Lessons from China’s past banking bailouts

Summary

China’s banking sector, particularly small and medium-sized banks, today face a headwind of asset quality deterioration. Revisiting Chinese bank rescues from the early 2000s, we examine how the authorities tackled a severe rise in non-performing loans (NPLs).

Key points

• Key points:
• This paper revisits the experience of China’s authorities tackling the NPL problem at the beginning of 2000s, particularly how they dealt with the problem with respect to the “Big Four” state-owned commercial banks.
• We describe the NPL clean-up process and provide an estimate of its medium-term costs.
• The two rounds of NPL clean-up and capital injection boosted public debt. A share of public debt became implicit debt of the Chinese government.
• China’s experience from bailing out its Big Four state banks in the early 2000s provides a context for the current efforts of Chinese authorities to deal with a new emerging NPL problem in Chinese banks.
• The evolution of China’s financial system means that cleaning up today’s NPLs in smaller banks is a thorny task ­– and not necessarily simpler than 20 years ago. Fortunately, the authorities can draw some useful lessons from the previous NPL episode.

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