China is in need of history’s biggest spring clean. Two years of reforms have probably stopped the flow of undesirable conduct from increasing. To make behaviour really change, it’s just as important to deal with the stock too: specifically a huge backlog of bad debts, empty houses and dirty secrets.
Start with debt. Lenders are in denial about loans to companies that are unlikely to pay back. According to figures from the Chinese bank regulator, just 1.1 percent of their lending had gone bad by the end of September. Yet that low number doesn’t gel with the two-year low in industrial profit growth, or GDP for 2015 growing perhaps at its slowest rate since 1990.
Understandably, no bank wants to go first. If bad debts were revealed to be 5 percent, lenders would need around $500 billion to restore their balance sheets to their current state of apparent health. The government, as major shareholder, would need to supply much of that. Yet it would be worth it. The mass of covered-over bad debt takes up precious lending capacity – and freed from it, banks would have less reason to fear transparent accounting.
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