Sir, Your editorial “China's banks return to old ways” (August 2) criticises China's banks on the grounds that “they face default on Rmb1,550bn [$229bn] of loans indirectly made to local governments – one-fifth of the total lent. These figures are a sobering reminder that, for all the progress made in recent years, the transformation of the Chinese banking sector is still far from complete ... As it happens, the banks appear to have got off relatively lightly ... That should not distract from the fact that a sectoral default rate of 20 per cent is devastating for any profit-driven bank.”
These figures would seem, on the contrary, to suggest that China's banks were responsibly run compared with their private sector counterparts in the US and Europe. The latter did not face default rates of 20 per cent on one sector of their loans but, as shown in the unfolding of the international financial crisis, their balance sheets as a whole were insolvent.
Your editorial adds: “The fact that part of the [Chinese] banking sector is now privately owned is also significant. While the government will come to the rescue of distressed major banks, it is not clear how long investors will be happy to subsidise public projects.” In reality, private entities have aided banks in all countries since the onset of the financial crisis, and they have merely done so in different forms – taxpayers are also private. It might seem preferable to many that private entities should subsidise public projects, as has occurred in China, than that private entities should compulsorily, through taxes, subsidise private projects – as has occurred with the rescue packages for private banks in the US and Europe.