China‘s Banking Sector

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China‘s Banking Sector

Old Problems Overcome – New Problems Ahead

Conference on European Economic Integration (CEEI) 2011

“European Integration in a Global Economic Setting – China, Russia and CESEE”

Vienna, 22 November 2011 Markus Taube

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Storyline

I. State of the Chinese Economy II. Banking Sector Development

III. Risk Assessment: The Real Estate „Bubble“

IV. Shadow Banking V. The Way Ahead

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Storyline

I. State of the Chinese Economy

II. Banking Sector Development

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Slowing but still strong growth

Contribution to GDP growth

%, annual average

10,610,1

9,0

6,8 6,2 7,9

9,1 10,7

11,5 10,3

9,2

9,8 9,7 9,5 9,1

0 2 4 6 8 10 12 14

1. Q 2008

2. Q 2008

3. Q 2008

4. Q 2008

1. Q 2009

2. Q 2009

3. Q 2009

4. Q 2009

1. Q 2010

2. Q 2010

3. Q 2010

4. Q 2010

1. Q 2011

2. Q 2011

3. Q 2011

GDP growth

%, quarterly, yoy

NBS 2011, IMF 2011

(5)

Private investors are back

Fixed Asset Investment, yoy growth

IMF 2011

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Strong exports and increasingly dynamic import activity

Trade Development, monthly, US$ billion

IMF 2011

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-4 -2 0 2 4 6 8 10

01.01.2007 01.04.2007 01.07.2007 01.10.2007 01.01.2008 01.04.2008 01.07.2008 01.10.2008 01.01.2009 01.04.2009 01.07.2009 01.10.2009 01.01.2010 01.04.2010 01.07.2010 01.10.2010 01.01.2011 01.04.2011 01.07.2011 01.10.2011

Overall CPI y-o-y Urban CPI y-o-y Rural CPI y-o-y

Inflation is coming down

NBS 2011 CCB Int‘l 2011

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Money supply and formal sector loans back to normal

0 5 10 15 20 25 30 35

01.01.2007 01.04.2007 01.07.2007 01.10.2007 01.01.2008 01.04.2008 01.07.2008 01.10.2008 01.01.2009 01.04.2009 01.07.2009 01.10.2009 01.01.2010 01.04.2010 01.07.2010 01.10.2010 01.01.2011 01.04.2011 01.07.2011 01.10.2011

M2^{, yoy}

0%

5%

10%

15%

20%

25%

30%

35%

40%

0 10000 20000 30000 40000 50000 60000

01.01.2007 01.04.2007 01.07.2007 01.10.2007 01.01.2008 01.04.2008 01.07.2008 01.10.2008 01.01.2009 01.04.2009 01.07.2009 01.10.2009 01.01.2010 01.04.2010 01.07.2010 01.10.2010 01.01.2011 01.04.2011 01.07.2011 01.10.2011

Mrd. Yuan

Total loans Change y-o-y

RMB loans

of financial institutions

CBRC 2011 Bloomberg 2011

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Storyline

I. State of the Chinese Economy II. Banking Sector Development

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China‘s banking system

Increasing diversity,

but still dominated by the big-4

IMF 2011

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The ‘old’ problems are gone

The problem of NPLs appears to have been overcome

– and it remains an SOCB issue.

0 2 4 6 8 10 12 14 16 18

01.03.2004 01.06.2004 01.09.2004 01.12.2004 01.03.2005 01.06.2005 01.09.2005 01.12.2005 01.03.2006 01.06.2006 01.09.2006 01.12.2006 01.03.2007 01.06.2007 01.09.2007 01.12.2007 01.03.2008 01.06.2008 01.09.2008 01.12.2008 01.03.2009 01.06.2009 01.09.2009 01.12.2009 01.03.2010 01.06.2010 01.09.2010 01.12.2010 01.03.2011 01.06.2011

NPL ratio in %

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 500 1000 1500 2000 2500

01.03.2004 01.06.2004 01.09.2004 01.12.2004 01.03.2005 01.06.2005 01.09.2005 01.12.2005 01.03.2006 01.06.2006 01.09.2006 01.12.2006 01.03.2007 01.06.2007 01.09.2007 01.12.2007 01.03.2008 01.06.2008 01.09.2008 01.12.2008 01.03.2009 01.06.2009 01.09.2009 01.12.2009 01.03.2010 01.06.2010 01.09.2010 01.12.2010 01.03.2011 01.06.2011

Mrd. Yuan

Total NPL (right) Share of SOCBs (left)

Total NPL and share of SOCB

(left) (right)

CBRC 2011 Bloomberg 2011

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Substantially strengthend, impressive crisis resistance

Thanks to the substantial decline of their NPL burden as well as strengthend equity capital positions all banks would withstand a NPL-quadrupling crisis upholding capital adequacy ratios of more than the required 8%.

IMF 2011

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Post-crisis tightened monetary policy

With inflation coming down and GDP growth slowing down China‘s monetary policy may have reached a turning point allowing for a loosening of policies in the next months

– liquidity spillovers in the informal sector are to be prevented CBRC 2011 IMF 2011

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Storyline

III. Risk Assessment: The Real Estate „Bubble“

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A bubble?

Residential housing

100 = Dec 2006, sa

Housing affordability

Price-to-income ratio

IMF 2011

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Local bubbles

Property Prices

1000 Y RMB,/s.qm., sa, 3mma

Commercial Real Estate

1000 Y RMB,/s.qm.

IMF 2011

(17)

Banking sector exposure

Real Estate Lending

quarterly

IMF 2011

Mortgage Loans

yearly

Hovering on a high plateau ,

formal sector (!) real estate lending has recently leveled off.

Informal inflows in the sector are understood to have remained high.

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Fighting fire with fire – and more …

Social housing in the 12th 5YP:

Construction respectively renovation of 35 million housing units Provision of social housing for 20% of urban population from 7%

end of 2010

35% of all housing construction starts in 2011 based on government housing initiatives

Additional measures:

− Increased downpayment-requirements for mortgage loans

− Higher interest rates (in general and depending on type of investment)

− Restrictive authorization procedures for purchase of 2^ndand 3^rd apartments

− Restrictive authorization of purchase requests by non-locals

− Real estate tax (pilot project in Shanghai und Chongqing)

− Charging of business tax for real estate resold during first 5 years after purchase

− Binding commitment of local governments to enforce price targets

(maximum price increases per year coupled to disposable income development)

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Storyline

IV. Shadow Banking V. The Way Ahead

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Global Financial

System

Transaction- based

Chinese Informal

Lending Channels Chinese Formal

Financial System

Transaction- based

Additional dimension of financial interaction – May serve as back-up in case of formal dis-intermediation (liquidity crunch)

Better equipped to serve the specific finance requirements of the Chinese

‚start-up economy‘ (!?)

More than there seems to be

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Negative real interest on savings accounts

1-year household savings deposit rate

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5

18.08.2006 18.11.2006 18.02.2007 18.05.2007 18.08.2007 18.11.2007 18.02.2008 18.05.2008 18.08.2008 18.11.2008 18.02.2009 18.05.2009 18.08.2009 18.11.2009 18.02.2010 18.05.2010 18.08.2010 18.11.2010 18.02.2011

-4 -2 0 2 4 6 8 10

01.01.2007 01.04.2007 01.07.2007 01.10.2007 01.01.2008 01.04.2008 01.07.2008 01.10.2008 01.01.2009 01.04.2009 01.07.2009 01.10.2009 01.01.2010 01.04.2010 01.07.2010 01.10.2010 01.01.2011 01.04.2011 01.07.2011 01.10.2011

CPI – overall

Negative real interest rates

on savings accounts in the formal sector continue to drive savers into the

(informal) shadow banking sector, draining the formal financial system of resources

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The ‘formal‘ shadow banking sector

Trillion Y RMB

PBOC 2011 China Economic Watch 2011

*

“Social Finance”-Concept of NBS, * No shadow banking

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The informal dimension of Chinese banking

hard information soft information

third party enforcement

‘Transaction-based lending’.

Standard object of analysis in the law, finance & growth literature.

Standardized information regime combined with highly formalized universalistic legal system.

History (reputation) plays is – in principle – of no importance.

‘Relationship lending’ of the law, finance

& growth literature. The evaluation of potential financial transactions is primarily based on information gathered by informal institutional arrangements

(-> History rules!). Ensuing financial transaction are embedded in formal justiciable contractual relations.

second party enforcement

Requires close relationship between transaction partners in order to facilitate property rights enforcement inside a social network and without recourse to an external ‘umpire’. Given this close relationship hard information can be expected to be systemically less important than soft information for most financial transactions.

-> Low empirical value: hostage giving, pawnbroker

Obstacles to co-operation like adverse selection and ex-post opportunism, i.e.

property rights enforcement, are solved by informal mechanisms, first of all social networks based on particu- laristic ordering regimes. Information required to make financing decisions is gathered in non-standardized form in the context of the underlying social network by means of frequent and multiplex interaction.

-> History rules!

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Specific forms of China’s ‘shadow banking sector’

‘Formal’ Shadow Banking

− Off-balance-sheet lending

− Special Purpose Vehicle lending

− Direct company-to-company lending

− Trust companies / Wealth management organizations

− Leasing companies

− Regulated pawnshops

− Loan guarantee companies

− Small loan companies / microfinance organizations

− Offshore borrowing

− Private equity organizations

‘Informal’ Financial Intermediation

− Underground banks

− Private money houses

− Associations for mutual assistance

− Rotating savings and credit corporations (ROSCA)

− Private peer-to-peer lending

− Unregulated pawnshops

− Unauthorized offshore borrowing

Total volume of ‘formal’ plus ‘informal’

shadow banking unknown,

but probably in the range of a minimum 20 trillion annual flow.

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Storyline

IV. Shadow Banking V. The Way Ahead

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Three major issues to look at

Property bubble

Are government policies adequate and can they be fast enough to deflate local bubbles

Political economy

Can the reform momentum be upheld in the run up to China’s leadership change in 2012/13 Shadow banking

Government must separately address two types of shadow banking

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University of Duisburg-Essen Mercator School of Management

IN-EAST, Institute for East Asian Studies Chair for the East Asian Economy / China Prof. Dr. Markus Taube

[email protected]