Chinas banking sector has traditionally served as a party-controlled feeding trough for its inefficient, unprofitable state-owned enterprises (SOEs), most of which were technically insolvent. The process was simple extend a loan to an unqualified SOE applicant, then write off the loan as a bad debt when it failed to repay. This situation is beginning to change, and Chinese banks are attracting the attention of foreign banks that are beginning to view them as investment opportunities rather than potential competitors. Nevertheless, Chinas banking industry is beset by several problems.
1. SOE Lending: The importance of the Chinese banking sector as a source of domestic capital is hard to overstate. Mainland Chinas stock markets are anemic compared to the behemoths of Hong Kong, Tokyo and New York, and Chinas bond market is virtually nonexistent. That leaves banks as the only major source of over-the-table domestic funding for private enterprises. Yet SOE lending continues to siphon off a good part of banking capital, notwithstanding that Chinas stock markets were largely designed to provide SOEs with an alternative source of funding. Many domestic companies have resorted...
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