The liberty to determine interest rates for foreign currency denominated loans and deposits, which used to be enjoyed solely by foreign banks, was already granted to Chinese banks. In due time, the favorable 15 percent income tax rate that foreign banks currently enjoy in their foreign currency business may also be raised to 33 percent to match those of their local counterparts. We hope the Chinese government will reduce the tax burden on banks in the process of unifying tax rates for foreign and local banks. As a result, loan growth declined dramatically from 24 percent in 1996 to 14 percent in 1999. Deposits have grown more rapidly than loans in recent years, leaving Chinese banks with excess liquidity and prompting the fear that capital is being trapped in the banking system instead of being allocated to productive use in the economy.
Foreign banks have similarly tightened lending standards.
They have also experienced a sharp drop in demand for foreign currency loans. As a result, the assets of foreign bank branches in China are declining. At the end of August 2000, the four AMCs had taken up about RMB1.3 trillion of bad loans from the four state-commercial banks. According to PBOC estimates, the proportion of nonperforming loans at the four banks were thus reduced to less than 20 percent, from 25 percent in 1999. Such a level of nonperforming loans is still high by international standards, which has caused some foreign observers to question the capital adequacy of the four main state-owned banks.