In the early 2000′s the Chinese government established corporations that bought the bad loans (called NPLs, or Non-performing Loans) of its Big 4 banks that had been trying to float the State Owned Enterprises (SOEs) during the 1990s. The AMCs bought the loans through a combination of cash and 10-year bonds, according to the Dragonomics blog. With ten years to recoup as much of the losses as possible, the loans only made up 4% of the government’s annual budget instead of the 20% that had been the case when the AMCs were created. The Chinese government will likely take the same approach to make up for losses from the RMB 2,200billion in loans to be dolled out during the 2008-2010 period that mark the most dramatic effects of the global economic downturn.

Dragonomics argues that the government will not be able to dole out such large sums again after 2020 as demographic pressures (the 1-2-4 problem) and a slowing GDP make rapid recovery of bad loans a third time around systemically hazardous to the country’s health. Serious reforms of the producitivity and governance of SOEs is paramount to stem the financing requirements of the SOEs a third time, as well as rationalization and transparency brought to the stock markets.

However, with an almost-certain global industrial boom by 2015 that will see an attendant spikes in the prices of oil, minerals and possibly even food, and deflationary pressure on property prices as China realizes it’s over-built (especially on the high-end residential and commercial markets), the government may find itself with an economy slowing sooner than the Dragonomics 2020 estimate. Likely, though, nepotism and unemployment concerns will reign, and the government will play the NPL card again without supporting reforms, and cross its fingers. 14 Nov 2009