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Wen Jiabao: Financial Crisis Could Be Catastrophic to China

Chinese premier Wen Jiabao talks about the danger of a financial crisis that looms over China.

A report from Cheng Ming (a monthly magazine from Hong Kong) disclosed Wen Jiabao’s speech in a recent meeting on China’s financial situation. Wen said: "[The state of the financial system] leads the nation’s economic development, social stability, and political security. Once a crisis is triggered, it will be out of control and catastrophic to the overall situation."

Two State Council Meetings on The Financial System

Since May 1, 2006, Wen Jiabao has called for two meetings on financial issues. The first was a State Council meeting to focus on the financial environment. Participants included representatives from the Ministry of Finance, the Central Bank, the China Banking Regulatory Commission, and the State Administration of Foreign Exchange. The second meeting focused on financial crises.

At the financial environment meeting, Wen said: "I am on alert all the time. We should not be too excited by the economic statistics, foreign exchange reserve figures, or reports on large-scale investment projects. By the same token, I also ask everyone not to allow the numbers, records, and positive reports to cause you to become too excited or even complacent."

Wen also said: "The central government’s macro-control policies have always been challenged and resisted by invisible forces that tend to take advantage of the policy so as to benefit themselves. As a result, the policies have not achieved the expected results. In some regions and industries, officials continue to work against the policies. This reflects the severe resistance to the implementation of laws and regulations. I am very concerned about our financial system, which is the leading force for economic development, social stability, and political security. If a financial crisis ever occurs, it will be catastrophic to the overall situation. No one will be able to handle the consequences."

Wen Has Three Worries

Wen says: "There are three issues that I worry about the most. The first is land, the lifeblood of villagers and farmers; the second is the living conditions of residents and migrant workers in urban areas, including housing, medication, and education; the third is the financial situation. Managing the financial system not only is a complex and profound science that involves knowledge of politics, the economy, and the social and international situation, but also the art of modern management. It is also a duty that requires loyal commitment and a sense of moral responsibility to the country."{mospagebreak}

Wen on Financial Crises

At the multiministry meeting on financial crises, Wen said: "Any trouble in our financial system could cost billions, tens of billions, even hundreds of billions. It could also trigger regional or national social unrest, the consequences of which would be beyond what any government agency or official could handle. There have always been problems in our financial system. There are old problems, new problems, and the complications that arise when old and new problems are intertwined. The most prominent and widespread problem is noncompliance with the central government’s policies. There are phenomena of localism and provincialism colluded with illegalities. Although I do not want to talk about such things, they are happening everyday, and the situation is deteriorating and spreading."

Wen said: "We ought to discipline ourselves with laws and regulations, but it seems that is not an easy task to accomplish." He also warned, "I am not afraid of the financial pressure from the international community; far more dreadful is that we ruin our own financial regulations."

Official and Internal Statistics On China’s Financial Health

The following are some financial data from official publications and internal sources from the end of April to mid-May 2006.

(1) From May 2001 to the end of March 2006, the Ministry of Finance has injected capital into the four state-owned commercial banks to eliminate their bad debts 15 times, for a total amount of 3.47 trillion yuan (US$434 billion). In the most recent two cases, 137 billion yuan (US$17 billion) was poured into the Bank of China in the beginning of April, and 85 billion yuan (US$17 billion) into the China Industrial and Commercial Bank at the beginning of May. The reason for the capital injections was that, by the end of May, the Bank of China had its IPO on the Hong Kong stock market, and the Industrial and Commercial Bank will be listed on the Hong Kong stock market by July or August.

(2) At the end of March, four state-owned banks reported bad debts of 2.35 trillion yuan (US$294 billion) in total. The Industrial and Commercial Bank reported 867 billion (US$108 billion); the Bank of China had 545 billion (US$68 billion); the China Construction Bank had 683 billion (US$85 billion); and the China Agriculture Bank reported 254 billion (US$32 billion).

(3) At the end of March, 150 local commercial banks reported 1.547 trillion yuan (US$193 billion) in bad debts. Among them, 52 banks are at the edge of bankruptcy and are being kept alive only by government capital.{mospagebreak}

(4) Three state-owned policy banks also reported 76 billion yuan (US$9.5 billion) in bad debts at the end of March. Among them, State Development Bank had 2.65 billion (US$331 million); the Agriculture Development Bank had 14.48 billion (US$1.8 billion); and the Import and Export Bank reported 59.28 billion (US$7.41 billion).

(5) By the end of April 2006, China’s foreign exchange reserve reached US$920 billion (US$115 billion).

(6) Total deposit in all financial institutions is 12.3 trillion yuan (US$1.54 trillion).

(7) Total amount of various bonds and notes is 2.1 trillion yuan (US$262.5 billion).

(8) Total cash in people’s hands is 2.2 to 2.5 trillion yuan (US$275-313 billion).

Bad Debt in Some Major Provinces

The following data are bad debts collected at the end of March:

  • Guangdong: 720 billion yuan (US$90 billion)
  • Zhejiang: 310 billion (US$38.75 billion)
  • Shandong: 190 billion (US$23.75 billion)
  • Jiangsu: 270 billion (US$33.75 billion)
  • Shanghai: 190 billion (US$23.75 billion)
  • Liaoning: 230 billion (US$28.75 billion)
  • Fujian: 120 billion (US$15 billion)
  • Heilongjiang: 150 billion (US$18.75 billion)
  • Henan: 87 billion (US$10.9 billion)
  • Hubei: 79 billion (US$9.9 billion)

Risks in the Financial System

According to a report by the Chinese Academy of Social Sciences, in case of a financial crisis or political unrest, China’s financial institutions could only handle 5 to 7 percent of the total withdrawal requests in the large and mid-size cities.

Translated by CHINASCOPE from