China's Banks Threatened by Shifting LandscapeIf China's new leaders hope to put the nation on a more sustainable growth path, they may need to make big banks friendlier to borrowers like Lin Jiexiong.
The executive at Guangdong Liantai Group Co., a private construction company in the southern Chinese city of Shenzhen, complains that credit is too hard to come by for a private business such as his. China's big banks, he says, favor large state-controlled companies and face little pressure to compete for his business.
'Compared to state-owned companies, it's usually harder for us to get loans, and the interest rates we pay are relatively high,' he said.
A Communist Party Congress meeting this week will select a new group of leaders for the world's No. 2 economy. A key task: rebalancing the Chinese economy away from bank-fueled investment that has enriched banks and state-owned enterprises, and toward consumption, which would benefit households and job-creating private companies.
If that agenda gains traction, it will require a revolution in China's banking system, one that for the past decade has largely relied on a government-controlled interest-rate regime. China's central bank sets a floor on lending rates and a ceiling on deposit rates, allowing banks to live off a guaranteed spread between the two.
Critics say the interest-rate controls shield banks from pressure to compete for business, hurting smaller borrowers, and that the controls penalize the depositors that Beijing hopes will become more-active consumers. China's four biggest banks reported a combined third-quarter profit of 190 billion yuan ($30 billion), almost triple the amount made by the top four U.S. banks.
A shift away from that model 'poses huge challenges to commercial banks including our bank,' said Wang Hongzhang, chairman of China Construction Bank Corp., China's second-largest bank by assets, at a news briefing on Sunday on the sidelines of the Communist Party's 18th Party Congress. Mr. Wang said the bank will try to adapt to the new banking order by diversifying into credit cards, insurance, commodities trading and other fee-based businesses.
Still, experts say incoming leaders may lack the political will to carry out overhauls that could hurt profitability at large banks. China's biggest banks are politically connected and often used to fund Beijing's policy decisions.
'Interest-rate liberalization is a process that will take a while,' Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank, said at the briefing. 'Recently, the pace has picked up.'
The stakes are high. The experiences of other countries show that if this process is botched, it can derail economic growth. Economists sometimes trace financial crises in countries─including the U.S. savings-and-loan collapse in the 1980s─to mishandled interest-rate liberalization. Allowing banks the discretion to decide for themselves how much to pay for deposits can set off frenzied competition to attract savers, which can cause lending standards to be weakened as banks' costs rise and they feel pressure to lend out the new deposits.
In China, bank lending accounts for 56% of the external financing for the corporate sector, compared with 43% in the U.S. and 41% in Brazil, according to ChinaScope Financial, a data firm partly owned by Moody's Corp. MCO -0.24% A tiny 4% of capital raised by Chinese companies comes from the stock market and 13% from bonds.
Beijing is already making some moves toward shaking up the banking sector. The central bank cut its benchmark rates twice this year, in June and July, and gave banks extra leeway to set their own lending and deposit rates. The moves, which analysts say represent a step toward dismantling the rigid interest-rate system, have started to prod Chinese banks to adjust their businesses in light of the potential for much slower profit growth and greater competition.
The rate cuts in July brought the one-year benchmark lending rate down to 6% and the one-year benchmark deposit rate to 3%. Many banks have set deposit rates at slightly above that benchmark rate, as is allowed by the central bank. But they have been slower to cut lending rates as much as is permitted.
As the changes narrow bank lending margins, 'commercial banks have to think about how to transform their business models to stay profitable,' said Ding Baohua, a senior executive at China Bohai Bank Co., a large national bank that is 20% owned by U.K.-based Standard Chartered PLC. STAN.LN -0.55%
The moves could have unexpected ramifications. Banks could put greater emphasis on already proliferating instruments known as wealth-management products, or short-term investments the banks market as low-risk alternatives to deposits but which offer a higher return. The products have become valuable to banks in the race for deposits, but extreme competition among banks is pushing up the returns they must offer, leading banks to increasingly package risky assets like property or corporate loans into those products.
For the big four banks─CCB, Bank of China Ltd., Agricultural Bank of China Ltd. 601288.SH +0.39% and Industrial & Commercial Bank of China Ltd., 601398.SH +0.26% China's No. 1 bank by assets─a shift to a more consumption-driven economy and the parallel financial overhauls would amount to a test of their credit and capital resilience over the next few years. 'They will find it tougher to maintain adequate profits as the economy slows and credit losses spiral up,' said Standard & Poor's analyst Liao Qiang.
Banks more broadly already face potential credit risks as the economy slows from its torrid pace of growth in the past decade. Problematic loans at the country's top 50 banks have been piling up, accounting for 3% of total loans as of the end of June, according to S&P. In the third quarter, the big four banks increased their provisions against bad loans.
The biggest shock, though, likely will be for smaller banks because of their high concentration of riskier loans such as those to property developers. In this sector, a wave of consolidation may be in the cards as credit quality worsens, Mr. Liao said.
Some small banks have sought to differentiate themselves from their bigger brethren by increasingly targeting the private sector. 'Our focus is not on getting big, but on finding niche markets in small and medium-sized enterprises, private businesses and high-net-worth clients,' Liang Yutang, vice chairman of major lender China Minsheng Banking Corp., 600016.SH +0.16% said at a recent banking forum in Beijing.
Source: The Wall Street Journal
As long as the major banks remain totally state owned that's all that matters.
Allowing foreign investment in a privatized banking system would worse than a nuclear attack.
China would be thrown back into the dark ages with foreigners quickly making claims on all of China.
If the new administration accomplishes nothing else, they should keep the banks and major
industrial enterprises state owned. That has been at the core of China's success in the past and
its success going forward.
Barbarians from offshore will never stop trying to steal China from the Chinese people.
Allowing privatization of banks is the greedy foreigners fondest wish.
China will never allow that to happen. :victory: The little fish always have to make the biggest adjustments before they are eaten by the bigger fish.