Ties That Bind - Bay Area Council Economic Institute

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Ties That Bind
assets, and smaller “city banks” 5.4%. Growth has been highest among the joint-stock and city
banks, which together have seen their market share rise from 30.5% in 1998 to 47.6% last year.
Because of weak capital markets, banks offer the most important form of external financing
available to the majority Chinese firms. Bank loans and deposits—at 121% and 150% of 2005
GDP, respectively—are unusually large for a developing economy.
Combined personal and business savings during 2005 were estimated at around $1.1 trillion, or
49% of China’s GDP. At the same time, the People’s Bank of China reported cumulative personal
savings across China reaching $1.7 trillion as of yearend 2005—the result of an annual average
savings rate of 40%. China’s household savings rate is high in part to cover retirement and
health care in the absence of a reliable safety net, and in part because the money has had nowhere
else to go:
� Home and car ownership were out of reach of all but a small number of Chinese.
� Cultural aversion to debt has limited consumer products such as credit cards.
� The renminbi is not convertible for capital account transactions, limiting overseas investment
by individuals.
� The poor quality of listed firms, and high stock valuations on the Shanghai and Shenzhen
exchanges have limited equity investment.
While banks are now at the forefront of efforts to develop new markets in bonds, derivatives and
currency trading, larger banks have until recently had few lending outlets for their vast deposit
balances, ending up by default the principal lenders—often by government directive—to thousands
of mostly inefficient state-owned enterprises. Local banks, meanwhile, have lacked experience
and training in credit evaluation and accounting practices, and have tended to disperse loans
based on personal or political connections, or at the behest of government officials to promote
economic goals with little regard to attendant risk. Fraud has been common.
As a result, China’s government has given a high priority to cleaning bank balance sheets, reforming
corporate governance and improving risk management. Since 1998, the government has
spent $288 billion to help large banks dispose of bad debts and recapitalize. In 2003 a new supervisory
body, the China Banking Regulatory Commission (CBRC), was established to improve
oversight and accelerate reform of bank lending practices. Even then banks continued to push
loan growth to excessive levels in overheated sectors like steel automobiles and property until
regulators cracked down. A June 2006 CBRC report estimates remaining current non-performing
bank loans at $160.6 billion, an overall ratio of 7.5% (9.5% for state-owned banks versus 3.1%
for newer joint stock banks) that is slowly but steadily declining. This has made China’s national
banks increasingly attractive candidates for foreign investment, restructuring and, in some instances,
private listing.
At present foreign investors may acquire stakes up to 25%, buying varying degrees of active participation
in restructuring, as well as access to China’s potentially huge retail banking market
down the road. Over 2001–03, overseas banks acquired shares in Chinese banks valued at $343
million for stakes ranging from 5–16%, including Citigroup’s $72 million acquisition of 5% of
Shanghai Pudong Development Bank. Two transactions in 2004 totaled $2 billion, including