Economy
Chinese Economy and its Banking Sector Updates
By Henry Yu. Posted June 2, 2008
The Chinese economy did not register in the top 10 ranking in the world’s GDP growth list thirty years ago. By 2007, China has registered a very impressive 11.4% economic growth, making China the world’s number 3 most important trading nation. The first phase of China’s economic growth mirrored that of the 4 Asian Tigers (Hong Kong, Taiwan, Singapore, and South Korea) in the 1980s when China took advantage of its abundance of cheap labor by concentrating on exports of labor-intensive goods. Economic activities have been heavily concentrated in 3 key regions-the Pearl River delta, the Yangtze River delta, and the Bohai-ring in the north. The first phase of economic growth was dominated by State Owned Enterprises (SOEs). Privatization of SOEs started in mid and late 1980s. Private sector has taken over in early 1990s as the main engines of growth during the second phase of economic growth. During this period, FDI (foreign direct investments) in the forms of joint ventures (and later wholly-owned subsidiaries as allowed by Chinese government) have provided China with technology required to move away from labor-intensive industries. Not surprisingly, China has developed strong expertise and technical know-how in industries such as pharmaceutical, steel, energy and bio-technology, etc. The third and recent phase of economic growth started in early 2000 and in particular after China’s accession to WTO in 2005.
China has been capturing headlines and noticeable performances since 2006 in terms of trade, investments, friction (product safety, trade disputes, etc) and the 2008 Olympics. Clearly, the world is paying attention to China as during the third phase, China really has developed into a multi-faceted economy with strong growth coming from various sectors-service, manufacturing, tourism, banking and finance, trade, coupled with substantial infrastructural projects. As China imports more than it exports (recently China still exports 30% more than it exports), trade friction with USA is a major issue for the authorities. For the first time, service sector accounted for about 50% of China’s GDP in 2007 and the trend is to continue its substantial growth due to increasing domestic consumption and China’s moving up the value-added chain. Since early 2000s, China has been moving its manufacturing bases to cheaper labor in Southeast Asia (noticeably in Vietnam). In addition, China is changing the world’s major Trading Blocs as and when the Asian pie is growing at close to double digit rates. Case in point, China/India trade was less than $5 billion 10 years ago and in 2007, 2-way India/China trade was slightly less than $30B. The same can be said for Latin and South America when trade has taken off since early 2000s. China’s trade with Africa and Middle East has also seen noticeable growth. Simply said, the 1800s and 1900s trading blocs of USA/Europe/Japan has been shifted in favor of China-led Asia/USA/EU/Middle East and Africa. Furthermore, for local Chinese companies to survive in their domestic markets, they have to go abroad via setting up of offices and manufacturing plants closer to their customers. Such a move will also make it easier for the Chinese companies to tap into financing in the West and to improve managerial skills, Human Resources skills, Branding and marketing. Chinese are already major investors in Africa, Middle East, and Latin America.
Though Chinese government has been controlling its over-heated economy in 2007 and 2008 via very tight monetary policy, authorities are facing up to many different challenges. Financial markets are underestimating not only the speed and pace of changes within China, but also the policy challenges ahead. The US sub-prime crisis certainly reduced confidence of Chinese stock markets. The Shanghai Index dropped about 50% from its high in October of 2007 to recent level of 2,780. As the private sector continues to grow, and as the regions seek to develop their own local economies, policy makers in Beijing are likely to find it harder to control the economy, particular with the limited policy tools that are available. In 2008, China is experiencing greater volatility in the economy. The Sichuan earthquake and the flood in southern region have contributed to higher inflation and to a smaller extent, a drag to the economy. Policy focus is to be on curbing inflation (currently growing at over 8% pace) and maintaining financial stability. While the pace of the local currency appreciation is likely to be of secondary importance, stronger CNY is likely to support the authorities’ overall aims.
Chinese Banking Sector
There was no Asian bank listed among the world’s Top 10 largest banks ranking ten years ago. By May 2008, ICBC has established itself as the largest bank in the world in market capitalization of USD278 billion! As a matter of fact, at May 8, 2008, 3 of the Top 5 banks are Chinese (others being China Construction Bank #2, Bank of China #4).
China’s banking sector has made significant progress since the launch of economic reforms and “opening up” in 1980. Generally speaking, the planned reforms and restructuring of banking industry has been well under way for the past several years. Some of the more profound changes include: the significant strengthening of banking supervision, ownership diversification, corporate governance reform, and a consistent and vigorous focus on risk management and internal controls. The “opening up” policy has already benefited the overall vitality of the banking sector with an accelerated pace of reform and improved global competitiveness. Total banking sector assets exceeded $6.5 Billion:
* 14 joint stock commercial banks and 114 city commercial banks
* 3 policy banks owned by the government support various industries
* Non-performing loans have been reduced from 40-45% level to 2-8% range in 2007
* Over 29,000 credit cooperatives operating in China
Foreign investments in local banks:
* Over 20 banks had been granted local banking licenses in 2007, with the first group being Citibank, HSBC, Standard Chartered Bank and Bank of East Asia
* Since early 2000s, foreign banks have been acquiring equity interests (20% maximum under current law and 25% for group of financial institutions) of local banks
* They include HSBC, Bank of America, Royal Bank of Scotland, Deutsche Bank, Scotia Bank, Standard Chartered Bank, Citibank, Goldman Sachs, AE Bank, ING Bank, ANZ, Commonwealth Bank of Australia, etc
* Big 5 (ICBC, Bank of China, China Construction Bank, China Agriculture Bank and Bank of Communications) accounted for about 57% of total banking system assets
Banking Regulatory Environment
To strengthen China’s banking regulatory and supervisory framework, China Banking Regulatory Commission (CBRC) was set up in April of 2003 to assume supervisory responsibility from People’s Bank of China (Central bank), which until then held dual responsibility for both monetary policy and banking system supervision. Along the same reasons, CSRC (China Security Regulatory Commission) and CIRC (China Insurance Regulatory Commission) were also set up in 2003.
Local companies have been relying heavily on bank financing as the corporate bond market is not fully developed. Tightening monetary policy (reserve deposit ratio was increased 6 times this years to 17.5% currently) and loan reduction guidelines has made it difficult for local companies to obtain financing since the 4th quarter of 2007. On quarterly basis, CBRC has requested both local and foreign banks to reduce their loan outstanding (10-15% range) as a way to prevent banks from excessive lending, in particular to Real Estate and property lending. Recently, local banks have been given permission to invest their customers’ money in US stocks and mutual funds to provide diversification and options for investors. Changes in local security laws since late 2007 also make it easier for local companies to obtain financing from local and foreign banks using short term assets as collateral. Though it is intense competition in China, many banks (local and foreign banks) recorded substantial growth in earnings in 2007 (30-60% increases are not uncommon). With the Chinese banks having cleaned up their balance sheets, they are in a very good position to acquire foreign banks outside of China to allow them to grow their international exposures and to reduce concentration in terms of geography and product offerings. Recent examples include a Chinese bank buying minority interest in United Commercial Bank in California (UCB acquired National Summit Bank in Atlanta a couple years ago), another local bank buying equity interest in an Africa bank, and another local bank buying majority interest in Commercial Bank of Hong Kong.
This article is contributed by former Atlanta resident Henry Yu who is currently a Director of Standard Chartered Bank, Shanghai, China.