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Bank bailouts are incredibly expensive, but don't panic! In fact, you should expect more of them.
Regarding China's big four banks, the government probably needs to infuse capital more than once, suggests a senior industry analyst.
"Problems tend to be persistent. You cannot find a once-for-all cure to solve a legacy of problems with bad loans," Paul Coughlin, managing director of Standard & Poor's in Asia-Pacific, told China Business Weekly.
"It is just a warning to say you need to be realistic about bank bailouts."
Coughlin said the government must fully realize a one-time bank bailout may not solve bad-loan problems, as new problem loans will occur.
As Chinese banks are still in the early stage of entering new territories, introducing new products and improving their operations, it is possible they will encounter new problem loans.
Coughlin said Chinese banks are now undergoing a "learning experience, which is quite expensive."
The Chinese Government last year recapitalized two State-owned banks, the China Construction Bank (CCB) and the Bank of China (BOC), by injecting US$45 billion from the nation's foreign exchange reserves.
Now, the government is contemplating new bailout plans for the remainder of the Big Four - the Industrial Bank of China (ICBC), China's biggest lender, and the Agricultural Bank of China (ABC), which, of the Big Four, has the highest bad-loan ratio on its books.
Coughlin declined to predict when the recapitalization will be announced, but he said "we are expecting something to happen."
He estimated the capital needed for the possible recapitalization will be as much as US$60 billion.
That was mainly due to the fact the task of recapitalizing CCB and BOC was apparently easier, as those banks were smaller and their non-performing loan (NPL) ratios were lower.
But even with such a huge capital infusion, the bailouts will not be the end, even after the four State-owned banks restructure themselves and list in the equity markets.
Coughlin said the Chinese banks' profitability is not high enough to charge off all the problem loans accumulated in the past.
"Once you take in mind the new problem loans would also arise because of the new learning experience, you should expect a higher loss rate in Chinese banks, higher than the average," Coughlin said.
"That is true around the world ... Sometimes the government needs to bail out banks several times, according to previous experiences in other countries."
Chinese banks, he added, are greeting an amiable environment as they begin reforming themselves.
The general outlook for economic growth is rosy in the country, which is conducive to the reformation of banks.
The government is also more skilled at managing the economy than it was 10 years ago.
A report prepared by the National Bureau of Statistics indicates China's tax revenues realized a year-on-year growth of 25.7 per cent by the end of last year, to reach 2.57 trillion yuan (US$310 billion).
Given the sufficient fiscal income last year, there is enough leeway for the government to inject capital to the banks.
China's fiscal income is expected to continue growing this year, although the growth rate may slow due to new tax policies.
In accordance with China's commitments to the World Trade Organization, the nation will allow unfettered access for foreign banks to its domestic market by the end of 2006.
Many experts suggest China's big banks are already near the critical stage at which they must recapitalize themselves to survive the competition that will follow foreign banks into China.
Coughlin said the threat posed by foreign banks is "a bit overblown."
As for retail banking, for example, not many foreign banks are strong enough to launch a foray into China.
China is not the first country to open its market to foreign banks, he said.
In many countries, local banks can still establish a solid foothold even after foreign banks flood in.
Given their sprawling branch networks and rich local experiences, Chinese banks are capable of competing, Coughlin said.
"It is a bit like the small fish that can swim well in a big pond, but the big fish is not good in small pond," said Coughlin.
"There are reasons to be optimistic."
But, Coughlin also warned, "Don't expect smooth sailing ... there are still many challenges.
"I don't think, in five years time, the pattern of China's banking industry will be significantly different from that in other countries.
"But it just takes time for Chinese banks to build up their strength and improve profitability."
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