Wu Xiaoling Delivers Tough Warning On Lending
Wu Xiaoling, vice chairman of the Peoples' Bank of China,
China's central bank, delivered a tough warning to China's
state-owned companies. His message was that the central
government would not stand by as many companies continued
to invest in inefficient enterprises which had little
chance of achieving profitability.
Wu said that so far the central government was trying
to use "soft and reasonable tactics" in trying
to cut back loans. If this policy didn't work, he promised
that the central government would turn to "tough
tactics' to crack down on indiscriminate lending. His
message was simple: "Don't fight the central government.
If you do, you will lose."
Chinese president Hu Jintao has said that the Chinese
government will use economic, legal and administrative
means to cut back on lending.
In his warning, Wu Xiaoling used the Chinese term "mangmu
touzi". Translated into English, the term literally
means "blind investment", a reference to spending
money on projects with little or no chance of earning
any return on investment. China's central government,
headed by the powerful China
Banking Regulatory Commission has been warning state-owned
enterprises against making blind investments, but the
SOEs see the cash currently available in China's economy
as their last chance at getting free money. China's four
state-owned banks are attempting to clean up their books,
so that they will present a new responsible face as they
try to go public in New York and Hong Kong, but their
own branches on the provincial level continue to lend
money to SOEs because of the "special relationships"
they have.
Bank reform has been a centerpiece of Premier Wen Jiabao's
reforms, and he is not pleased with the results he has
been getting so far.
China is now undergoing three levels of reform simultaneously:
party, government and banking. The three levels are very
deeply interconnected, which means that it is more like
a matrix then three separate tracks.
On the party side, the party hierarchy is insisting that
all senior government officials who are party members
must give up senior management positions in state-owned
enterprises. If they decide to give up their government
positions and become senior managers, they are prohibited
from using their former positions to lobby the government
to make decisions favorable to their enterprises.
On the government side, officials are required to make
decisions which do not show special favor to state-owned
enterprises. The problem is that most of those state-owned
enterprises were formerly under their management, and
they have worked closely with the current management.
On the banking side, new regulations from the central
government force much more stringent controls on bank
lending. The problem now is that the economy is awash
in cash.
To make things even more complicated, the state-owned
enterprises see this as their last hurrah, before they
lose all access to easy money.
The scene is set for a showdown between the central government
on one side, and the provincial government and state-owned
enterprises on the other.
In the next nine months, we will see how it all plays
out.
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