Wednesday, November 15, 2006
The first thing is whether this will get Guo Shuqing into trouble According to the advisor, he repeatedly contacted Guo Shuqing about the problem. Did Guo look into it? Or did he want to speed up the IPO? Will the CBRC or the State Council look into this allegation? I doubt it, since CCB can always trod out the KPMG findings to refute the whistle-blower. But, can someone raise this issue when they (meaning the Standing Committee) discuss the future of Guo Shuqing? Yes.
Second, the Chinese strategy of co-opting foreign banks is working. BOA probably knew that the allegation was true, but decided to do nothing about it. To be sure, it was faced with no good option. It could have sunken the deal by suing CCB, but what would have been the point? It might have won a few millions in settlement in a US court, but BOA would have been forever barred from China. Instead, it probably used the information to negotiate a slightly better deal, but CCB and Huijin still had the upper-hand since they knew that BOA couldn't credibly walk away from negotiations. So now these large American banks, including now Citibank, are trapped in China's web of political lobbying. Instead of relying on transparency and the legal system, they must do back-room deals with the government and be held hostage to the threat of being barred from China.
What about the other two listed banks? ICBC and BOC. I have heard reliable rumors of similar practice in the BOC. I have not heard of similar practice in the ICBC, at least not recently, but I somehow suspect that it is also a widespread practice there. But it doesn't seem like the public cares much about a few billion in hidden NPL here and there. They invested in these banks because of China's economic future. This is all fine as long as China's growth trajectory continues at its current pace.
November 15, 2006
Rare Look at China’s Burdened Banks
By DAVID BARBOZA
BEIJING — Two years ago, one of China’s largest state-owned banks hired a senior risk adviser who had previously worked for major banks in the United States. His mission was to advise the Chinese bank on how to clean up its books, by helping assess loans that were going bad.
The banker’s career at the China Construction Bank, however, would prove to be contentious and short. It ended with his firing in July, after he repeatedly told top executives that up to $3 billion in bad loans might have been intentionally hidden from outside auditors, just months before the bank’s first sale of stock to public investors.
Officials at the bank strongly dispute the assertions, saying they investigated and dismissed them. The bank called the risk adviser a disgruntled employee.
But the dispute between China Construction and the banker — who spoke on condition that he not be identified because of fear of reprisals in China — provides a rare glimpse inside a banking system that analysts say continues to have widespread problems that could ultimately threaten the country’s breakneck economic growth.
The analysts say that China’s big banks have made too many loans for political or social reasons, rather than commercially sound ones, that may never be repaid. While the government has sought to ease the problem by spending $400 billion since 1998 to cover bad loans for real estate projects or to state-owned enterprises, fears remain that banks are still burdened with many more troubled loans than they acknowledge.
Even a top official of the central bank recently acknowledged that bad loans remained an issue. “The task of avoiding a rebound in nonperforming loans is still huge and difficult,” Wu Xiaoling, deputy governor of the People’s Bank of China, told a financial conference recently, according to a Chinese Web site, sina.com.
Today, countless new buildings, and cranes constructing still more of them, fill the skylines of cities across China, financed by loans from the banks. But half-completed buildings and warehouses, where construction has stopped, also dot cityscapes.
If loans to many of these borrowers are not repayable, as analysts suspect, the losses at some point could weigh down the country’s financial system, potentially constraining the banks’ ability to lend to new projects or companies.
Yet the amount of bad loans that Chinese banks officially report on their books is well within a range that would be acceptable for Western banks.
At China Construction Bank, officials noted that outside auditors had signed off on the books. And at the end of 2004, the bank said it had some $10.31 billion in bad loans on its books, or just 3.92 percent of its $263 billion in total loans, according to the bank’s filing. An additional $3 billion in bad loans, the amount supposedly hidden, would be sizable but not enough to threaten the bank’s stability and thus not a cause for major concern, the banking analysts say.
Similarly, China’s commercial banks officially have an estimated $163 billion in nonperforming loans, a manageable 7.5 percent of their total in June 2006, according to the China Banking Regulatory Commission.
But analysts say the bad-loan figure could be more than double the official reports. Fitch Ratings said its own estimate of problem loans is closer to $480 billion. The agency, along with other analysts, suspects that most of those loans are on bank books in the “special mention loan” category, the second and lowest level of performing loans, though still deemed good.
“A lot of analysts have been skeptical” of the bad loan figures, said Charlene Chu, a Fitch analyst. “The improvement in the nonperforming loan ratios have been so dramatic that some analysts question whether they can improve that fast.”
Despite these concerns, some of the world’s largest financial institutions are buying stakes in Chinese banks. In the last year, Bank of America, Goldman Sachs, the Royal Bank of Scotland, UBS, Merrill Lynch, HSBC and American Express have all bought minority stakes in Chinese banks ahead of planned initial stock offerings.
For now, many of those investments look like winners. China Construction’s public offering in Hong Kong in the fall of 2005 raised $9.2 billion and at the time was the biggest stock offering worldwide in four years. The Bank of China topped that, raising $11.2 billion in an initial public stock offering in mid-2006. And late in October, the Industrial and Commercial Bank of China, the country’s largest bank with more than $800 billion in assets, sold a 16 percent stake, raising about $22 billion.
“The China theme is hot, and everyone wants some exposure,” said Jonathan Anderson, the chief Asia economist at UBS.
The dispute between China Construction and its senior risk adviser began toward the end of 2004. He had joined the bank earlier that year to help China Construction as it was preparing for its initial public stock offering in October 2005.
The adviser, who studied at Beijing University and later earned a Ph.D. in applied mathematics at an American university, had previously worked for two leading multinational banks in the United States.
Asked about his time at China Construction, the risk officer confirmed that he had differences with top executives, but said he wanted to avoid a public dispute. Officials at the bank, responding to inquiries, confirmed that it had a disagreement with the former employee and discussed details about the differences.
As a senior adviser, he was allowed to travel through the country, going from branch to branch to assess the bank’s nonperforming loan ratio — which was among the bank’s most sensitive data. At one point, he reported directly to the chairman.
The government had been pressing the big four state banks to sharply improve their nonperforming loan ratios, and China Construction had turned in the best numbers at that point, reducing its share to 3.92 percent of loan assets late in 2004, down from 17 percent in 2002.
But the risk adviser began cautioning that bad loans were being hidden at the bank’s branches, erroneously labeled as good loans, even though company records showed that they were impaired. He told bank officials that in Beijing and Tianjin alone, he had uncovered $750 million in bad loans that had been deemed good. Though large northern cities, the two account for just a small fraction of nationwide loans.
The risk adviser wrote to his superiors, including the chairman at the time, Zhang Enzhao, that many nonperforming loans were being hidden in the “special mention loan” category. According to Fitch Ratings, at the end of 2005, nearly 12 percent of the bank’s loans were in that category.
Mr. Zhang, though, resigned in March 2005, after a lawsuit filed in the United States accused him of accepting a $1 million bribe from an American company doing business in China. He was in time replaced by Guo Shuqing, a well-regarded former official of the central bank, who pushed China Construction to go forward with a public listing. (Mr. Zhang recently was sentenced to 15 years in prison for accepting bribes.)
The risk adviser persisted. China Construction officials recently acknowledged that months before the bank’s public offering, he sent letters or e-mail messages to the new chairman, Mr. Guo, as well as the bank’s president and other executives. In that correspondence, he told them that the bank was hiding some of its bad assets.
The red flags were raised at a critical time, because unanticipated bad news could have resulted in a delay in the offering. The bank went ahead, maintaining that after an audit by KPMG there were no undisclosed problems in its loan books. After the stock offering, the bank says the risk adviser continued to press for the problems to be fixed.
Another senior official at the China Construction Bank, who spoke on the condition that he not be named for fear of reprisals, said that internal risk controls were inadequate and that the outside auditors from KPMG often battled with bank officials over bad-loan assessments.
China Construction Bank officials say that even the suggestion there were hidden loans is preposterous.
“Hidden bad loan information does not exist at C.C.B.,” a spokesman said. The bank added that in August 2004, a team of internal investigators looked into some of the risk adviser’s assertions and found no evidence there were “mischaracterized loans” on the books.
In a statement issued in response to questions, China Construction said, “Our bank’s management and responsible persons in our risk management department conducted a diligent discussion and evaluation of the issues he raised, concluding that he had not provided any valuable evidence and that his reasoning was simplistic and arbitrary, with some things clearly contrary to common sense, and therefore it did not have a minimal level of persuasiveness.”
The bank cited several letters from the risk adviser, reading them aloud or making reference to them in an interview at its Beijing headquarters several weeks ago. Bank officials said that even though the risk adviser was one of the institution’s top-ranking risk officials, he was unqualified to assess its loan portfolio.
Moreover, it questioned his motives. In one letter the bank released in part, the adviser told the bank in August 2005 that it had three choices: to give him a new assignment, fire him with a severance package or, if it refused either of those two, he would ask his New York lawyer, among other things, to reveal information about the bank — “especially about several key risk management department executives,” who, he said, “manipulated C.C.B.’s bad loan ratio.”
In July, the risk adviser was fired, the bank said, for forging his sick-leave papers.
No one outside the China Construction Bank was told about the accusations until July, when officials at Bank of America — which paid $3 billion in 2005 to acquire a 9 percent stake that is now worth more than $9 billion — say they received a letter from the former adviser detailing some of his findings and arguments that the bank was manipulating its figures.
They rejected the accusations as “unlikely” after interviewing the adviser by telephone and then holding discussions with China Construction officials.
Bank of America, based in Charlotte, N.C., said in a statement: “KPMG, the bank’s outside auditor, and the global underwriters of C.C.B.’s initial public offering conducted extensive reviews of C.C.B.’s loan portfolio prior to the I.P.O. last October. Based on our knowledge of those exhaustive efforts, and our own due diligence prior to our initial investment, we thought it unlikely these allegations were true.”
Still, Bank of America officials say they passed on the letter containing the accusations to board members of China Construction Bank. A KPMG official in Beijing declined comment.
China Construction Bank officials say the company’s loan portfolio is in good shape, that top auditors now regularly peruse the loan books and new risk-management procedures have been put in place.
All these help explain, they say, why the company’s shares have risen sharply since it went public.
I think that you vastly overestimate the amount of leverage that the Chinese government has over BOA. BOA could have allowed itself to be outbid by another suitor and walked away. The threat of being barred from China is not much of a threat if you think that there are still some systemic problems in the banking system that you don't know about.
In particular, there is a lock in period before BOA can cash out of the CCB deal. If BOA thinks that there is a major problem that will cause it to lose money before the lock-in period ends, it makes no sense to go forward with the deal.
Finally the NYT article is very confused in its accounting. The 7.5 percent bad loan ratio is largely concentrated in the Agricultural Bank of China. The $400B number from Fitch doesn't contradict the $163B from the Chinese government since the Fitch number counts about $250B in rural credit cooperatives and loans that have been moved to the asset management companies. The $163B number from the Chinese government counts only bad loans in the big four, and those are almost all in ABC.
There is also the strong temptation here to assume "good whistleblower versus evil corporate managers" but that's not necessarily always the case. The possibility exists that BOA and CCB looked into the risk managers position and correctly concluded that they were incorrect.
Prof. Shih, your comment?
Either way, thanks!
Friday, November 10, 2006
Long March: In China, Citigroup Encounters Hurdles to Retail-Banking Plans --- New Rules Could Delay Access To Coveted Mass Market; Foreign Firms Crowd In --- Installing ATMs at 7-Eleven
By James T. Areddy
10 November 2006
The Wall Street Journal
(Copyright (c) 2006, Dow Jones & Company, Inc.)
SHANGHAI -- Five years ago, China pledged to open its banking market to foreign competitors, and Citigroup Inc. didn't hesitate.
As Beijing dribbled out opportunities, the New York-based banking giant seized them. It set up units to lend foreign currencies, trade bonds and package derivatives. It began installing ATMs, and, through a partnership with a Shanghai bank, launched a credit card. Last year, it bid about $3 billion for a controlling stake in Guangdong Development Bank, which has 501 branches.
But Citigroup hasn't yet been allowed to reach out to ordinary retail customers in the world's most populous nation. Today, it operates just 13 branches in six Chinese cities. Its growing network of ATMs, including a new one at the Great Wall, so far exists to spit out cash mainly to foreign visitors and to publicize its brand.
At the moment, neither Citigroup nor any other non-Chinese bank can take deposits from individuals or make them loans in China's currency, the yuan. Citigroup's own employees, in fact, have to be paid through accounts at Chinese banks. Citigroup's experience in China has involved clawing through a thicket of regulations and making compromises in the hopes of one day sharing in what may be the banking industry's biggest prize.
Next month, China is supposed to lift all remaining restrictions on foreign banks, fulfilling a promise that helped it gain membership in the World Trade Organization in 2001. But a raft of new rules passed on Wednesday by the State Council, China's highest administrative body, threatens to further delay access to ordinary Chinese customers, leaving some foreign bankers wondering how eager Beijing really is to give them the run of its coveted market.
"The intent was to open the sector to the maximum extent possible," says Charlene Barshefsky, the Clinton-era U.S. Trade Representative who helped negotiate the WTO agreement. Ms. Barshefsky, now a partner at Washington law firm Wilmer Cutler Pickering Hale & Dorr LLP, characterizes any new hurdles as "troubling" and "certainly not the intent of the agreement." She declines to discuss whether she is representing any U.S. banks in China.
China contends it is complying with the spirit of the agreement and is merely subjecting foreign banks to many of the same requirements Chinese banks face. The rules will "strengthen and improve the supervision and management of foreign banks and promote the stable operation of the banking sector," the State Council said in a statement Wednesday.
More than 70 foreign banks are vying for a piece of the Chinese market. For now, nearly all of them, including Bank of America Corp., have decided not to roll out their own brands for consumer banking in China. Instead, they are taking stakes in Chinese banks and may try to introduce their own products through them, or are sticking to niches like corporate banking or private banking for rich customers.
Citigroup is one of about 10 big foreign banks -- and the only American one -- with plans to go after Chinese retail customers under their own flags. Citigroup boasts of operations in about 100 nations, and consumer banking is a mainstay in many of those nations. Up for grabs in China, Citigroup estimates, is a "bankable" population of 300 million to 400 million of the nation's 1.3 billion people. Citigroup aims to target the emerging middle class and the new rich.
Charles Prince, Citigroup's chairman and chief executive officer, said earlier this year that it would be "almost criminal" not to position the bank for the long term in China. Chinese individuals have stashed roughly $2 trillion worth of yuan in the nation's commercial banks, according to China's central bank. That's equal to 70% of total consumer deposits at commercial banks in the U.S. "It may be . . . that 20 years from now, China will be the largest consumer market in the world," he said.
Citigroup, which currently employs about 3,000 in China, is called "Hua Qi," Chinese for American flag. U.K.-based HSBC Holdings PLC has also made Chinese retail banking a priority. Michael Smith, chief executive of HSBC's Hongkong & Shanghai Banking Corp. and chairman of its Hang Seng Bank Ltd. unit, characterizes the opening of the market as more like "an evolutionary step."
In HSBC's Shanghai offices, two dozen customer-relationship managers face monthly targets for sales of foreign-currency financial products such as mortgages and time deposits. The crown for "deposit king" recently went to an HSBC manager who brought in about $3 million of deposits, mortgages and other business in a month.
Foreign banks have long yearned for access to the China market. Many, including Citigroup's predecessor company, were active around Shanghai's famed riverfront Bund from the beginning of the 20th century, but pulled out after the Communist takeover in 1949.
After China adopted market reforms, regulators allowed Citigroup to open a south China office in 1983 and to return to Shanghai in 1985. But Citigroup and other foreign banks could neither take deposits from Chinese customers nor make loans to them. They couldn't do much aside from work with multinational companies expanding into China.
The landmark agreement for China to enter the World Trade Organization in 2001 was designed to change that. Ms. Barshefsky, who was President Clinton's lead negotiator on the matter, recalls that China was worried its weak domestic banks would be overrun by foreign ones. The agreement called for the market to open to foreign competition in stages so that China would have time to repair its banking system, which was burdened with bad loans.
China laid out a five-year timetable governing when and where foreign banks could begin taking on various categories of customers. Customers banking in foreign currency would come first, followed by Chinese companies doing business in yuan, then Chinese consumers with yuan. "Within five years after accession, foreign financial institutions will be permitted to provide services to all Chinese clients," read a short passage about banks in the 900-page WTO agreement.
In March 2002, three months after the WTO agreement took effect, Citigroup swung open the doors of a new branch in the landmark Peace Hotel on Shanghai's Bund. Four hundred customers were in line, the bank says. Citigroup became the first foreign bank to interact with Chinese consumers, taking their deposits in U.S. dollars and other foreign currencies.
Each WTO anniversary was expected to bring new expansion opportunities for foreign banks. But foreign bankers say that from the start, Chinese officials treated the dates as points at which foreigners could begin applying for the promised access. Actually getting the permission takes time, they say.
In 2002, Citigroup agreed to pay $67 million for a small stake in Shanghai Pudong Development Bank Co. The partners later released a co-branded Chinese credit card, a first in China. Citigroup has not disclosed details about how the card program is faring.
In 2003, Citigroup gained the right to do business, in yuan, with Chinese corporate customers. It built a desk to trade in Chinese government bonds and began to design yuan-denominated financial derivatives. It became a custodian for Chinese pension-fund money.
During this period, China worked to strengthen its own banks. In 2003, Liu Mingkang, an English-speaking former banker, was tapped to run the newly formed China Banking Regulatory Commission. The government sank $60 billion into China's three biggest banks, dramatically reducing nonperforming loans.
China had capped foreign ownership stakes in domestic banks at 25%. Nevertheless, one year ago, Citigroup challenged the limit with a $3 billion bid for 85% of Guangdong Development Bank, or GDB, which is owned by the Guangdong provincial government. If successful, the deal would allow Citigroup, along with its co-investors, to reshape a major Chinese bank with a nationwide license and assets of $48 billion.
Song Hai, a vice governor of Guangdong Province in charge of its economic portfolio, was eager to develop the region's financial-services industry and had welcomed investment by foreign companies. Mr. Song encouraged Citigroup to bid for outright control, according to another government official familiar with the situation. A former banker, Mr. Song is considered an economic reformer, and unlike most officials, is not a member of the Communist Party. A spokesman for Citigroup declined to comment on any aspect of the GDB bid, as did Mr. Song.
From the start, the bid was a long shot. China Construction Bank Corp. went public around the same time, and its stock had surged on the Hong Kong stock exchange. Some government officials complained that the stock's initial pricing had been too low, and that liberals in China's government were selling the jewels of the nation's financial system on the cheap to foreigners.
In late 2005, France's Societe Generale AG made a competing bid for GDB, structured not to breach the 25% ownership cap. Confident that a deal would be announced by the Chinese New Year in January, Societe Generale officials strung traditional red envelopes around their Paris office and bought Champagne, according to a banker in that office.
Senior government officials took an interest. In March, Premier Wen Jiabao said that "the state must have absolute controlling stakes" in state banks. Still, during a visit to China later that month, U.S. Sen. Charles Schumer heard "positive things" about Citigroup's bid when he met with its bankers and People's Bank of China Gov. Zhou Xiaochuan, who is considered a reformer.
But in mid-April, Chinese bank regulators sent a letter to Mr. Song's Guangdong government reiterating the 25% ownership cap. Citigroup scaled back its ambitions. Its current bid as part of a consortium would comply with the foreign ownership cap, although Citigroup still wants control of GDB's board of directors, people familiar with the matter say.
On Aug. 14, Citigroup and other foreign banks with designs on the Chinese market got a surprise: a three-page document outlining a new set of requirements to meet before they are allowed to take deposits in yuan from Chinese individuals. Among other things, the new rules call for foreign banks to incorporate their operations locally. The bankers conferred by conference call to figure out what the new requirements meant.
The following week, the foreign bankers met in Beijing with Wang Zhaoxing, deputy chairman of the bank regulatory commission. He explained in Mandarin that in addition to putting up $125 million in capital for the first six branches, each bank would need to establish a stand-alone holding company, incorporated in China with its own board of directors, much as Chinese banks are structured, according to attendees.
Mr. Wang outlined other requirements that foreign bankers contend will limit or delay their access to individual Chinese customers. Foreign bank branches, for example, will need to be open for three years -- and to be profitable for two years -- before authorities will let them take yuan deposits from individuals. Government officials have said the timetable is meant to protect Chinese depositors until a deposit-insurance program can be established.
Citigroup says the most important facet of its push into China is to build its own retail-banking operation. That priority would become even more critical if its GDB bid fails or its effort to boost its 4% stake in Pudong Development Bank falls short.
Anand Selvakesari, who is in charge of Citigroup's retail-banking operations in China, plays a key role in that effort. Among other things, the 39-year-old veteran of the bank's business in India is in charge of finding locations for branches and hiring managers to run them.
"We have to get new customers," says Mr. Selvakesari, who arrived in Shanghai in April. ATMs are one strategy. Electronic banking is already popular in China, but Citigroup cannot yet issue its own ATM cards in the country. Visitors and others with foreign bank cards can use its machines to withdraw yuan. Citigroup collects fees for such usage.
It regards the machines as a form of advertising, an alternative to billboards, and has installed them in 7-Eleven convenience stores, in airports and in a hotel at the portion of the Great Wall closest to Beijing. "Our objective is to create awareness," Mr. Selvakesari explains. By year's end, Citigroup intends to have 85 machines in place, and it has made separate arrangements to give its customers access to thousands of local-bank ATMs. Eventually, it hopes to use its network to service Chinese retail customers.
Citigroup used a similar tactic in India, where foreign branch banking is also highly restricted. It now has hundreds of ATMs spread over 30 cities there.
For now, Citigroup is reaching out to China's wealthy by marketing fancy deposit products tied to stocks and commodities which it already has permission to sell, such as an investment account linked to the stock performance of five retailers. Mr. Selvakesari targeted affluent customers in Singapore with similar products in the mid-1990s. He says they offer customers higher returns than basic Chinese savings accounts do, and they underscore Citigroup's global reach.
Mr. Selvakesari says he wants to get wealthy people buzzing about Citigroup. He arranges for prospective customers to test drive Ferraris and Range Rovers. His team has invited prospects to "micromarketing events" such as presentations on feng shui, wine appreciation, health and economics.
Tang Hanting in Shanghai contributed to this article.
Tuesday, November 07, 2006
China's forex reserves exceed $1,000bn
By Peter Garnham
Published: November 6 2006 20:57 | Last updated: November 7 2006 04:57
China's foreign currency reserves have exceeded $1,000bn for the first time,
according to reports yesterday on the country's state television network.
The announcement had been expected since China's State Administration of
Foreign Exchange announced last month that its reserves hit $987.9bn at the
end of September.
China's forex reserves became the largest in the world this year when they
overtook those of Japan, which stood at $881bn at the end of September.
Analysts said the report was likely to put the spotlight on the renminbi,
which many of the nation's trading partners believe is deeply undervalued.
The renminbi is currently allowed to fluctuate in a daily 0.3 per cent band
around a central rate set by the People's Bank of China.
Under this managed float system the renminbi has risen 2.4 per cent against
the dollar to Rmb7.8750 this year. However, there have been calls,
particularly from the US, for China to let the renminbi appreciate faster or
even float freely.
Fan Gang, director of China's National Economic Research Institute and
member of China's monetary policy committee, said on Monday that while he
was expecting "more China-bashing" as its stockpiles surged past $1,000bn, a
rapid revaluation of the renminbi could have catastrophic consequences for
the country's economic development and the employment of millions of poor
"The real problem the world faces today is an overvalued dollar, not just
against the renminbi but against all major currencies," said Mr Fan. "The
main responsibility for this imbalance lies with a US Treasury, which is
printing too much money."
Simon Derrick, currency research chief at the Bank of New York, said Mr Fan's
comments reflected a growing level of concern in China that at 70 per cent,
the proportion of dollars it holds in its reserves was too high.
"$1,000bn is just a number, but a phenomenal number," said Mr Derrick. "It
might be the trigger for the Chinese authorities to consider a fundamental
change in reserve allocation."
China's reserves are growing at a rate of nearly $30m an hour, thanks mostly
to a gap between imports and exports that trebled to $102bn in 2005. China's
trade surplus so far this year has surpassed last year's, hitting $108.9bn
by the end of September and is expected to exceed $140bn for the year.
Thursday, November 02, 2006
http://finance.sina.com.cn 2006年11月02日 02:38 第一财经日报