China’s Banking Has A Long Way to Go

In some way, the low degree of internationalization and less intensive competition, these defects of China’s banking on the contrary help itself to avoid suffering great losses in the financial crisis, it just like a person who does not know to swim will not be drowned if he never down to the water, of course it is a safe way to stay on shore, however for China it is maybe not a positive way to develop banking sector like this, that is because the China’s banking will be internationalized sooner or later, and it is undesirable and impossible to only rely on government bailouts when financial crisis happens again. Therefore, it is worth considering how China’s banking can obtain steady and healthy development in the international and domestic market.

I think that in the post-crisis era, China’s banking should go back to basics, it should focus on improving the domestic banking market firstly and then develop the international business. Obviously, strengthening banking reform is imperative, the banking sector should speed up the formation of healthy competition and then be able to offer sufficient financial products to meet the increasing need of the real economy, rather than the over-virtualization economy, meanwhile, well-designed regulation and appropriate monetary policy can serve the development of the banking sector better, only by doing so, in the near future China’s banking would get rid of troubles such as refinancing problem. With no doubt, China’s banking has a long way to go.

How Chinese Economists Think about China's Banking

On the other hand, many financial specialists from China comment critically on the performance of China’s banking in post-crisis era.

Some of them think the situation in China’s banking is very severe. As some claim, they are very worrying about the near future of banking sector, to be more exact is the refinancing link. In general, there are three methods for banks to raising capital. The main resource is retained profit, banks have to accumulate by themselves. The second one is through the capital market, namely, issuing shares or bond financing. The last one is by means of private shares, for instance, soliciting strategic investors or adding investment of original investors. However, any of them is not easy for China’s banking to raise capital. Yin Zhongli, who is one of famous researchers of Chinese Academy of Social Sciences Finance Research institute, pointed that, the profitability for Chinese commercial banks is rather low and the speed of business expansion is very fast, therefore it is quite difficult to raising capital by them. If they focus on capital market, it is also hard to meet the increasing needs of capital funds of the banking sector as the domestic equity market existing financing function defects. Many banks already realized the incurring problems which are produced by insufficient capital adequacy ratio and credit expansion, they through a public way to issue or additionally issue shares and raise common stocks for raising capital, for some banks they issue subordinated debts to enhance the capital adequacy ratio, but there is no evidence to show if this method is efficient so far. 

Other Chinese experts although believe that the banking sector exists problems, they insist that it is not yet time to be deep in the crisis completely for now or in the near future. They think that if China’s macro economy does not go downhill and maintains relative stable rate of rise in general, then the banking market and business will not fade rapidly.

With no doubt, the defections of China’s banking have aroused strong attention in domestic market, in a short, what exactly the future of China’s banking is will depend on what kinds of efficient measures they would take. So in the final post, I would like to state what these possible measures are.

the Underlying Problems of China's Domestic Banking in Post-crisis Era

After two-year financial crisis, when most countries engaged in recovering financial sectors, on the other hand, China announced some positive information of its banking industry.

The China Banking Regulatory Commission (CBRC) said that the nonperforming loan (NPL) ratio for all Chinese banks was 0.9% by the end of September of 2011, which was declining compared with the last year’s figure 1.1%. Moreover, the total assets of China’s banking marked a breakthrough 100 trillion RMB by the end of the first season of 2011, and the capital adequacy ratio was 12.3%.

However, we cannot conclude that the Chinese banks are healthy, as it is predictable that the dramatic credit growth which was caused by the quantitative easing policy would incur higher NPL ratios in the following years, the tight monetary policy which was launched at the end of 2010 could make it worse.

Many international financial institutions offered report to warn China’s banking. On May 16, 2011, Bank of America Merrill Lynch pointed that the off balance sheet which occupied about 25% to 60% of all bank loans will increase sharply as the effect of the restrictive lending policy and it would break down the strong looking capital and provisions. In the same month, Standard & Poor’s stated that NPL ratios of Chinese commercial banking will rise up quickly and the rate of capital returns will decline accordingly in the next three years.

As far as I am concerned, the quantitative easing policy which propelled China thriugh the 2008 financial crisis seems troubling the Chinese banks a lot in post-crisis era.

Why China’s Banking Can Survive the 2008 Financial Crisis ?

During 2008 and 2010, the subprime crisis in the United States triggered the global financial crisis, China’s banking as its high market capitalizations, good profitability and large scale attracted more and more attentions from the entire world. So, in the next posts I would like to figure out  why China’s banking performed better than other countries’ and what is the situation of its domestic banking after this financial crisis.

From Financial Times

As we can see from the above chart, the top three banks are all from China in 2009.The China’s banking could occupy good position after financial crisis has its outer-cause and inner-cause.

First of all, the outer-cause is the low degree of internationalization of China’s banking. Chinese banks did not participate in the international financial market as sufficiently as large banks in Europe and the US. For example, the total assets of overseas institutions of Chinese banks occupied the all total assets less than 4%, while the percentage of the European and US banks is 40. Also, the bond trading scale of Chinese banks on the international financial market is very limited. When Lehman Brothers declared bankruptcy, the seven listed Chinese banks held its bonds assets less than 722 million US dollars. The loss of the involved China’s banking sector in this subprime mortgage crisis is about10 billion US dollars which is less than 1% of the total size of the US's.

On the other hand, in domestic banking industry, the less intensive competition and government’s efforts contribute to a good performance of China’s banking in financial crisis. In fact the China’s market economy just stared and has not formed a complete mechanism of market competition, that means the competition in china’s banking sector was far less than developed countries, such as the US, accompanied with the insufficient competition, the elimination mechanism was not perfect either, based on this situation, during 2008 and 2010, no banks bankrupted in China. Meanwhile, The People’s Bank of China which is the central bank of China launched quantitative easing policy at the end of 2008, and the government injected 4 trillion RMB to stimulate the whole Chinese financial market, then the turnover of the property market rebounded gradually, as well as the amount of banks’ loans increased dramatically (10 trillion RMB). The scale and profits of China’s banking therefore expanded and rose sharply.