Thursday, October 16, 2003
Andy Collier of SCMP has once again sent me an article on an interview with Liu Mingkang, the head of the Central Banking Regulatory Commission. And my comment on the article was this:
I also read the Liu Mingkang story with interest, but I have heard it all before from Zhou Xiaochuan. If you compare what Liu said to what Zhou said six years ago, you won't find that much variation. Interest rate liberalization, for example, has been kicked around since the late 80s. In fact, Xie Ping was one of the first proponents for liberalization within the PBOC. (don't quote me on this, but his loud mouth has resulted in him being in the same position for almost ten years now). I think they will continue to make micro-steps toward liberalization, but nothing major. I think diversifying ownership of the Big Four will be very contentious. A couple of things on the list that will probably go forward are allowing foreigners to hold more shares in city commercial banks. The city commercials are now in very poor shape, so I am sure they wouldn't mind injecting some fresh capital in some of them. Also, they will try to consolidate the RCCs, but that will involve a nasty fight with the local governments. Also, I am not sure if the PBOC really wants to find out how badly off some of the RCCs are doing. I also find Liu's estimate of new NPL being in the 2-3% range wildly optimistic. While there is no doubt that NPL ratio among new loans is lower than in the early 90s (most of the NPLs were generated in the 90s, not a "historical problem" as they claim). But I would be surprised if the true figure is lower than 10%.
The article:
Chinese Regulator Promises
To Turn Around Ailing Banks
By KATHY CHEN
Staff Reporter of THE WALL STREET JOURNAL
BEIJING -- The top bank regulator in China vowed to turn around the bulk of the nation's debt-laden banks in five to seven years and, calling on foreign investors to help, said Beijing plans to raise the stake they can acquire in Chinese banks to 25% from 15%.
In his first interview with a foreign newspaper since taking office in March, Liu Mingkang said Wednesday that China's recently anointed leadership under Communist Party chief Hu Jintao is committed to speeding up reform of the debt-burdened financial sector. He said Beijing has a broad plan in the works that includes diversifying the ownership structure of the nation's four big state-run commercial banks, further liberalizing interest rates "in the near future," and passing a tough bank-supervisory law as early as December.
Prolonging bank reforms "will increase sharply the cost and burden" to the financial system, said Mr. Liu, who heads the recently established China Banking Regulatory Commission. "China's new leaders realize this, and they said they have got to quicken the pace."
Mr. Liu said China plans to start by reforming and restructuring the big state-run banks and tens of thousands of rural credit unions, which together account for nearly three-fourths of the country's total financial assets. He said he hopes foreign investors can help reform China's shareholding banks by taking stakes in those banks. "All the banks will have to diversify their ownership and attract new blood," he said, predicting a turnaround for these banks "in five or seven years."
Mr. Liu, a professional banker who has a business degree from the City University of London, has his work cut out for him. A decade into a bank-reform program, Beijing has spent nearly $200 billion during the past five years to fix the bad-loan problem, a legacy of decades of government-mandated financing for state-owned enterprises. But the nation's banks remain buried under $375 billion in bad debt, by the government's own estimate. Many economic analysts say the problem is far larger.
And financial fraud is on the rise, even as foreign banks such as Citigroup Inc. and HSBC Holdings PLC are gearing up for a push into China. Under its agreement with the World Trade Organization, China has promised to give foreign banks free access in December 2006.
One major problem is the supreme role that Communist Party officials play in managing banks, from the largest state-owned lenders down to thousands of tiny rural banks owned by local governments. On personnel appointments, many lending decisions and even annual deposit quotas, China's bankers report not to an independent board of directors or shareholders, but to party bosses in Beijing. The result, bankers and industry experts say, is a system often void of accountability.
Identifying Risk
Mr. Liu and his staff of regulators are trying to change all that by stressing to banks the importance of identifying risk and by backing up their supervision of the sector with teeth. "The new government has asked us to have a brand new approach to monitoring risk and supervision," he said.
The commission, which in March was split off from the central bank to take over regulation and supervision of the banking sector, has authority to block banks from opening new branches or expanding if they don't meet the agency's standards. It also has power to fire top managers and impose penalties and fines for violations of rules.
Regulators hope to strengthen their enforcement authority with the expected passage by year-end of the country's first bank-supervisory law, which would give the agency powers such as the right to foreclose on properties. A draft law is under debate and would require approval by the national legislature's standing committee.
Other reforms in the works or under way include:
. Consolidation of China's 35,500 rural credit cooperatives to about 2,000 in the next two or three years. Mr. Liu said the sector would be open to private investment, with foreign investment possible in prosperous coastal regions.
. Further liberalization of interest rates "very soon." Small rural banks already enjoy authority to adjust their rates to match the risk; bigger banks are restricted to a narrower band. But Mr. Liu conceded that more flexibility is needed. Banking regulators are finalizing a rate liberalization plan.
. An increase to 25% in the stake that foreign investors may take in Chinese banks. Mr. Liu said foreign investors, including banks, insurance companies, and funds, could play a role in helping Chinese banks improve their corporate governance and management structures. Besides investing in China's shareholding banks and more than 100 city commercial banks, foreign investors might be allowed to become strategic investors in the state-run commercial banks, he said.
. Approval of Citibank's application to issue a yuan-denominated credit card with Shanghai-based Pudong Development Bank, in which the Citigroup unit has a 4.62% stake. Most cards issued by Chinese banks are some form of debit card, and this would be the first true credit card to be offered to Chinese consumers by a Sino-foreign venture.
. Fulfillment of a pledge China made to the WTO to allow foreign banks to provide Chinese-currency services to domestic corporate customers by Dec. 6, and to lift all barriers on foreign banks to the Chinese market by Dec. 1, 2006.
Speaking in fluent English in an office building on loan from the central bank, Mr. Liu conceded that China has a long way to go in creating a modern banking system, and that the speed of reducing nonperforming loans has been slow. But he sought to strike an optimistic note on the changes that Chinese banks are undertaking. He estimated that banks' ratio of new nonperforming loans totaled between 2% and 3% of all new loans during the past three years, a figure that he says is "within our control. In a transitional economy like China's, I'm confident as long as we can keep overall nonperforming loans to between 5% and 6%."
Potential Bubble?
Some Chinese and foreign economists have voiced concerns in recent months that China's economy may be overheating, driven by a wave of easy bank credit, and that a potential bubble may be forming in the red-hot property sector. Mr. Liu agreed that new lending has picked up -- the amount of loans outstanding rose 23% as of the end of August compared with the same period last year -- but he said he is comfortable with the trend.
He said faster loan growth has been necessary to fuel economic growth after severe acute respiratory syndrome temporarily shut down parts of the country earlier this year and amid Beijing's ambitious plans to overhaul the ailing state sector.
"With an expansion of lending, you can never draw the conclusion, 'Is it a good thing or a bad thing?'" he said. "If you can see an improvement of quality, then we will welcome it."
Write to Kathy Chen at kathy.chen@wsj.com
I also read the Liu Mingkang story with interest, but I have heard it all before from Zhou Xiaochuan. If you compare what Liu said to what Zhou said six years ago, you won't find that much variation. Interest rate liberalization, for example, has been kicked around since the late 80s. In fact, Xie Ping was one of the first proponents for liberalization within the PBOC. (don't quote me on this, but his loud mouth has resulted in him being in the same position for almost ten years now). I think they will continue to make micro-steps toward liberalization, but nothing major. I think diversifying ownership of the Big Four will be very contentious. A couple of things on the list that will probably go forward are allowing foreigners to hold more shares in city commercial banks. The city commercials are now in very poor shape, so I am sure they wouldn't mind injecting some fresh capital in some of them. Also, they will try to consolidate the RCCs, but that will involve a nasty fight with the local governments. Also, I am not sure if the PBOC really wants to find out how badly off some of the RCCs are doing. I also find Liu's estimate of new NPL being in the 2-3% range wildly optimistic. While there is no doubt that NPL ratio among new loans is lower than in the early 90s (most of the NPLs were generated in the 90s, not a "historical problem" as they claim). But I would be surprised if the true figure is lower than 10%.
The article:
Chinese Regulator Promises
To Turn Around Ailing Banks
By KATHY CHEN
Staff Reporter of THE WALL STREET JOURNAL
BEIJING -- The top bank regulator in China vowed to turn around the bulk of the nation's debt-laden banks in five to seven years and, calling on foreign investors to help, said Beijing plans to raise the stake they can acquire in Chinese banks to 25% from 15%.
In his first interview with a foreign newspaper since taking office in March, Liu Mingkang said Wednesday that China's recently anointed leadership under Communist Party chief Hu Jintao is committed to speeding up reform of the debt-burdened financial sector. He said Beijing has a broad plan in the works that includes diversifying the ownership structure of the nation's four big state-run commercial banks, further liberalizing interest rates "in the near future," and passing a tough bank-supervisory law as early as December.
Prolonging bank reforms "will increase sharply the cost and burden" to the financial system, said Mr. Liu, who heads the recently established China Banking Regulatory Commission. "China's new leaders realize this, and they said they have got to quicken the pace."
Mr. Liu said China plans to start by reforming and restructuring the big state-run banks and tens of thousands of rural credit unions, which together account for nearly three-fourths of the country's total financial assets. He said he hopes foreign investors can help reform China's shareholding banks by taking stakes in those banks. "All the banks will have to diversify their ownership and attract new blood," he said, predicting a turnaround for these banks "in five or seven years."
Mr. Liu, a professional banker who has a business degree from the City University of London, has his work cut out for him. A decade into a bank-reform program, Beijing has spent nearly $200 billion during the past five years to fix the bad-loan problem, a legacy of decades of government-mandated financing for state-owned enterprises. But the nation's banks remain buried under $375 billion in bad debt, by the government's own estimate. Many economic analysts say the problem is far larger.
And financial fraud is on the rise, even as foreign banks such as Citigroup Inc. and HSBC Holdings PLC are gearing up for a push into China. Under its agreement with the World Trade Organization, China has promised to give foreign banks free access in December 2006.
One major problem is the supreme role that Communist Party officials play in managing banks, from the largest state-owned lenders down to thousands of tiny rural banks owned by local governments. On personnel appointments, many lending decisions and even annual deposit quotas, China's bankers report not to an independent board of directors or shareholders, but to party bosses in Beijing. The result, bankers and industry experts say, is a system often void of accountability.
Identifying Risk
Mr. Liu and his staff of regulators are trying to change all that by stressing to banks the importance of identifying risk and by backing up their supervision of the sector with teeth. "The new government has asked us to have a brand new approach to monitoring risk and supervision," he said.
The commission, which in March was split off from the central bank to take over regulation and supervision of the banking sector, has authority to block banks from opening new branches or expanding if they don't meet the agency's standards. It also has power to fire top managers and impose penalties and fines for violations of rules.
Regulators hope to strengthen their enforcement authority with the expected passage by year-end of the country's first bank-supervisory law, which would give the agency powers such as the right to foreclose on properties. A draft law is under debate and would require approval by the national legislature's standing committee.
Other reforms in the works or under way include:
. Consolidation of China's 35,500 rural credit cooperatives to about 2,000 in the next two or three years. Mr. Liu said the sector would be open to private investment, with foreign investment possible in prosperous coastal regions.
. Further liberalization of interest rates "very soon." Small rural banks already enjoy authority to adjust their rates to match the risk; bigger banks are restricted to a narrower band. But Mr. Liu conceded that more flexibility is needed. Banking regulators are finalizing a rate liberalization plan.
. An increase to 25% in the stake that foreign investors may take in Chinese banks. Mr. Liu said foreign investors, including banks, insurance companies, and funds, could play a role in helping Chinese banks improve their corporate governance and management structures. Besides investing in China's shareholding banks and more than 100 city commercial banks, foreign investors might be allowed to become strategic investors in the state-run commercial banks, he said.
. Approval of Citibank's application to issue a yuan-denominated credit card with Shanghai-based Pudong Development Bank, in which the Citigroup unit has a 4.62% stake. Most cards issued by Chinese banks are some form of debit card, and this would be the first true credit card to be offered to Chinese consumers by a Sino-foreign venture.
. Fulfillment of a pledge China made to the WTO to allow foreign banks to provide Chinese-currency services to domestic corporate customers by Dec. 6, and to lift all barriers on foreign banks to the Chinese market by Dec. 1, 2006.
Speaking in fluent English in an office building on loan from the central bank, Mr. Liu conceded that China has a long way to go in creating a modern banking system, and that the speed of reducing nonperforming loans has been slow. But he sought to strike an optimistic note on the changes that Chinese banks are undertaking. He estimated that banks' ratio of new nonperforming loans totaled between 2% and 3% of all new loans during the past three years, a figure that he says is "within our control. In a transitional economy like China's, I'm confident as long as we can keep overall nonperforming loans to between 5% and 6%."
Potential Bubble?
Some Chinese and foreign economists have voiced concerns in recent months that China's economy may be overheating, driven by a wave of easy bank credit, and that a potential bubble may be forming in the red-hot property sector. Mr. Liu agreed that new lending has picked up -- the amount of loans outstanding rose 23% as of the end of August compared with the same period last year -- but he said he is comfortable with the trend.
He said faster loan growth has been necessary to fuel economic growth after severe acute respiratory syndrome temporarily shut down parts of the country earlier this year and amid Beijing's ambitious plans to overhaul the ailing state sector.
"With an expansion of lending, you can never draw the conclusion, 'Is it a good thing or a bad thing?'" he said. "If you can see an improvement of quality, then we will welcome it."
Write to Kathy Chen at kathy.chen@wsj.com
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