The Point Woman In China's War On Bad Banks

From her Shanghai base, Wu Xiaoling will lead the reformers

One of China's most respected and hard-nosed financial bureaucrats, Wu Xiaoling, 51, is suddenly being faCed with one of the most daunting jobs for a central banker anywhere on earth. Tapped in late November to run the People's Bank of China's powerful new regional branch in Shanghai that will open on Jan. 1, Wu is the spearhead of a long promised shakeup as the PBOC attempts to knock China's ailing banking system into shape (table) by functioning more like the U.S. Federal Reserve.

Wu, a career central banker who has worked in the PBOC for nearly 15 years, won her spurs--and the confidence of economic czar Zhu Rongji--by successfully cracking down on capital flight as deputy, and later head,of China's State Administration of Foreign Exchange. "Wu really made a name for herself there," says a Beijing-based Western economic analyst. "Zhu needs and wants people whom he can trust."

CAVING IN. Beijing is taking on the provincial nabobs who are partly to blame for strapping China's banking system with bad debts estimated at $250 billion, a quarter of gross domestic product. The PBOC's 31 provincial branches are being consolidated into 9 regional ones run by Beijing appointees such as Wu. Sub-branches of the PBOC, many of which piled up bad loans by caving in to local political pressures rather than sticking to commercial criteria for lending, will be axed, to around 130 from more than 300. "Beijing is taking back control from the provinces," says one Western banker.

Regaining control is the reason Wu is moving to the trenches in Shanghai. It is China's premier financial city, with ambitions to overtake rival Hong Kong. Besides, her branch will supervise banks in the dynamic economies of Zhejiang and Fujian provinces, which account for a seventh of bank deposits and loans. But streamlining the PBOC and appointing strong executives is no miracle cure. "We can't reform the banks without dealing with the root problem--our money-losing, state-owned enterprises," says Beijing University economist Song Guoqing. These businesses gobble up some 75% of loans in China, while accounting for just 30% of output. There is, too, a risk that Zhu and PBOC Governor Dai Xianglong may crimp the new regional bank governors' role, especially if China's slowing economy needs loose money to revive it.

All the same, Zhu and Dai had to do something after the Oct. 6 collapse of Guangdong International Trust & Investment Corp. It sank under the weight of an estimated $3.6 billion in bad loans. Wu and her future colleagues will have to stage a ferocious crackdown on errant financial institutions. As many as 70% of China's 240 investment trusts, for example, may need to be shuttered next year.

CREDIT RATINGS. Such policies will be coordinated through meetings, probably monthly, between the nine PBOC regional heads and Governor Dai. Among other key early plans is the adoption by June 1 of an internationally accepted system that rates loans into five categories of creditworthiness for domestic debt, from just two now. The new categories will be based on those used by regulators in the U.S., Britain, and Singapore. In addition, Chinese banks will have to declare loans as unrecoverable far faster than the present five years.

Although Beijing says foreign estimates of bad debts are overblown, it will start writing off some loans under the new system. Debt that cannot be immediately recovered "will be shifted to another company for it to manage," Dai announced at Wu's appointment ceremony. That could lead to creation of a U.S.-style Resolution Trust Corp. agency to sell off some remaining debt.

The PBOC shakeup isn't a quick fix for China's rotten banking system. This reform is going to take the best efforts of China's top technocrats--and even that may not be enough.