There are two tiers of problems that beset China's
transition to an efficient market economy; 1) problems at the state
level with both large and small banks, and 2) problems at the village
level with 35,000 village cooperatives.
Large state-run banks have substantial bad debt and
nonperforming loans (some analysts estimate are as high as 50%). The
state is committed to restoring these large banks to a fiscally sound
status in order to attract foreign partners and compete in open markets
on equal footing without invoking state subsidies. This is a requirement
for China to retain its place in the World Trade Organization.
Small banks that were formally viewed as successful
models now reel with corruption scandals, soured foreign-investment
deals and examples of overly rapid expansion. Faced with these
challenges, the question is: can China rid itself of a culture of
state-planned control and successfully transition as a responsible
lender?
On an entirely different level, China must figure out
how to unlock $35 billion in deposits which are desperately needed for
investment by strapped small Chinese provincial governments. It's a
Catch 22 riddle where the state counts on revenue from the provincial
governments and at the same time must guarantee the security of these
peasant deposits.
If the rural cooperatives are free to make loans lacking
the right incentives, the money is wasted and fails to perform its
objective. The example cited by the WSJ is of a Chinese village with
fallow springtime fields because agricultural taxes had made them
unprofitable to farm.
Officials from the village government proposed building
hundreds of greenhouses that would add a second crop if properly
constructed and thus turn the land profitable. The officials leading the
project skimmed money from the greenhouse loan and the greenhouses were
poorly constructed and subject to constant flooding which prevented
planting the second crop.
The true cost came when the village officials and credit
cooperative tried to collect on the loans. With no collateral, farmers
closed their deposit accounts at the cooperative, fearing the money
would be confiscated by the corrupt officials and cooperative. Since the
cooperative isn't performing what it's intended to i.e., it can't make
loans and pay taxes to the central government it becomes a financial
sinkhole. Multiply this example by 35,000 cooperatives and you have a
monumental problem.
These credit cooperatives control 12% of the states
financial system not an insignificant sum. Given that the depositor's
are amongst the country's poorest, the central government has no choice
but to guarantee the deposits to prevent the poor from putting their
savings in a tea can.
Although the political system is frozen in place, the
political landscape has changed since Tiananmen. Young, urbane
technocrats have emerged to replace the old revolutionaries and Marxism
has morphed into a new form of Fascism. The changes that have occurred
have been bottom-up with a determination to work around the impediments
of a rigid leadership that refuses to take serious steps toward
political reform.
As more Chinese enter the private sectors, the state is
no longer able to control every aspect of daily life. An example of
bottom-up changes was reported by the WSJ (August 16, 2004). Frustrated
villagers with a badly polluted stream running through their village
declared they would elect anyone village chief who would clean up the
mess.
A local entrepreneur who had created a fortune
manufacturing ball-point pens, who was not a party member, stepped
forward. It is reported that 65% of 421 democratically elected village
chiefs in this province are wealthy entrepreneurs. The motivation for
these businessmen to enter the political arena is the lack of
independent courts, industry associations and institutions necessary for
their companies to survive. They are literally creating the local
infrastructure necessary to support their businesses.
The downside is the danger of mixing business with
politics which has led to the graft and corruption that plagues the
central government, state owned enterprises and banking system. The flip
side of the growing influx of Chinese businessmen entering politics is
the increase of Chinese officials seeking sabbaticals in the private
sector.
Critics charge this is illegal and Beijing repeatedly
issues warnings it is illegal for government officials to hold positions
in private companies. But lacking an effective civil-service system to
train officials, these violations are overlooked. The message is, now
that people are making their own economic decisions, they want to have a
hand in making their own political decisions as well.
Countless stories have appeared in the WSJ and other
news media documenting severe problems resulting in a society where
entrepreneurial forces have been unleashed without adequate
institutional safeguards. Tens of thousands of Chinese people have been
evicted from their homes, land confiscated and old non-performing
businesses demolished which were supposed to give way to major new
projects that were intended to reward the displaced people with new
homes, jobs and a higher standard of living.
The motivation for these "get rich quick
schemes" were prompted by local and regional officials in towns and
cities eager to become part of China's growth phenomena, but were not
adequately schooled and monitored in the process of due diligence.
These failed projects result in large numbers of people
being duped or forced into signing contracts for ill-conceived schemes
where they ultimately lose their life savings and livelihood by what
amounts to the authorities' illegal use of the "right of eminent
domain" (the governments right to seize land and property -- for
the better use and good of the state).
In many of these frauds, the victims have banded
together and brought what amounted to class-action suits against the
government. But the Chinese court system is another primitive
work-in-process and none of these suits thus far appear to have been
successful in reclaiming compensation for these displaced people.
How many Chinese people have been victims of these
embezzlements sanctioned and encouraged by party members is impossible
to determine, because, obviously, local officials have done everything
they can to cover up their tracks. This sort of corruption is endemic
where the juices of capitalism are unleashed without adequate
safeguards.
