China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [69]
The suppression of competition in the banking sector makes little economic sense because all performance data showed that new entrants—joint-stock banks, Minsheng Bank (the only private bank), and foreign banks—were more efficient operators and delivered far superior financial results. Joint-stock banks were six times more profitable than the SCBs in terms of returns on assets and net profits.80 From 1994 to 1998, their returns on assets and on equity were ten times higher than the SCBs.81 Their asset quality was higher as well. In June 2003, the NPL ratio for the eleven joint-stock banks was only 9.3 percent (based on the five-category classification), compared with 21.4 percent for the four SCBs.82 City commercial banks, the successor to urban credit cooperatives, had fewer NPLs than the SCBs. Only RCCs had a higher NPL ratio (30 percent) than the SCBs.83 Minsheng Bank’s NPL ratio in 2002 was only 1.74 percent.84 The NPL ratio for foreign banks operating in China was 4.3 percent.85
The most important reason for the higher profitability and asset quality for Minsheng Bank, foreign banks, and, to a lesser extent, joint-stock banks is that these institutions, compared with the SCBs, made more loans to nonstate borrowers that were less likely to default. In 1998, for example, 45 percent of the loans issued by ICBC to small and medium-sized SOEs were nonperforming, compared with 29 percent for Sino-foreign joint ventures and private firms.86 Although the percentage of loans issued by joint-stock banks to private firms was relatively low, it was on average about twice higher than that issued by the SCBs.87 Sixty percent of the loans made by Minsheng Bank went to private firms, as well as to medium and small firms.88 By comparison, the SCBs and, to a lesser extent, joint-stock banks gave nearly all their loans to SOEs. In the mid-1990s, about 95 percent of the SCBs’ loans and 92 percent of the loans from joint-stock banks went to SOEs.89 This situation did not improve in 2000. For example, in Jiangsu and Zhejiang, the two provinces with the most dynamic private sector, only about 5 percent of the outstanding bank loans went to the private sector, including TVEs.90
Among developing countries, China’s lending to the private sector has been considered the most discriminatory. In 1999, of the seventy-eight countries surveyed by the World Bank, China’s lending to the private sector—calculated as the ratio of credit by deposit money banks and other financial institutions to the private sector—was ranked the bottom fifteenth, just ahead of countries such as Haiti, Ghana, Syria, Rwanda, Algeria, Niger, and Sudan.91 Lack of access to credit forced China’s private firms to turn to internal financing, hampering their growth. A study of small and medium-sized firms, mainly private enterprises or TVEs, in Zhejiang and Jiangsu in 2000 found that only 24 percent of their capital was bank loans. These firms relied on the curb market SCBs and raised money from employees for expansion and operation. 92 During most of the 1990s, about two-thirds of the loans made by the entire banking sector went to SOEs. Only about 10 percent were provided to TVEs, private firms, and foreign joint ventures; about 6 percent of the loans made by the SCBs went to private firms, TVEs, and foreign joint ventures.93 Starting in 1998, however, with the rapid increase of residential mortgage loans, consumer credit, and the transfer of 1.4 trillion yuan in NPLs from the SCBs to the four AMCs in 2000-2001, the share of the outstanding loans