Fina 331 Project-banking In Mainland China

Banking in Mainland China

Damien VIGNES, Amber Pan Hui, Paula Sun Jin, Rachel Guan Xinyue

Interesting Figures

Participants: Banks: Stated-owned banks Big Four Banks Policy banks Joint Stock Banks Private-owned banks Foreign banks others Regulators: PROC CBRC

The “Big Four” state-owned Banks •

The Bank of China (BOC) • • • • It was listed to

•

Foreign-exchange transaction Trading finance Setting exchange rates for China's currency Allocating the country's foreign exchange reserves the HK stock exchange in 2002.

The China Construction Bank (CCB) • Medium and long term credit Helps financing infrastructure projects /housing development

State-owned Banks – The “Big Four” • The Agricultural Bank of China (ABC) • Help for financial operations in the rural areas • Wholesale and retail banking services to customers

• The Industrial and Commercial Bank of China (ICBC) • Foreign exchange business • RMB clearing business

The Policy Banks • •

Financing the economy trade development Tackling state invested projects

3 main Policy banks:

The Agricultural Development Bank of China (ADBC) • Provide many different loans for rural development projects The China Development Bank (CDB) • Promoting coordination in regional development • Restructuring key industries The Export-Import Bank of China (CHEXIM) • Trade financing • Overseas loans making • Credit offering for export activities

Foreign Banks • Couldn’t open branches • Could Only expand by partnering with Chinese banks • Own a Maximum of 20% of a Chinese bank (HSBC and Bank of Shanghai)

Source: CBRC website

Stock Exchange

The Shanghai Stock Exchange (1990) • • •

The first Chinese stock exchange The 5th largest in the world Market capitalization: US$3.02 trillion (in 2007)

• The Shenzhen Stock Exchange

• People’s Bank of China – Central Bank

• The China Banking Regulatory Commission 

Regulators – POBC •

At the foundation of the banking system in China

• The officials: o Appointed by the government o The term of officials > 5 years Duties: Formulates and implements monetary policy Manages official foreign exchange and gold reserve Oversees the state administration of foreign exchange (SAFE) o Responsible for setting the foreign exchange policies o Full autonomy in applying the monetary instruments • o o o

Regulators – CBRC • Supervisory role • Formulate supervisory rules and regulation governing the bank institution • Enhance supervisory transparency in line with international standard • Focus on macro economy and currency policy • Enhance international competitiveness of the Chinese bank sector • Promote financial stability

Unique Features of Banks • • • • • • • •

Close-market  Protection Close-market  Restriction on FX Close-market  Interest rate policy State-owned bank Limited financial services Commercial banks and IB are separated No deposit insurance Culture – Customer Habits

• Bank-dominated intermediation • Bank loan remain the primary funding sources for Chinese enterprises

Source: Reserve Bank of New Zealand January 2007

Strong deposit Base: The consolidated balance sheet of Chinese banks as of end 2007

Source: People’s bank of China 2007

• Net interest income is the single largest component (>75%) • Non-interest income remains at a low proportion (<25%)

Private banking?? Financial Advisory?? Syndicated loan??

• Credit growth does not support earning growth • Weak asset quality and capital adequacy

• Credit Risk • Market Risk • Other Risks – Increased competition – Alternative funding sources

• Basel II

• Credit Risk – Large networks to manage – Poor borrower disclosure and accounting – Lack of a deep and experienced professionals

• Market Risk – More flexible Interest and exchange rates – Overseas investment portfolio

• Implementation of Basel I at end of 2006 • Schedule for Basel II implementation • Key Challenges – Absence of robust historical (and to some extent even current) data – Lack of technical skills and resources to supervise IRB banks

Domestic Banks • Strengthening bank balance sheets • Using commercial lending criteria • Strengthening SOE finances and management – Improving governance

• loans must be made against collateral • banks must assess borrower creditworthiness, • loans to a single borrower must not exceed 10% of bank capital • individuals and nonbank organizations may not interfere in bank operations • Commercial banks may not give unsecured loans to related parties or provide secured loans on preferential terms

• Large SOEs :commercial practices Small SOEs: Privatized. • Restructuring SOEs: • Close or merge unprofitable SOEs: nearly $10 billion in 2002 • In 2001 460 SOEs  shut down $6 billion in NPLs  written off

• Chinese firms and banks are listing their shares, exposing them to market discipline

Foreign Banks • Operation Licenses • Foreign Exchange Business of Foreign Banks • Outlets in the Same City • Renminbi Business of Foreign Banks • Car Loan Services • Financial Leasing Business