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The ICFAI University


CHINAS BANKS AND THE OVERHEATING ECONOMY
If China is likened to a machine at full speed, then the bank is no doubt its engine1.

INTRODUCTION
China embarked on a journey of transition from a planned economy to a market economy in 1978. Before this period China entailed strict restrictions on foreign capital and external economic factors. There was also collectivization of land, government control over the accumulation and reinvestment of capital and state ownership of major as well as small scale industries and banks. In 1978, Deng Xiaoping, the architect of modern China, initiated what is known as the open door policy by bringing out reforms in all the key sectors of the economy and integrate the countrys economy with the rest of the world. China was to witness its transition from a planned economy to a market economy. Since the beginning of the reforms in the same year, the country had achieved an average annual growth rate, which made it the fastest growing economy of the world. The country had successfully emerged as the factory of the world and was the chief cause of the manufacturers envy across the globe. The Bank Credit Analyst, a Canadian research firm, estimated2 that Chinas share in global growth between 1995-2002 was 25%3. Goldman Sachs, an investment bank had predicted that by 2040, China would overtake America as the worlds biggest economy. The key sectors of the economy were witnessing an expansion drive in anticipation of higher demand, both domestic and international. On March 14th 2004, at the Annual National Peoples Congress Conclave Meeting, the robust performance of the economy was the core theme when Premier Wen Jiabao was about to address the audience. But what the speaker had to say raised many eyebrows and fuelled some speculations. Bank lending which is fuelling such demand must be curbed if China is to maintain its economic stability, said the Prime Minister4. There was growing concern in the economic fraternity about the overheating economy of China. It was a general perception that bubbles were beginning to form in property, steel and cars the key sectors of the economy. Power generation was witnessing capacity constraints. The demand in these sectors was growing so fast that even the leadership in Beijing was worried. The consumer price inflation rose to 3% in March 2004 from 0.9% in the same month, previous year. Investments too increased by 50% over the previous year. The Chinese currency was pegged to the U.S dollar and the increase in investment inflow, meant that the central bank would have to buy the dollar from the market, in exchange for Yuan in order to restrict the appreciation of the domestic currency. This was important to maintain the export competitiveness of the country. As a result the foreign exchange reserves of the country shot up by 39% reaching a figure of $440 billion in March 20045. The output of cars and home appliances also grew by more than 50%6 by March 2004. Economic reforms had helped the country to grow at a breakneck speed but the question puzzling the government was whether a volley of easy credit had also fuelled the investment boom or not. While the increase in bank lending led to a dramatic increase in the money supply, at the same time banks were sitting under a mountain of bad debts. There was wide spread concern over the mounting bad debts and the way the banks had financed large investment
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Editors Notes: Deepening Reform: The way-out for Chinas Banking Sector Facing the WTO Challenges www.tdctrade.com Measured on purchasing power parity. Steaming, November 13 2003. www.economist.com Loosing its balance, March 18 2004. www.economist.com The temperature is rising, April 15 2004. www.economist.com Ibid

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projects, which later went bust with the recovery of the loan becoming impossible. In 2004, Standard & Poors, an international credit rating firm, estimated the value of the Non-Performing Loans in China at $860 billion7. The Prime Minister Wen Jiabao made it clear to the top finance officials in another annual conclave that there are many problems and pitfalls in the finance system8 that need a complete overhaul. There was also the threat of a deflationary spiral owing to the over investment in the country. China was supposed to remove all restrictions to foreign banks by 2006 according to the World Trade Organization rules (foreign banks were not allowed to accept deposits in domestic currency). Thus there was a pressing need for financial reforms in the country. The government is really feeling the pressure to get things going in the run up to 2006, said Joan Zheng, China economist at J.P. Morgan Chase $ Co., in Hong Kong9.

BACKGROUND
When the communists came to power in China in 1949, the capitalist banking structure was dismantled and the Peoples Bank of China (PBOC) was established as the countrys only bank. Deng Xiaoping, the architect of Chinas reforms, believed that the financial sector formed the core of the modern economy. He envisaged a special role for the banking sector, where it was required to support the investment driven transformation of the economy. China had to depend on the banking sector for the creation of credits to boost infrastructural development and generate rapid economic growth. By the 1980s, specialized banks such as the Policy banks, Shareholding commercial banks were formed along with the establishment of the Non-banking financial institutions. This phase of the banking sector reform focused on constructing a basic framework of the banking sector, which would complement Chinas transition to a market economy. Four state-owned specialized banks the Agricultural Bank of China (ABC), the Peoples Construction Bank of China (PCBC), the Industrial and Commercial Bank of China and the Bank of China (BOC), referred to as the big four, were established to allocate the financial resources among the specific sectors in an efficient manner. In 1984, the Peoples Bank of China was made the Central Bank of the country but was not given much power in terms of the implementation of the monetary policy and the regulation of the financial institutions. The bank was devoid of such powers until the introduction of the Central Bank Law in March 1995. However, despite this law, PBOC was hardly in a position to perform its task independently as the bank still functioned under the State Council10. Though the banks were devoid of such crucial powers, they effectively performed the main task cutout for them: the creation of bank credit. Bank loans grew by on an average annual rate of 20%11 against a nominal GDP growth of 16%12 during the entire period of the reform process i.e., 1978-2003. The banks were also required to disburse their operational profits and pay taxes to the government to support the rapid economic growth of the country by the latter.

CHINESE BANKS: THE SOURCE OF EASY CREDIT


The banks in China were like the locomotives that would pull the economy to a different level. They were the primary weapons to bring about a transition in the economy and the ammunition was the creation of easy bank credits. The banks had almost over $1 13 trillion in household savings. The overall domestic savings rate was 43% of GDP. The Chinese have long been compulsive savers, and with the end of state guaranteed lifetime jobs and retirement benefits, people save even more14. The fast pace development of Chinas economy since the reforms were initiated in 1978

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12 13 14

Balfour Fredrick, Roberts Dexter, Bremner Brian, Headed for a crisis, May 3, 2004. www.businessweek.com Ibid Ibid The state council is Chinas cabinet, which consists of a group of ministers. Deepening Reform: the way-out for Chinas Banking Sector Facing the WTO challenges www.tdctrade.com Ibid Strings attached, May 6, 2003. www.economist.com Balfour Fredrick, Roberts Dexter, Bremner Brian, Headed for a crisis, May 3 2004. www.businessweek.com

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was supported by investment that mainly consisted of the funds of banks, largely controlled by the government. The country, which had some 300,000 State Owned Enterprises (SOEs), absorbed large amount of subsidies. These subsidies were in the form of soft credits or policy loans from the state banks to the SOEs. These loans were implicitly guaranteed by the government and were considered as a priority task of the banks. The borrowings of the SOEs increased by 40 times between 1978 and 1997 because of this preferential treatment given to them. With the opening up of the economy in 1978, the SOEs, most of which were badly managed saw their profits declining and market share shrinking. They accounted for 30% of the industrial output in 2001 compared to 80% in 1986 and the profit of the industrial SOEs declined from a level of 6% of GDP in 1991 to a level of 1% of GDP in 2001. Despite this kind of performance, the SOEs on an average sported a debt to equity ratio of 400% to 700%15. This was because of the support given by the banks in the form of easy credit. The big four banks have together lent 8.316 trillion Yuan, comprising of more than 80%17 of private domestic savings to the SOEs by 2003. The government has simply chosen to place most of the costs of Chinas transition from a planned to a market economy in the banks loan books, quoted The Economist18. Between 1999 to 2003, mortgage lending by the Industrial and Commercial Bank of China grew by 32 times and consumer lending by the big four banks increased from 1% of their loan books in 1998 to 10% in 200319. It was estimated that 70%20 of capital for property development came from loans. Between January 2003 to July 2003, new loans provided by the commercial banks reached a figure of 1.9 trillion Yuan21 ($228.9 billion) whereas the figure for the entire period of 2002 was 1.8 22 trillion Yuan. About seven regional commercial banks, more than a hundred commercial city banks and twelve rural cooperative lenders were giving credit to the customers without a proper analysis of their books and credit check23. On August 23rd 2003, the central bank said that their economic policy units unanimously thought that the loans were increasing too fast. The lending was also propelling huge capital investment with great velocity. But it was heavily skewed towards the State Owned Enterprises. The big four banks of China together operated 116,000 branches across the country and held 67% of the countrys deposits and made 61% of the loans in 2003 24. According to the government estimate 23% of the big four loans were non-performing. However, independent analysts put it at close to 33%25. In 2003, bank lending hit $350 billion26 - an increase of 21% from 2002 and the broad money supply increased by 20%27 in the same period against a targeted growth rate of 16% 28 (Exhibit 1). The easy lending provided by the banks and the booming trade surplus had stuffed the economy with cash. Since interest rate in China is not set by the market the central bank could use only blunt tools to deal with the problem, said Ping Chew, director of sovereign ratings at S&P in Singapore. Chinas construction industry and the property sector was also booming and growing very rapidly. The banking sector provided the industry with easy credit, which catalyzed the investment surge there. The banks issued a total mortgage of $142 billion in the year 2003, an increase of 40% over
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16 17 18 19 20 21 22 23

24 25 26 27 28

Sharma Shalendra D. Stability amidst Turmoil: China and the Asian Financial Crisis. www.fas.harvard.edu Ye Miao, Banks Menaced. www.atimes.com/atimes/China Ibid Banking on growth, Chinas capital markets, January 16 2003. www.economist.com Banking on growth, Chinas capital markets, January 16 2003. www.economist.com Ye Miao, Banks Menaced. www.atimes.com/atimes/China Ibid Ibid Balfour Fredrick, Roberts Dexter, Bremner Brian, Headed for a crisis, May 3 2004. www.businessweek.com A $45 billion Shot in the Arm, January 6 2004. www.economist.com Ibid Balfour Fredrick, Reform Picks Up Speed, March 8 2004. BusinessWeek, page-19 Ibid Ibid

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the previous year. Fuelled by this easy credit, investment in the real estate grew by 41% in the first quarter of 200429. Tina Zhao, who bought a 500 square feet toehold, got an $18,000 mortgage from Chinas Minsheng Bank very easily. It is very easy, there was no strict procedure for this at all, said Zhao30 (Exhibit 2). According to Nicholas Lardy - senior fellow at the Institute of International Economics a Washington-based think- tank, Chinas largest banks are not subject to independent audits. Three of Chinas four largest banks do not even report their consolidated financial results31 All this leaves the banks with little accountability and they tend to sanction loans on the basis of anything but rational expectations. There is a popular saying in China: whenever there are policies from the top, the bottom produces counterstrategies (shangyou zhengce, xiayou duice)32 . This can best be substantiated by the system of Guanxi in China. Guanxi literally means relationships, but in the Chinese business world, it stands for the network among various parties that cooperate and support one another. According to the Los Angeles Chinese Learning Center, regardless of business experiences in ones home country, in China it is the right Guanxi that makes all the difference in ensuring that business will be successful. The system encouraged many banks to provide loans to projects of dubious value without a proper analysis of the viability of the project being done. The banks did not even conduct a proper credit check of the respective borrowers. The banks had become a source of easy credit for anyone with the right Guanxi. This kind of easy credit had propelled a construction boom in the country. Owing to the high demand, residential prices across the nation grew by 7.7%33 in early 2004. China was also witnessing a stadium construction boom because of the 2008 Olympic Games and the demand for related construction materials were at an all time high.

CHINAS OVERHEATING ECONOMY


Since China embarked on the road to economic reforms in 1978 its real gross domestic product increased at an average rate of 9% a year and foreign trade grew at an annual rate of 15% 34 a year. By 2004, it became the sixth largest economy of the world with a GDP of $1.4 trillion. The speed and the scale of growth in China over the past 12 years is a miracle. It is a miracle that China is developing in such an orderly fashion, says Dietmar Nissen, East Asia President of BASF, a chemical company35 (Exhibit 3). However, many economists felt that the economy was overheating or might be on the verge of it. According to the data provided by Morgan Stanley, a global financial services firm, prices were up on an average of 8.1% in the first quarter of 2004, as compared to the figure in the previous year with edible oil leading the race with a price increase of 27.2% 36. Cost of medical and healthcare facilities and education also increased by 8.1% and 3.9% in the first quarter of 2004 as compared to the figures in 2003. But one fact that Morgan Stanley chief economist Stephen Roach put as mildly disturbing was the 17.9% increase in industrial output in 2003, which according to him indicates that the economy is overheating. This could lead to high prices, failing industries, insolvent banks and a lot very unhappy Chinese people, said Roach37. There were also signs of a ballooning property bubble. According to one conservative estimate property investment was up by 34.9% in the first quarter of 2003, which was far ahead of the GDP

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30 31 32 33

34

35 36

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Are Chinas Home Lenders Pumping Up a Bubble, INTERNATIONAL COVER STORY, May 3 2004. www.businessweek.com Ibid Lardy Nicholas. R, China and the Asian Contagion, August, 1998 www.foreignaffairs.org Tsai Kellee. S, Back-Alley Banking: Private Entrepreneurs in China www.cato.org Are Chinas home lenders pumping up a bubble, INTERNATIONAL COVER STORY, May 3 2004. www.businessweek.com Ahmed Sameena, Behind the mask, SURVEY: BUSINESS IN CHINA, March 18 2004. www.economist.com Ibid Keliher Macabe, Chinas economy in 2004: Dimming or brilliant, January 6 2004. www.atimes.com/atimes/China Ibid

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growth rate of 8% of China in the same year 38. In Beijing and Shanghai, 17%39 of the modern offices were empty according to a report by Jones Lang LaSalle, a big property company. Prices of luxury properties in Shanghai increased by 172% in 2003 when compared to their prices in 200240. In the beginning of 2004 China stood next to America and Japan in spending on construction and had the fastest annual growth rate of 8-9%41 among the top ten spenders on construction. Despite a growing economy and such huge investment coming into the construction business, vacancies stood at an estimated 26%42, whereas the international standard is 10.4%43. However, the perplexing factor was the number of commercial and luxury buildings that the developers had left partially constructed. The situation was such that near the town of Langfang, 75 miles from Beijing, a deserted compound housing a villa (pretentious and luxurious country residence with extensive grounds) was given to a foreign run orphanage to use a part of it without any monetary consideration. Economists said that the construction industry was witnessing a wide mismatch between supply and demand and speculated a supply bubble in the luxury housing business. International Finance Journal reported: The media are rife with speculation that soaring real-estate investment, coupled with the record high vacancy rate, implies a possible recurrence of a bubble similar to those elsewhere in Southeast Asia that led to the Asian financial crisis in 199744. China has dealt with such overheating in the past. The difference this time is that its footprint on the world is much larger it is the worlds sixth largest economy and produces far more tradable goods, says Justin Lahart, CNN/Money Senior Writer45. According to Credit Suisse First Boston chief non-Japan Asia economist Dong Tao, China is a classic overinvestment story. Excess capacity is being used up, bottlenecks are beginning to emerge in key sectors (electricity, raw materials, transport), said the economists at Merrill Lynch46 . As credit was available readily, more and more investment was taking place, capacity was being added and the economy was flooded with liquidity. Money-supply growth is far too rapid, said Nichols Lardy, senior fellow at the Institute of International Economics, a Washington-based think-tank. Credit expansion and the rate of investment are at all time highs47. According to Paul Heytens and Harm Zebregs of the IMF, 75% 48 of Chinas growth comes from capital accumulation. What was concerning the economists was that Chinas growth had become a drain now. In the 1980s and 1990s, it took $2-3 of new investment to bring an additional growth of $1. But the country needed more than $449. Fuelled by the rapid credit expansion and the investment in the automobile, cement, steel and the construction industry, China was able to maintain an express delivery of performance with respect to the economy. The inflation rate had registered a sharp rise, but as Nicholas Lardy puts it, The biggest problem is not inflation but a decline in the quality of assets in the banking system. There is a popular saying in China When you owe a bank a little money, you are the banks hostage, but when you owe the bank a lot of money, the bank is your hostage. According to Standard & Poors, the borrowers have defaulted on nearly half of all the bank loans in China. In March 2003, the NPLs of the big four commercial banks amounted to a total of $500 50 billion, though the banks had been trying to improve them since 1999. The firms Asia-Pacific Banking
38 39

Ibid Bradsher Keith, Economic Worries in China as Companies Pile Up Debt, New York Times, September 4th, 2003. http://taiwansecurity.org/NYT/2003/NYT-090403.htm Ying and Yuan, August 28 2003. www.economist.com Cultural revolution, Architects in China, February 12 2004. www.economist.com Ibid Calculated from the data that Chinas vacancy is 2.5 times the international standard Ye Miao, Banks Menaced. www.atimes.com/atimes/China Lahart Justin, China Capacity Causes concern, November 21 2003. www.cnn.com Keliher Macabe, Chinas economy in 2004: Dimming or brilliant, January 6 2004. www.atimes.com/atimes/China Holland Tom, An Incredible Balancing Act, March 18 2004. www.feer.com Ahmed Sameena, Behind the Mask, SURVEY: BUSINESS IN CHINA, March 18 2004. www.economist.com Ahmed Sameena, Behind the Mask, SURVEY: BUSINESS IN CHINA, March 18 2004. www.economist.com Ye Miao, Banks Menaced. www.atimes.com/atimes/China

40 41 42 43 44 45 46

47 48

49

50

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Outlook 2004 Report estimated the Chinese banking sectors gross NPL ratio at 44-45%51 till the end of 2003. By 2004 the NPLs had already attained a gigantic proportion as estimated by Standard & Poors52 (Exhibit 4). The officials in the government only feared that the story of the other Asian economies like Korea and Japan might repeat itself in China. They believed that the countrys problem of NPLs was spinning out of control and something needed to be done in earnest. Premier Wen Jiabao mentioned it as the problems and pitfalls in the finance system53. Essentially there were three problems looming large over the economy of China. First was the everpersisting problem of NPLs. The second was the excess of liquidity in the economy that had made the inflation rate to rise and how to reduce it. The bond market in China was quite underdeveloped. The excess liquidity could be mopped up through this route, but for that, the government had to increase the interest rate, which would again attract inflow of foreign funds. The third area of concern was the possibility of Deflation. The economy was overheating with an increase in inflation and an increase in the level of economic activity. But there was also a considerable increase in expansion taking place, which ran the risk of outstripping the demand, and hence deflation could also prove to be a distant possibility. China was also supposed to allow foreign banks to operate in the country without any restrictions in 2006 as per the WTO mandated rule.

REFORMS: THE UNFINISHED AGENDA


Though the reform of the banking sector started during the premiership of Zu Ronghji and some degree of accountability was introduced, the system largely remained the same with bank credit allocation increasing and the problem of NPLs remaining untackled. The Peoples Bank of China issued a Notice on Further Strengthening Management of Real Estate Credit, to diversify the capital channels for realty enterprises and hence decrease banks risks. On January 6th, 2004, China injected $4554 billion out of its foreign currency reserves into two big state banks, China Construction Bank and Bank of China. However, the analysts were quick to point out that the bailout was too small when compared to the total size of the NPLs. They pointed out that the government had injected approximately $20055 billion in the banks in 1998 without any tangible results. To take stock of the situation and bring out reforms in the banking sector the government created 10 inspection teams, drawing members from various ministries and the Peoples Bank of China in 2003. The teams were sent to seven provinces to examine the industries that received too much investment. The government also instructed the Land & Resources Ministry to stop the allocation of land to sectors that were overbuilt. But the Chinese officials didnt want the economy to slowdown too much, which would result in job losses. I would rather want that the economy overheat than be cold, because then there would be a lot of problems, said Li Yushi, vicepresident of the Commerce Ministrys Chinese Academy of International Trade & Economic Cooperation56. The reserve ratios for the commercial banks was raised from 6 to 7% on September 21st 2003. The Central Bank of China then increased the reserve requirement from 7 to 7.5%57 on April 11th, 2004, which came into effect on April 25th. The effort was on to create a real financial system, one that raises capital efficiently and directs it to the best companies, reported Businessweek58. The measures were also supposed to contain the growing money supply in the economy and thus slowdown the overheating of the economy. The government was planning a restructuring of the banking system that would prevent state enterprises from getting easy money. The loans were put into asset management companies that would restructure and repackage the loans and sell them to other banks over a period of ten years.
51 52 53 54 55 56

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Wong Terence, Chinas Weak Banking Sector: A competitive edge for Malaysia, www.ram.com.my See page 2 paragraph 1. Balfour Fredrick, Reform Picks Up Speed, March 8, 2004. BusinessWeek, page-19 Botox Shot, Recapitalising Chinas Banks, January 8 2004. www.economist.com Beyond a Bail-out, Chinas Banks, January 8 2004. www.economist.com Balfour Fredrick, Roberts Dexter, Bremner Brian, Headed for a Crisis, May 3 2004. www.businessweek.com The Temperature is Rising, April 15th, 2004. www.economist.com Balfour Fredrick, Reform Picks Up Speed, March 8, 2004. BusinessWeek, page-19

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According to the government sources, it hopes to recover almost one third of the loans that are non-performing. Under this plan Huarong Asset Management Co., which holds the NPLs of Industrial and Commercial Bank of China, held an auction on December 2003 with dismal results. Out of total loans of 2259 only 360 were auctioned because of the precarious state of the assets. China had taken note of the current situation and knew that the overheating had to be arrested if the stories of the Southeast Asian economies were not to be repeated. The growth in money supply had to be contained and for that the banking sector had to be restructured. The question was whether these measures would slowdown the economy a little too much or just as much as it was required, and if the economy was slowed down then what would be the likely impact on the capacity expansion that has taken place on all the major sectors. The government needs to slow the economy and restructure the banking sector so that the banks are able to allocate the funds efficiently and effectively. The current watch on credit could lower the growth in investment by half by the end of 2004 and let the economy still grow at the required level of 7%, said Andy Xie, an economist at Morgan Stanley61. DRAGONS, as any child will tell you, have a weak spot: their underbelly. In Chinas case the underbelly is its financial system62. The economy was overheating and this time the Banks were at the centrestage. What was the role-played by the banks in the overheating of the economy? What was the effect of the easy credit availability on the investment in various sectors? What would be the impact of a loan default by the investors, given that the banks already had huge NPLs and the economy was overheating? These were some of the questions the authorities needed to answer.

59 60 61 62

Balfour Fredrick, Reform Picks Up Speed, March 8 2004. BusinessWeek, page-19 Ibid Steaming, November 13 2003. www.economist.com Beyond a Bail-out, January 8 2004. www.economist.com

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Exhibit 1 Money Supply


Unit RMB 100 million

Value Year Month Currency in Circulation (M0) 17937.2 17106.5 17441.0 17115.0 16956.9 17362.0 17607.0 18306.4 18251.0 18440.0 19746.0 22287.0 19893.4 Money (M1) 69756.6 71438.8 71321.0 72778.0 75923.2 76153.0 77033.0 79163.9 80267.0 80815.0 84118.6 83790.0 83556.4 Money & Quasi-Money (M2) 190108.4 194487.3 196130.0 199505.0 204907.4 206193.0 210592.0 213567.1 214469.0 216352.0 221222.8 225076.0 227050.7

% Increase over same period last year Currency in Circulation (M0) 7.8 10.1 9.9 12.3 12.3 13.7 12.4 12.8 14.0 12.8 14.3 4.9 10.9 Money (M1) 18.8 20.1 18.0 18.8 20.2 20.0 18.8 15.5 19.6 18.9 18.7 15.7 19.8 Money & Quasi-Money (M2) 18.1 18.5 19.2 20.2 20.8 20.7 21.6 20.7 21.0 20.4 19.6 8.1 19.4

2003

2 3 4 5 6 7 8 9 10 11 12

2004

1 2

Source: http://www.china.org.cn

Exhibit 2 Total Investment in Fixed Assets Item Actually Finished Jan Feb, 2004 Total Investment Of which: State-owned & State Share holding Companies Residential Buildings By Industry Tec Primary Industry Inve Secondary Industry Other Tertiary Source: - www.china.org.cn 16 10.38 1268.64 2008.01 13.86 710.32 1424.12 3.48 558.32 583.89 25.1 78.6 41.0 3287.03 1999.22 721.00 Jan Feb, 2002 2148.39 1288.16 484.87 Over same period last year Value 1138.64 711.06 236.13 Percentage 53.0 55.2 48.7

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0005-02 Exhibit 3 Changes in Chinas Main Economic Indicators


2000 GDP Industrial value added Year-on-year change By month compared to same month In previous year: year-on-year change Nominal value Real value 8.0 11.4 2001 7.3 9.9 Total 8.0 12.6 2002 Q3 7.9 13.1 12.2 9.3 8.2 6.9 3.6 7.9 7.5 -20.4 -20.8 27.8 13.7 13.3 6.6 11.6 14.7 14.0 90.0 88.7 6.8 16.1 15.9 5.2 4.8 17.8 18.8 39.9 41.0 22.3 24.3 23.8 2.4 4.3 18.1 19.1 49.5 50.7 28.6 19.4 35.8 8.2 21.2 29.3 17.2 9.7 10.1 7.5 6.7 1.9 2.1 0.4 10.1 10.9 9.2 8.5 5.0 4.2 0.7 8.8 10.2 12.5 13.5 4.6 4.8 -0.8 8.8 10.0 16.0 17.2 4.8 5.4 -0.8 Q4 8.0 14.5 12.6 17.1 17.2 5.2 4.8 17.8 18.8 10.4 11.1 30.5 22.3 33.1 21.2 9.2 10.1 12.5 13.5 4.6 4.8 -0.6 Q1 9.9 17.2 17.2 31.6 28.1

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2003 Mar Apr. 16.9 17.2 31.6 28.1 14.9 16.4 30.5 27.8

May 13.7 15.9 31.7 29.8

Fixed assts investment accumulative amount compared to same period in previous year Finished Products Inventory Nominal value Real value Balance of resident savings Nominal value deposits Real value Newly-added resident Nominal value monthly savings deposit Real value compared to same period in previous year Total Exports By month compared to same period In previous year: year-on-year change Total Imports By month compared to same period In previous year: year-on-year change Monthly consumer goods Nominal value retail sales in month Real value compared to same period in previous year Per-capital disposable Nominal value income of urban residents Real value amount compared to same period in previous year Per-capital net income of Nominal value rural residents amount Real value compared to same period in previous year Resident consumer price By month compared to same period in previous year: year-on-year change Commodity retail price By month compared index to same period in previous year: year-on-year change Capital goods price index By month compared to same period in previous year: yearon-year change Manufacture producer price By month compared index to same period in previous year: yearon-year change Monetary aggregate M0 Monetary aggregate M1 Monetary aggregate M2 Outstanding of loans extended by financial institutions Ratio of loans to assets of financial institutions

20.1 19.5 50.1 49.4 33.5 33.5 5.4 52.4 9.2 9.4 9.3 8.8 8.1 7.5 0.5

9.9 6.1 20.1 19.4 19.5 18.7 184.0 -37.4 181.5 38.0 34.7 33.5 45.1 52.4 9.3 9.1 33.3 33.5 34.4 46.8 7.7 7.6

19.8 19.1 73.8 72.6 37.3 34.3 40.9 45.6 4.3 8.0

0.9

1.0

0.7

=1.5

=0.8

=1.3

=1.1

=0.8

=0.2

0.2

0.1

0.6

3.1

=1.6

=3.2

=0.2

=0.6

5.5

6.4

5.3

3.2

2.8

1.3

2.2

1.8

0.4

3.6

4.6

3.6

2.0

8.9 16.0 14.0 13.4 72.0

7.1 12.7 14.4 11.6 69.3

10.1 16.8 16.8 15.4 69.5

7.8 15.9 16.5 14.6 69.2

10.1 16.8 16.8 15.4 69.5

10.1 20.1 18.5 19.9 66.1

10.1 20.1 18.5 19.9 66.1

9.9 18.0 19.2 20.1 65.9

12.3 18.8 20.2 21.4 66.1

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Wage related cash credit by financial institutions By month compared to same period In previous year: year-on-year change Nominal value Real value 7.4 5.6 10.3 11.9 8.3 16.1 10.3 21.5 21.5 21.2 21.5

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11.4 19.1 19.9 19.2 1.98 0.1 23.8 3401

Legal interest rate for 2.25 2.25 1.98 1.98 1.98 1.98 1.98 1.98 one-year savings deposits 0.0 4.2 2.5 3.5 2.5 =0.3 =0.3 0.1 in financial institutions Balance of Trade 241 225.5 303.5 199.9 303.5 =10.3 =10.3 0.9 (accumulative absolute amount, in US$ 100 million) Foreign Exchange Reserve 1656 2174 2864 2586 2864 3160 3160 3263 (absolute amount, in US$ 100 million)

Source: China and World Economy, November 4th, 2003. Exhibit 4 Non-Performing Loan Ratios of Domestic Banks End of Month 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 12 12 12 12 12 12 12 12 12 12 3 6 9 12 2002 3 6 9 12 2003 Notes:
1. Non-performing loans include: payment of principal is past due three months or more, repayment of interest is past due six months or more, and installment repayment loans for medium to longterm is past due six months or more. Before 1992, the figures only include the data of Domestic Banking Units (DBUs) of domestic banks. Since 1993, the figures are on a consolidated basis including the data of DBUs, Offshore Banking Units (OBUs) and overseas branches of domestic banks.

Non-Performing Loans 45,259 47,718 78,288 147,578 257,195 354,813 428,931 548,153 660,150 773,522 842,525 929,068 1,120,075 1,087,013 1,147,470 1,056,911 998,772 864,350 854,940 808,729

Total Loans 4,687,698 5,879,096 6,838,630 8,114,282 9,017,078 9,652,831 11,602,248 12,562,320 13,524,472 14,474,639 14,307,740 14,360,914 14,371,747 14,527,437 14,280,857 14,129,753 14,029,563 14,130,749 13,998,273 14,231,997

NPL Ratios 0.97 0.81 1.14 1.82 2.85 3.68 3.70 4.36 4.88 5.34 5.89 6.47 7.79 7.48 8.04 7.8 7.12 6.12 6.11 5.68

3 6

2.

Source: www.cbc.gov.tw

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