China: November 28, 2003


China is bailing out its nearly-insolvent state-run banks again. Estimates of the assets involved in non-performing loans are officially stated to be 23 percent, or two trillion yuan (slightly over $240 billion). Economists put the figure higher, at about 40 percent, raising the shortfall to about three and a half trillion yuan (slightly over $420 billion). Thats a lot of money, and it will put a pretty big dent their foreign-exchange reserves. While they have a large trade surplus with the United States, which will help cushion the blow, the Chinese have sold missile technology to countries like Iran and Pakistan in the past, and even sold Saudi Arabia intermediate-range missiles. They could repeat that pattern, selling arms for hard currency to countries looking for weapons. Most likely, the funds for the bailout will come from other areas of the budget, which includes the PLA. The cash crunch created by this expenditure will also limit options in dealing with Taiwan. Fighting a war costs money, and that will be in shorter supply because of the massive amounts of money needed. The Chinese will also have to try to take Taiwan without doing too much damage. The need to make up for the huge expenditures will also cut funds for other items, including maintenance and training, which will only make it harder for their forces to perform efficiently and will increase losses due to accidents losses that will be difficult to make up when money is short. -- Harold C. Hutchison


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