japan as an advocate of closure of 30 large companies, the so-called Dirty 30, that he considers to be responsible for the bulk of banks' bad debts. If Koizumi really takes this path, the immediate prospects in Japan are for additional unemployment and probably a further decline in public confidence. TakenakaÕs statement that no company and no bank was "too big to fail" has already brought new lows to the Tokyo stock market.

The question is whether just ÒcuringÓ the banksÕ debt problem is going to bring Japan out of its long period of relative stagnation. One school sees JapanÕs problem as its unique savings capacity, consistently about 25 per cent of GDP --- far more than in other industrialized countries During ÒThe BubbleÓ private investment absorbed almost all these savings. But the surplus of private sector savings over investment -- from 1.6 per cent of GDP, on average between 1986 and 1993, to the 8.3 per cent of GDP forecast for this year -- has been absorbed by additional government borrowing. There is also an argument that Japanese companies over invest as compared with their American and European counterparts, that their balance sheets have to be restructured along with the banksÕ debts. All of this means more dismantling of that fabulous and unique Japanese system that produced ø with the interregnum of the war years 1936-45 ø the great industrial machine that has so surprised the world over the last half century.

Apples and oranges? Yes. But what is clear is that ÒsolutionsÓ in both countries will require social and even psychological adjustments beyond the counting houses.

Sol W. Sanders, (solsanders@comcast.net), is an Asian specialist with more than 25 years in the region, and a former correspondent for Business Week, U.S. News & World Report and United Press International. He writes weekly for World Tribune.com.

October 9, 2002

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