[FOUNTAIN]World needs to be watchful over China

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[FOUNTAIN]World needs to be watchful over China

Crises do not always come out of the blue. Many result from the buildup of small problems over a long time. This is especially true in economic affairs. The financial crisis of 1997 was an example, and the latest “China shock” is another.
Beijing had warned several times that it would take retrenchment measures to slow its economic growth. The most recent warning came at the National People’s Congress of the Communist Party on March 5. Chinese Prime Minister Wen Jiabao said that the government would cut construction bonds by 21 percent this year. He also said loans by financial services companies would be controlled. His words were as good as a proclamation of a restraint policy.
China, whose growth had been solid, started last year to look like a bubble economy. Investment, production and money supply all seemed excessive. Growth was gathering speed, and the economy was being threatened with major disruption.
Nonperforming loans were becoming another big problem. If an economy were a human body, then you could say circulation was a problem. There is a study showing that the ratio of nonperforming loans of Chinese banks is nearly 24 percent. It is far higher than the recommended 15 percent in the guideline of the People’s Bank of China, the central bank. Insolvent loans perhaps reached nearly 3 trillion yuan, equivalent to $362.4 billion. It is nearly 26 percent of China’s gross domestic product, and some think the size of insolvency could be even larger.
The Chinese government pledged last year to decrease the ratio of the nonperforming loans of the four state-run banks to below 15 percent by 2005. But the banks tried to make the denominator, the total amount of loans issued, larger instead of reducing the numerator, the amount of nonperforming loans.
Increasing loan issues would add fuel to the already overheated economy. It could lead to inflation. The series of economic problems could have called for the control measure on loan issues, which started the China shock. In the early 19th century, Napoleon said, “China: There is a sleeping giant. Let it sleep. For when it wakes, it will shake the world.”
China has been awake for a while, and it is not likely to go back to sleep. It is for the rest of the world to develop some immunity when things start shaking.

by Nahm Yoon-ho

The writer is a deputy city news editor of the JoongAng Ilbo.
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