Are China's Financial Reforms Leaving the Poor Behind - Harvard ...

espectively. In the following sections, we review the empirical evidence on changes ineach of these factors, highlighting differences between rich and poor areas. We thensummarize the relative importance of each factor in explaining changes in intermediationover time.Loan PerformanceNon-performing loans include three categories: overdue, inactive (overdue formore than 2 years), and dead (overdue for more than 3 years or confirmed for otherreasons to be unrecoverable). Most non-performing loans fall in the first category butnearly half fall in the two more delinquent categories. Overall, the share of outstandingloans that are overdue in the full sample rises from 17 percent in 1994 to 24 percent in1997 (Table 3). However, the overdue rates are substantially higher in poorerprovinces. 11In Sichuan, overdues increase from 25 to 32 percent, and in Shanxi, theyrise from 30 to 40 percent. In 1998, the percent of outstanding loans overdue stabilizes to28 percent in Sichuan but continues on an upward trajectory in Shanxi, reaching 48percent. Such repayment rates are financially unsustainable if banks are to remainsolvent without major infusions of outside capital. And they may understate the truemagnitude of the repayment problem if banks roll over loans through “evergreening” orotherwise conceal repayment problems (Lardy, 1998).These percentages of non-performing loans appear comparable to the 22 percentfigure cited by Lardy (1998) for China’s four large state-owned banks in 1995. We alsocan compare the overdue rates to those found in other surveys. The 1996 national village11 The full sample average reflects the greater number of financial institutions surveyed in the coastalprovinces and the greater amount of funds per financial institution.17