What Is a Non-Performing Asset?

Non-performing assets is a general concept. It is aimed at bad debts in accounting subjects. It mainly includes but is not limited to non-performing assets of banks, non-performing assets of governments, non-performing assets of securities, insurance and funds, and non-performing assets of enterprises. Financial companies are the source of bad assets.

Non-performing assets

Bank of China

Dealing with bank non-performing assets

I. State-owned banks' non-performing assets and government debt

It seems an indisputable fact that the bad debt of the Chinese banking system, especially the state-owned banking system, accounts for a high proportion of total bank loans ^[1] . We do not have accurate figures in this regard, and can only be estimated based on information from all aspects. In order to maximize the risk estimation and avoid underestimating the seriousness of the problem, the more serious one of the various estimates that has been used is to estimate that non-performing assets account for 25% of total bank loans.

State-owned enterprises are heavily in debt, of course, first of all because of institutional problems. Under the trinity of state-owned economic systems such as state-owned enterprises, state-owned banks, and government intervention, the "bad debt" owed to society by the state-owned economy as a whole will always occur in various forms (financial subsidies, triangular debt, wage arrears, junk stocks, junk Bonds, inflation, and so on, we will not analyze in detail here). But one of the specific reasons for this in the special form of bad bank debts is that, beginning in the 1980s, the Chinese government gradually transferred the financial responsibility of state finance to state-owned enterprises to banks. This is reflected in the following aspects:

1. Starting from the "allocation of loans", the government almost no longer invests capital in state-owned enterprises. The establishment and development of enterprises mainly rely on bank loans (of course, government approval is required), whether it is fixed capital or liquid capital. . Many of the so-called "state-owned enterprises" actually had no state financial input from the beginning.

2. When an enterprise loses money, the government almost no longer subsidizes the enterprise. Instead, the state-owned bank will extend its debt or add new debt. The reasons for the loss can be various, it can be poor management, it can also be a social burden (such as the state has taken away various labor insurance funds that should be left, etc.), or it can be a decision-making error of a superior (some companies simply It shouldn't be built), but as long as a loss occurs, the previous method of subsidizing financial contributions was changed to the method of additional bank loans, which is a basic direct reason for the increase in bad debts of banks.

That is to say, the bad debts of banks actually play the role of "fiscal subsidies". Establishing state-owned enterprises without state finances to inject capital and subsidies for it will result in a large number of non-performing assets in state-owned banks. This is the internal logic of the "trinity of the state-owned economy". When thinking about the relationship between state-owned enterprise liabilities and financial risks, we should link the issue of fiscal liabilities for a comprehensive review, treat bad debt of state-owned enterprises to banks as "quasi-government debt," and treat bad debt of state-owned enterprises with government debt Counted as "national debt". This analysis can first explain two aspects. On the one hand, why China has such a large state-owned economy and the government debt is particularly low (the government debt balance accounts for only about 8% of GDP); on the other hand, it is the Bank of China's The proportion of bad debt is particularly high.

What is clear here is that only the bank's "bad debt" constitutes part of the "national debt". Because only "bad debt" constitutes a burden on society and the government, it must be dealt with with some state power (taxation, national debt, currency issuance, international financing, etc.). As long as a company can still use its income to pay interest and pay off its principal, its liabilities do not form part of what we call "national debt."

In a more general sense, even if it is assumed that there is no state-owned economy, the "bad debt" that occurs between private companies and private banks has an "external effect" or "public nature" because the banking crisis caused by bad debts of banks, The financial crisis will have adverse consequences for the economic stability and economic development of the entire society. To solve this problem, it is usually necessary for the government to come forward and deal with public resources ("taxpayer's money"). The practical experience of other countries (such as the United States in the 1980s, current Japan, and South Korea, etc.) all show this truth. In any case, from the perspective of an economy as a whole, bad bank debt and government debt can also be regarded as a kind of debt burden on society as a whole. The increase in the number of them all means an increase in economic and financial risks.

To examine the problem from the perspective of an economy's ability to cope with the financial crisis, we also need to examine the relationship between bad bank debt and government debt. The bad debt ratio of banks is high. If the government debt ratio is also high, the government's ability to cope with risks will be poor. On the contrary, if the government debt is low, additional debts can be used to clear debts and stabilize the economy. The financial risk of a country depends not only on the health of the financial system itself, but also on the government's ability to cope with the crisis.

Foreign debt

Another factor to consider is external debt. The Chinese government borrows a small amount of foreign debt, which does not pose a problem and can even be ignored in the discussion. However, one of the lessons of the Southeast Asian financial crisis is that, although many foreign debts are commercial loans borrowed by the private sector, in the end they also become national debts, and the consequences must be borne by the state or the entire population. For China, this problem is even more serious. Because China s foreign debt, even if it is not borrowed by the government, is at least borrowed by state-owned enterprises and state-owned financial companies. If there is a problem, the government is responsible and all citizens are responsible. Therefore, from the perspective of national finance and debt situation, we may wish to calculate China's "all foreign debts" as government debts or national debts in order to estimate financial risks to the greatest extent. This debt accounts for about 14% of China's GDP.

Of course, a more detailed analysis method is only "short-term external debt", because in terms of risk, mainly short-term debt plays a role, triggering a payment crisis. If this is calculated, China's risks appear to be even smaller, because the proportion of short-term foreign debt to GDP is only about 1.5%. Even if more short-term external debt is not registered in some places (as revealed by the "Guangxin" incident), it will not exceed 3% at most, and the financial risk measured by this will be lower.

For an economy with an open capital market, the problem is more complicated, because foreign "securities investments" that are more liquid and can be quickly withdrawn from the market are also calculated. However, China does not yet have this problem, so it will not be discussed in this article. Please pay full attention to this point. The concepts of "national comprehensive liabilities" and "national comprehensive financial risks" proposed in this article are only relatively "integrated" and "comprehensive" for an economy like ours whose capital markets have not yet been fully opened, and are completely open to capital markets The economy of China needs to add more and more complicated factors. The international comparisons we make later are only comparing aspects that are comparable to China, and not including other aspects.

3. "National Comprehensive Debt Ratio"

The above three items, namely government debt, bad bank debt and all external debt, can be said to cover the main national debts that have occurred in an economy that may lead to the financial crisis, and some other potential and implicit government debts can be reduced to One of the above three items (such as the government's "pension fund" debt owed to employees of state-owned enterprises, which is actually happening in the form of bad corporate debt), or there are other counterparts in the economy (such as the government's The "fund" is owed and can be repaid by privatizing housing and auctioning some state-owned assets).

Putting the above three items together, we can get a concept of "national comprehensive debt ratio", which can be expressed in terms of quantity by the following formula:

This can be said to be a comprehensive index to measure a country's financial situation. It contains some major adverse factors that may cause macroeconomic fluctuations and financial turmoil in an economy where the capital account is not yet open.

Using this composite index, we can analyze the following issues.

(A) the size of the overall financial risk of the economy (international comparison)

Whether a country will experience an economic crisis depends on many economic, political, social and international factors. Even if an economic indicator is "comprehensive", it cannot be judged with absolute accuracy whether a country's economy is at risk of falling into crisis. However, the more "comprehensive" indicators are always better than single, one-sided indicators. Horizontal comparisons using this indicator are also more illustrative.

Compared with some other countries, China's economy is characterized by large bank bad debts, while government debt and external debt are relatively small. Therefore, although China's banking system has major problems, the country's comprehensive debt ratio is relatively low overall, only 47% at the end of 1997, and not more than 50% in 1998. If only China's short-term foreign debt is calculated, this indicator is even lower, only about 37%. This ratio was much higher in other Asian countries than in China at the end of 1997 (see Table 1). The European Monetary Union requires the member countries to achieve a government debt-to-GDP ratio standard of 60%; the same indicator in the United States has also been as high as 70% for a long time (please note that developed countries have fewer bad debts, and because the government does not interfere with bank credit activities, Governments with bad debts are also less responsible, so we only calculate government liabilities).

This can explain why the bad debt problem of the Chinese banking system is so serious that the problem may be greater than some other countries that have experienced financial crises, but they can still maintain economic stability, the economy can grow, and there is no threat of a financial crisis. The simple inference that simply predicts that China will soon fall into an economic crisis based on the fact that the Chinese banking system has more bad debts is not correct because it does not comprehensively analyze the overall economic burden of an economy. When people fail to predict in time that some countries in Southeast Asia will fall into an economic crisis, they only see a part of the debt indicators and lack a comprehensive perspective. For example, looking at government debt, South Korea and Thailand seemed to be doing well. However, if the non-government sector's bad bank debt and short-term external debt are added together for analysis, the conclusion will be very different.

(2) Macro policy choices

An analysis of the debt structure of a country's "National Comprehensive Liabilities" is conducive to the choice of our macro policies. At present, the Chinese economy is facing the problems of declining growth rate and insufficient aggregate demand, which requires the government to adopt expansionary macro policies. The question then is which of the various policy tools available is more appropriate and beneficial? Given other factors, from the structural analysis of "comprehensive debt", we can see that under the situation of China Economic Bank with large liabilities and small government debt, the biggest risk comes from bad bank debts. Therefore, it is currently more appropriate The policy mix is to maintain tight credit policies and make greater use of fiscal expansion policies, so as to continue to maintain the pressure of bank reform and corporate reform on the one hand, and strive to reduce the proportion of bad debt in banks, on the other hand, expand domestic demand and maintain economic growth .

As China s national comprehensive debt ratio is low, the government debt balance as a percentage of GDP is relatively low, and interest rates are still lower than the economic growth rate (see the analysis below), increasing some fiscal deficits in two to three years And government debt to ensure sustained economic growth, though inevitably? The National Comprehensive Debt Ratio and corresponding financial risks have increased, but on the premise that the problems of the economic system have not continued to deteriorate (instead, the reform efforts have been strengthened, including controlling bad bank debts and clearing out foreign bad debts). The policy will not cause serious problems and there will be no debt explosion. In other words, for China, there is still a certain margin for issuing debt.

From the perspective of the relationship between system reform and macro policies, if we can control the growth of bad debts of banks through reforms, our macro policies will have more room to operate, and we will be able to borrow more (both internal and external debt). Support economic growth.

4. Inflation and the "National Comprehensive Financial Risk Index"

Another factor to consider is inflation or deflation. Inflation is good for resolving bank debt and government debt problems (conversely, deflation is not good for resolving debt problems) because it can depreciate debt relatively and reduce our "national comprehensive debt ratio" due to an increase in denominator (inflation It can also be viewed as an implicit tax or fiscal surplus). However, inflation also increases financial risk in another way:

First, under the condition of fixed exchange rates, inflation has caused the currency to be overvalued and caused financial market fluctuations, as happened in some Southeast Asian countries in the past two years.

Second, in the case of inflation, it will be difficult for the government to use additional currency and debt to cope with the difficulties in the financial system and resolve the problem of excessive debt, not to mention that inflation itself will cause society, Political instability.

In order to also take into account the negative aspects of inflation, we further constructed the following "National Comprehensive Financial Risk Index" on the basis of the previous "National Comprehensive Debt Ratio":

Using this index for analysis, the current "deflation" is a disadvantage on the one hand, because it relatively appreciates the existing debt (because it causes the denominator "nominal GDP" to shrink), but on the other hand, it has Its positive impact, because it gives the government more room to issue additional debt and currency. In fact, this is equivalent to saying that the situation of deflation requires the government to adopt an expansionary policy, and at this time, the issue of additional debt to cause financial risk expansion is relatively small. The China National Comprehensive Financial Risk Index calculated by this formula was 47.95% at the end of 1998, which was lower than the country's comprehensive debt ratio of 50.53%, which shows this.

The above-mentioned "National Comprehensive Financial Risk Index" can be said to cover various factors related to macroeconomic fluctuations. There are not only inflation and government debt that people paid most attention to when analyzing macroeconomic problems in previous years, but also private sector debt (banking Debt and external debt). Through the observation and analysis of this index, we can control the macro financial risks of the entire economy in a timely manner. Of course, it must be recognized that any "index" only has the meaning of "index", it is only a reflection of some economic relations in the real situation, not all of them. It is impossible to fully and accurately indicate all the relationships, trend. With some indexes, we can better analyze reality, but no index can replace more comprehensive economic analysis.

The above analysis shows that China still has a certain "margin to issue" in order to adopt effective macroeconomic policies. What needs to be clear is that an important issue for the Chinese economy in the short term is how to maintain the momentum of economic growth. Therefore, expansionary macroeconomic policies are needed. Such expansionary policies are conducive to controlling financial risks in the short term; Obviously, no macro policy can substitute for system reform. Only reform can fundamentally reduce financial risks. It's just that this is a relationship at different levels, and we won't discuss it in one article.

V. How to eliminate bad debts of banks: The important problem lies only in controlling the increment and not in clearing the stock

The above analysis is just a "static" analysis. From a dynamic perspective, the financial risks associated with various debts and the development and evolution of such financial risks depend on other factors, the most important of which are the (debt) interest rate, the growth rate of bad debts and the economy Relationship of growth rates.

In order to analyze the problem more conveniently, and to discuss in depth the most "headache" problem for the Chinese economy, namely the bad bank debt, we will focus on the clean-up of the bad bank debt as an example to the debt in the dynamic process Financial risk issues are discussed. We might as well assume that all subsidies to state-owned enterprises are realized through bank bad debts. Assuming that the country's comprehensive liabilities only include bank bad debts, all the problems analyzed above must be solved by solving bank bad debts.

Let D stand for "bank bad debt"; take gd for the annual growth rate of bad debt, which is approximately the sum of the growth rate of the principal of the bad debt and the interest rate of the debt; The sum of the actual growth rate of GDP and the inflation rate; with B as the "bad debt / GDP ratio", t as the time (year), and 0 as the initial year, we have the following relationship:

In the dynamic process, when gd <g we have

The above relationship shows that given the potential growth rate of the economy, as long as the growth rate of bad debts is controlled to be lower than the economic growth rate, in the long run, the problem of bad debts will not tend to "explode", but will gradually Eased and gradually eliminated as the reform progresses.

This relationship has two important policy implications:

First, to solve the problem of bad debts, we must basically focus on controlling the increase, that is, we must focus on structural reforms to reduce the occurrence of bad debts in the future. Only when the growth of bad debts is controlled can the problem be solved and the dilemma be overcome, otherwise it will fall into a vicious circle and finally a financial crisis will occur. The reforms here are, first and foremost, the reforms of enterprises and the government, that is, the reform of the "spending money", otherwise the root of the bad debt problem will not be removed. Of course, the reform of banks is also very important. In the short term, we must first strengthen risk management and reduce bad debts as much as possible; in the medium and long term, we must fundamentally change the state-owned banks unified financial system and encourage non-state banks to Competition in the banking industry has further strengthened the control of risks in terms of property rights.

Second, "cleaning up existing bad debts" is not important. The existing stock of bad debts is money that has already been spent, and it will not be collected after cleaning up. However, no matter how large D0 is, it will be insignificant in the long-term economic growth process. In this case, instead of using government spending to clear bad debts, it is better to keep them on the balance sheet of enterprises and banks, but it is conducive to maintaining a "reform pressure" on enterprises and banks. Otherwise, the system has not changed, and it will pop up again after cleaning up today and tomorrow. Instead of cleaning up the existing bad debts, we will focus on controlling the increase, and the problem of stocks will be more easily resolved in the future.

From the above formula, we can see that as long as we control the growth rate of bad debt gd from today and make it lower than the economic growth rate g, no matter how large the initial bad debt D0 is, over time , Our bad debt rate will gradually decrease, and it will become easier and easier to handle.

What needs to be clear is that in strengthening the risk management of banks, the reduction of the "bad debt ratio" B should be the goal, not the absolute amount of bad debt reduction. And to ensure that the problem of bad debts does not worsen, the most fundamental thing is to ensure that the economic growth rate is higher than the growth rate of bad debts. This is why: first, institutional reforms are important (to ensure that the growth rate of bad debt is down), and second, economic growth is important (it makes the ratio of bad debts drop).

For further detailed analysis, we can also notice the other two implicit relationships in the above formula:

First, the "bad debt growth rate" gd contained in the "bad debt rate" numerator is approximately equal to the sum of the growth rate of the principal of the bad debt and the interest rate, which means the growth rate of the total debt and interest payments in the future. . The growth of bad debt principal is, of course, as low as possible, which depends on the reform of the system. And given the growth rate of bad debt, the lower the interest rate on debt, the smaller the risk caused by debt growth, and vice versa. This means that in the case of lower interest rates, in order to implement expansionary policies and increase some debt, the risk will be small.

Second, the "nominal GDP growth rate" contained in the denominator of the "bad debt rate" is (approximately) equal to the sum of the actual GDP growth rate and the inflation rate. This actually means that inflation is good for solving bad debt problems and deflation is bad for solving bad debt problems. It is conceivable that if we have a real GDP growth rate of 7% per year and inflation of 5%, our bad debts will depreciate by 12% each year; if there are so many bad debts, the reform will no longer increase the bad debts, 5 In the year, although we did not do anything to clear up bad debts, our bad debt ratio can still be reduced by 50% relatively. Recognizing this is instructive for us to clean up bad debt.