JUST WHAT ARE we to make of China’s banks? World leaders, a bit ropey, poor-to-middling, or cataclysmically awful? Are they now the template on which emerging market banks will be based, or do they face future systemic pressures unparalleled in an economy at its stage of development?
And what is the banking system’s real level of non-performing loans? In a country where secrecy is a virtue, how can we ever really know how many failed bank loans are in the system?
The latter point first. A decade ago, China’s banks were a laughing stock, bursting with soured loans after two decades of uncontrolled lending. Then Beijing got its act together, listing its lenders in Hong Kong and Shanghai and launching an unparalleled crusade to boost transparency and adopt western-style management methods.
Many still boast valuations at or above the level of their largest global peers. At March 14 this year, Industrial and Commercial Bank of China (ICBC), the country’s largest bank, listed in Hong Kong and Shanghai, boasted a market capitalization of $239 billion, well above the largest listed leaders in the US (JPMorgan: $182 billion) and Europe (HSBC: $187 billion).
But then came the financial crisis and China’s banks reverted to type, retreating in on themselves to become again the submissive tools of their political overlords. When Beijing ordered them to lend, as it did during the financial crisis of 2009/10, they dished money out like sailors on shore leave. Beijing mandated the creation of an initial fiscal stimulus package worth $600 billion – a budget that was severely overshot.
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“There was a period before the financial crisis where Chinese banks were seen as western-oriented but that idea has been blown out of the water by the events of the past two to three years. The banks are now tools of the government again, and this is the way it will remain”
Mark Williams, Capital Economics |
As a result, any pretence of being listed banks in the western sense has disappeared, perhaps for ever.
“[China’s] listed banking vehicles are now largely an irrelevancy,” says Mark Williams, senior China economist at Capital Economics. “There was a period before the financial crisis where Chinese banks were seen as western-oriented but that idea has been blown out of the water by the events of the past two to three years. The banks are now tools of the government again, and this is the way it will remain.”
A Beijing-based distressed debt specialist notes: “It has always been amusing to me that people bought shares in these banks believing they are buying shares in real banks. They are not. They are buying shares in the Chinese government.”
This return to type led to the splurge-gun lending of 2009 and 2010. China’s banks officially doled out Rmb17.5 trillion ($2.7 trillion) in new local-currency loans – almost a quarter of China’s entire economic output – in those two years.
And despite exhortations to rein themselves in, including punitive measures such as regularly increasing reserve requirements, the lending orgy continues. In January 2011 banks disbursed Rmb1.04 trillion in new loans, up 18.5% year on year.
That prompted Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), to grumble that by any measure lending had become “excessively fast”. Not that his words and actions – or those of any senior mandarin – seem to have any visible impact. According to Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, loan growth is rising at a “greater rate than ever”, with total lending in 2010 “actually higher than it was in 2009”.
Fresh capital
Much of this splurge lending was siphoned out of state banks into state companies, whence it was dispersed into a dizzying array of investments. Another wave of fresh capital flooded into local government financing vehicles – investment trusts used to pump money into industrial projects to maintain high economic growth and prevent mass redundancies in the face of a weak export market.
Some of this cash was wisely directed into much-needed capital projects such as light rail systems and residential infrastructure. But much went into the sort of scattergun lending reminiscent of China in the 1980s and 1990s.
This led to the construction of ghost towns such as Kangbashi in Inner Mongolia, complete to the last detail bar one: inhabitants. Or the 2010 Asian Games in Guangzhou, more expensive than the 2012 London Olympics; and the two new financial hubs being built in the provincial capital of Henan province, Zhengzhou.
In a normal country, this sort of serendipitous, slapdash lending would quickly leach through the banks. Companies and project vehicles would be unable to service the cost of borrowed capital and loans would be recouped by the banks through sales to third parties.
But China doesn’t work this way. NPLs are a dirty word in a country where economic and social harmony is prized above all and where it is impossible, in legal terms, to declare a state-run company bankrupt.
Given that no one in China, include the country’s own leaders, trusts any official statistic, calculating sour loan ratios is largely guesswork. The last time ICBC estimated its NPL ratio, at the end of September 2010, it stood at 1.15%.
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| Liu Mingkang, CBRC, thinks lending has become “excessively fast” |
Bad loans as a proportion of total loans at ICBC’s overseas branches was reckoned to be even lower, at 0.5%. Across the entire banking sector, from the big-four banks to small city lenders and development lenders, the overall rate of NPLs is estimated by the CBRC at between 2% and 3%.
Few people, probably including senior China bankers, believe their institution’s own internal figures.
It is worth estimating the total quantity of soured loans in China. Talking to the CBRC, it places the total pool of dud loans at about Rmb900 billion, or about double the Rmb450 billion to Rmb500 billion estimated at end-2010 by the People’s Bank of China. That would place NPL ratios at about 4% to 5%.
