Case studies of the bank credit risk management in China

Pao Yue-kong Library Electronic Theses Database

Case studies of the bank credit risk management in China

 

Author: Chow, Fung Prudence
Title: Case studies of the bank credit risk management in China
Degree: M.Sc.
Year: 2000
Subject: Banks and banking -- China -- Case studies
Risk management -- China -- Case studies
Bank loans -- China -- Case studies
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Dept. of Business Studies
Pages: 72, [4] leaves : col. ill. ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1538377
URI: http://theses.lib.polyu.edu.hk/handle/200/982
Abstract: The Chinese banking system is in shambles. It was originally meant to operate as an extension of the ministry of finance of a communist country. On the asset side, they were to direct loaned funds or rather disguised subsidies to state-owned enterprises (SOEs) in need. With no regard for the economic justification of SOEs, the communist state was the ultimate treasurer of political and social decisions. Even though SOEs' contribution to the country's total net wealth creation is modest, it is estimated that about 85% of the working capital of China's SOEs are financed by the banking system. Depending on what conceptual approach is selected to measure the SOEs chances of survival, anything between 25% and 45% of them will never be able to reimburse their loans. A simple mathematical operation would show that potential loan losses are larger than the aggregate equity of all commercial banks in China. The system is virtually bankrupt. In China, a bad loan is not a bad loan, until the government says it is. With creative accounting, it is possible to keep the system alive for quite some time. However, the author also believes that the unsatisfactory performance of state commercial bank can be attributed to other reasons. Against the background of preventing financial risks, banks must increase credit in order to facilitate strong economic growth. However, non-performing loans and thus financial risks tend to increase if the quality of credit is neglected in the process. With China's entry into the World Trade Organization (WTO) soon, the banking system will become more open. Domestic banks will compete directly with foreign banks. Therefore, it is worth studying how changes in the risk management system in the Chinese banking sector can equip domestic banks for future competition. The author, first attempt to classify different kinds of risk in credit operation, applying in the context of the Chinese Banking System. Factors that have impact on those risks are identified. Obviously, it is encouraging that both the risk environment and risk management system of banks are improving with support from empirical study on the two loan cases from Bank of China. There are numerous findings with Chinese characteristics that are very interesting. Last but not least, implication for foreign banks and Hong Kong has been concluded.

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