Tuesday, October 14, 2003
Andy Collier, of SCMP, also asked me about his article on Xia Bin (attached below), the State Council's expert on banking reform. Wow, I really wasted a lot of time today. My comment was this:
On Xia Bin's comment, I think he is both right and wrong. He is right in that ownership restructuring will not help bank performance. Some of the joint stock banks have a lot of NPL, although they are only partially owned by the state and are much newer. In fact, I am doing a study comparing the credit risks of the different types of banks. We find that city commercial banks, which are also joint-stock banks, perform the worst out of all the different types of banks. I suspect that part of the reason why city commercial banks do so terribly is that they are completely at the mercy of the local government, which leads to a lot of intervention. Big Four state banks, on the other hand, because they now enjoy State Council and Central Finance Work Committee protection after 1998, can say no to the local government. Although they can't say no to the central government, they get partially compensated for carrying out central policies. Thus, making them into weaker bureaucratic entities actually makes little sense and will worsen their performance. But Xia Bin's suggestion of making top managers independent of the state will have a similar effect. No one will take someone without a bureaucratic rank seriously. It might actually lead to more local intervention in the banks, not less.
The article:
Andrew K. Collier in Beijing
The head of the financial research arm of China's State Council said the state banks should focus on eliminating bad loans before they move to the next stage of selling shares to the public. "If we want to have public offerings, we have to resolve the problems of the non-performing loans. Without resolving NPLs, how can we do offerings," said Xia Bin, director general of the Financial Research Institute of the Development Research Center (DRC) of the State Council. Speaking at a financial seminar yesterday, Mr. Xia also recommended that state bank presidents should relinquish their government titles to avoid confusion and he called for China to hire more foreigners to become bank executives. "The Big Four presidents are advisors on the Ministerial level. The presidents and director generals should eliminate their official titles," he said. In addition, "I advocate recruiting people overseas to become presidents of branches." While Mr. Xia doesn't set policy, his institute provides analysis to the country's top leaders in financial reform. He made his comments at a seminar sponsored by the Asian Development Bank and attended by key policymakers from the state banks, the People's Bank of China, the China Banking Regulatory Commission, and other financial institutions. The seminar occurred just as Beijing is holding its annual Party Congress, which is expected to result in announcements about new plans for reforming the economic system, including stronger rules protecting private property. PBOC officials said many of the questions about the direction of China's banking reform "would be resolved" in statements made after the close of the Party Congress, which ends Tuesday. At the seminar, Mr. Xia and other officials commented on a paper sponsored by the ADB by Professor Giovanni Ferri, a former World Bank official now at the University of Bari in Italy.
Professor Ferri argued that a gradual move to "mixed governance" - a combination of state owners and shareholders - would improve corporate governance at the banks and slowly reduce the banks' huge non-performing loans. The former World Bank official also said the Government should establish a State Banking Holding company to provide a "filter" between the banks and the government. However, Mr. Xia and other officials said reducing state control won't eliminate bad debt. Instead, the problem is that government officials, mainly in the rural areas, intervene in making loans that end up being unprofitable. Until this and other larger political issues are overcome, NPLs will continue to plague the banking system. "A large amount of NPLs are caused by external factors outside of the banking system" that cannot be eliminated until major macroeconomic issues are resolved, said Xie Ping, director general of the Research Department of the People's Bank of China.
Mr. Xie said analysis of 300 bank branches shows that 20 per cent of the NPLs are caused by bad corporate governance, while "a large amount of the rest is due to poor performance or loss-making enterprises."
Nor does mixed ownership guarantee good corporate governance. The biggest owner in one bank in Hainan has only 5 per cent of the shares "but it is very hard to make them repay debts," the DRC's Mr. Xia said. Similarly, companies like Petrochina and Sinopec have highly efficient financial operations even though they are majority controlled by the state, he noted. Despite its high non performing loans in China, companies like the Bank of China with branches in Hong Kong have generated excellent profits due to Hong Kong's sound regulatory system, Mr. Xia said. Others agreed on a "go slow" approach to public floatation of the state banks. "Ownership diversification should not be the single goal of the banking sector," said Ruizhang Jian, vice president of the Industrial and Commercial Bank of China. The government must balance the need to lower NPLs with the potential for protests by laid-off workers, said another finance official. "If there are too many NPLs, it will be a big problem for the stability of the banking system. However, if we push too hard, it can cause a lot of unrest in the local level, particularly in the Northeast," said Wang Haijun, executive director of the China Cinda Asset Management Corp. (CINDA).
He said CINDA has faced a "big headache" selling NPLs. Investors point to Southeast Asian countries in the 1997 financial crisis that sold assets at 5 cents on the dollar and demand similar deals from China. "I say China is different because China's economy is not in crisis," Mr. Wang said. Although CINDA is receiving cash recovery on the NPLs at a rate of 20 per cent, "I doubt we can in the short-term solve the NPL problem." The PBOC's Mr. Xie said China can "grow" out of the NPL problem. If China can maintain high growth over five to ten years, and keep the increase in NPLs to 5 per cent a year, "we will see a fast decrease in NPLs." Meanwhile, foreign banks will not be a significant factor in the resolving the problems in the banking sector. "The role of foreign banks in China is not so visible," he said.
On Xia Bin's comment, I think he is both right and wrong. He is right in that ownership restructuring will not help bank performance. Some of the joint stock banks have a lot of NPL, although they are only partially owned by the state and are much newer. In fact, I am doing a study comparing the credit risks of the different types of banks. We find that city commercial banks, which are also joint-stock banks, perform the worst out of all the different types of banks. I suspect that part of the reason why city commercial banks do so terribly is that they are completely at the mercy of the local government, which leads to a lot of intervention. Big Four state banks, on the other hand, because they now enjoy State Council and Central Finance Work Committee protection after 1998, can say no to the local government. Although they can't say no to the central government, they get partially compensated for carrying out central policies. Thus, making them into weaker bureaucratic entities actually makes little sense and will worsen their performance. But Xia Bin's suggestion of making top managers independent of the state will have a similar effect. No one will take someone without a bureaucratic rank seriously. It might actually lead to more local intervention in the banks, not less.
The article:
Andrew K. Collier in Beijing
The head of the financial research arm of China's State Council said the state banks should focus on eliminating bad loans before they move to the next stage of selling shares to the public. "If we want to have public offerings, we have to resolve the problems of the non-performing loans. Without resolving NPLs, how can we do offerings," said Xia Bin, director general of the Financial Research Institute of the Development Research Center (DRC) of the State Council. Speaking at a financial seminar yesterday, Mr. Xia also recommended that state bank presidents should relinquish their government titles to avoid confusion and he called for China to hire more foreigners to become bank executives. "The Big Four presidents are advisors on the Ministerial level. The presidents and director generals should eliminate their official titles," he said. In addition, "I advocate recruiting people overseas to become presidents of branches." While Mr. Xia doesn't set policy, his institute provides analysis to the country's top leaders in financial reform. He made his comments at a seminar sponsored by the Asian Development Bank and attended by key policymakers from the state banks, the People's Bank of China, the China Banking Regulatory Commission, and other financial institutions. The seminar occurred just as Beijing is holding its annual Party Congress, which is expected to result in announcements about new plans for reforming the economic system, including stronger rules protecting private property. PBOC officials said many of the questions about the direction of China's banking reform "would be resolved" in statements made after the close of the Party Congress, which ends Tuesday. At the seminar, Mr. Xia and other officials commented on a paper sponsored by the ADB by Professor Giovanni Ferri, a former World Bank official now at the University of Bari in Italy.
Professor Ferri argued that a gradual move to "mixed governance" - a combination of state owners and shareholders - would improve corporate governance at the banks and slowly reduce the banks' huge non-performing loans. The former World Bank official also said the Government should establish a State Banking Holding company to provide a "filter" between the banks and the government. However, Mr. Xia and other officials said reducing state control won't eliminate bad debt. Instead, the problem is that government officials, mainly in the rural areas, intervene in making loans that end up being unprofitable. Until this and other larger political issues are overcome, NPLs will continue to plague the banking system. "A large amount of NPLs are caused by external factors outside of the banking system" that cannot be eliminated until major macroeconomic issues are resolved, said Xie Ping, director general of the Research Department of the People's Bank of China.
Mr. Xie said analysis of 300 bank branches shows that 20 per cent of the NPLs are caused by bad corporate governance, while "a large amount of the rest is due to poor performance or loss-making enterprises."
Nor does mixed ownership guarantee good corporate governance. The biggest owner in one bank in Hainan has only 5 per cent of the shares "but it is very hard to make them repay debts," the DRC's Mr. Xia said. Similarly, companies like Petrochina and Sinopec have highly efficient financial operations even though they are majority controlled by the state, he noted. Despite its high non performing loans in China, companies like the Bank of China with branches in Hong Kong have generated excellent profits due to Hong Kong's sound regulatory system, Mr. Xia said. Others agreed on a "go slow" approach to public floatation of the state banks. "Ownership diversification should not be the single goal of the banking sector," said Ruizhang Jian, vice president of the Industrial and Commercial Bank of China. The government must balance the need to lower NPLs with the potential for protests by laid-off workers, said another finance official. "If there are too many NPLs, it will be a big problem for the stability of the banking system. However, if we push too hard, it can cause a lot of unrest in the local level, particularly in the Northeast," said Wang Haijun, executive director of the China Cinda Asset Management Corp. (CINDA).
He said CINDA has faced a "big headache" selling NPLs. Investors point to Southeast Asian countries in the 1997 financial crisis that sold assets at 5 cents on the dollar and demand similar deals from China. "I say China is different because China's economy is not in crisis," Mr. Wang said. Although CINDA is receiving cash recovery on the NPLs at a rate of 20 per cent, "I doubt we can in the short-term solve the NPL problem." The PBOC's Mr. Xie said China can "grow" out of the NPL problem. If China can maintain high growth over five to ten years, and keep the increase in NPLs to 5 per cent a year, "we will see a fast decrease in NPLs." Meanwhile, foreign banks will not be a significant factor in the resolving the problems in the banking sector. "The role of foreign banks in China is not so visible," he said.
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