Banking Reform in China
Following up on this post describing advice the U.S. is giving China, Weijian Shan of Newbridge Capital analyses the Chinese banking system, the banking reforms in progress, and the need for further widespread reform in this commentary from the Wall Street Journal:
Will China's Banking Reform Succeed? By Weijian Shan, Wall Street Journal: ...more than two years ago, China's newly appointed governor of the central bank, Zhou Xiaochuan, told a business audience that China would take a "gradualist" approach to reforming its banking system. Many thought the governor meant China was in no hurry to fix its banks. Since then, however, China has injected more than $60 billion to recapitalize four of its five largest banks and has transferred some $200 billion worth of nonperforming loans out of these banks ... almost twice as much as Korea spent to restructure its banks during the 1997-98 financial crisis. ... A healthy banking system ... is necessary for China to sustain its economic growth. ... In spite of its rapid growth ... the Chinese economy remains inefficient and wasteful. ... These inefficiencies have not yet slowed down the economic expansion because the growth fueled by the country's extraordinarily high savings rate ... As the savings are channeled into investments by banks, the inefficiencies and wastefulness simply turn into bad loans. ... To continue to grow, China needs to clean up its banking system and force its banks to kick the habit of underwriting bad loans. A strong banking system will ensure more efficient allocation and use of scarce resources, allowing the economy to grow on the basis of improved productivity, as opposed to increased input. Chinese leaders' resolve to reform the nation's banking system shows that they understand what it takes to sustain economic growth. They are wise and far-sighted enough to take painful measures without waiting until the going gets tough. Whereas many other countries regard foreign capital as the last resort or a necessary devil in solving a banking crisis, China is in the enviable position of having sufficient [foreign-exchange reserves] to clean up its banks without foreign help. ...
China wants foreign investors not so much for their capital, but for the expertise they bring in. As such, China is prepared to be generous. ... Foreign investors may be only minority shareholders. But it is whether they are treated as necessary devils or welcome angels that will make the difference between the success and failure of China's banking reform. Chinese banking officials do not wish foreign investors to simply take a ride. They want them to contribute to changing how banking business is conducted in China. Chinese banking reform does not just redress the balance sheet, it involves systemic change. ... the most significant step is China's effort to push its banks to adopt good corporate governance. Almost all the national banks have been, or are in the process of being, transformed into joint stock companies with boards whose independent directors must represent a third of the total. ... This subjects them to greater transparency, tighter supervision and close scrutiny by overseas regulators and public shareholders. While what China has accomplished thus far in its banking reform is impressive, Chinese banking still has a long way to go to meet international best practices. ... More broadly, it will take time for Chinese banks to build a real credit culture in which lending decisions are made on the basis of the credit worthiness of the borrower and risk analysis, regardless of relationships and government policies. In hindsight, a "gradualist" approach means one step at a time, although the pace of change is anything but slow. ... The rest of the journey will be very tough. Still, there is good reason to believe that China will get there eventually, given the vision and resolve its leadership has shown in banking reform so far.
Posted by Mark Thoma on October 17, 2005 at 03:12 AM in China, Economics, Financial System, International Finance | Permalink | Comments (10)
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? Daily linklets 18th October from Simon World
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Comments
This charge of "bad performing loans" and even the more general charge of "inefficient banking system" is wearing thin in some quarters. Japan, too, was beset by these perils. They both need to get up to speed and do some house cleaning, [note to self] get some professionals perhaps, modernize those institutions --throw out the abacus.
Let the pros help forchrisake. Our pros could use the work as the Western market looks to be close to saturation judging by the latest numbers. 'Time to get our mitts on those Chinese reserves and make hay'
I think is how the Chinese view these offers from their sophisticated Western collegues. Just looking at those GDP numbers and the debt ratios makes me think that its a buyer's market and the Chinese can afford to be picky.
The deal, if there is one, is fueled not by China's crumbling position, but ours, no?
Posted by: calmo | Link to Comment | Oct 17, 2005 7:40:42 AM
Countries with a trillion dollars in foreign reserves can afford to slowly restructure financial systems, as China and Japan are doing. The Japanese restructuring is well advanced, and I am increasingly impressed by Japan's new economic performance. China beyond restructuring is building a modern financial system, and there is leeway in foreign reserve accumulation to easily be successful.
Posted by: anne | Link to Comment | Oct 17, 2005 8:23:36 AM
The question that we seem remarkably reluctant to ask, is beyond the German or Japanese or Chinese financial systems, what about the American system? Probably I am completely wrong, how could I be right, but in the last week I thought we found the head of a prime Wall Street financial concern had secretely borrowed a half billion dollars from the company. I must be wrong however. Surely. Why is it that the lack of competitiveness beyond advertising of American financial companies is so overlooked?
Posted by: anne | Link to Comment | Oct 17, 2005 8:29:39 AM
http://select.nytimes.com/2005/10/16/business/16gret.html
October 16, 2005
If Refco Isn't Scary, What Is?
By GRETCHEN MORGENSON
SECURITIES regulators and pundits say that there will be no financial market tremors emanating from Refco Inc., the enormous commodities and financial services firm that, after more than 30 years in business, hit the skids last week. Maybe so, but it seems incomprehensible that a financial domino this big can topple without making a sound. Refco, after all, was one of the largest players in commodities, derivatives and United States Treasury markets, operating in 14 countries and serving more than 200,000 clients.
Financial market tremors or not, there is plenty to be afraid of in the Refco mess. First, of course, is the frightening spectacle of the company's chief executive, Phillip R. Bennett, hiding a personal loan from Refco worth almost half a billion dollars from his shareholders, as described by prosecutors in their suit charging him with securities fraud. Then there is the inability of Refco's auditors or investment banks to notice the repeated shuffling of this loan on and off the company's balance sheet.
Watching a company that went public just two months ago sink from sight is also disquieting, of course.
But scariest of all may be the fact that supposedly savvy institutional investors who are fiduciaries - TIAA-CREF and Oppenheimer Funds, for example - bought Refco's shares in spite of the hair-raising risk factors detailed in the prospectus.
One example was the disclosure that Refco's internal auditors reported two significant deficiencies in its internal financial controls. Refco, for example, lacked "formalized procedures for closing our books." Sounds like a big deal, no?
Refco also said that it was found to be deficient in its ability to prepare financial statements "that are fully compliant with all S.E.C. reporting guidelines on a timely basis."
This is the way investors live now: a financial services company's inability to prepare its own financial statements does not preclude financial institutions from buying its stock.
Wait, there's more. Refco told prospective investors that it was under investigation by both the United States attorney in New York and the Securities and Exchange Commission. The S.E.C.'s inquiry centered on Refco Securities, its brokerage subsidiary, and its chief executive, Santo C. Maggio.
At the time of the offering, the prospectus said, Mr. Maggio was near a resolution of the matter and was ready to accept an order from the commission suspending him from any supervisory duties at the firm for one year. Nevertheless, "while complying with the restrictions of such supervisory suspension, Mr. Maggio would continue to work for us and Refco Securities in his current capacities," the prospectus said.
Isn't Wall Street wonderful? ...
Posted by: anne | Link to Comment | Oct 17, 2005 8:32:34 AM
Spectacular. [Ok that IS from G Trudeau.]
Need to hear your view of the US delegation and its bevy of heavies from the Financial world, Anne. Will the progress report mention anything more than currency exchange? tariff legislation? globalization hitting a snag?
I can hardly wait.
Posted by: calmo | Link to Comment | Oct 17, 2005 10:27:37 AM
The answer to middle class needs and sureties is in gradually reforming domestic economic structure and fiscal policy. China can be negotiated with on trade issues, as we negotitate with the European Union.
Posted by: anne | Link to Comment | Oct 17, 2005 12:22:20 PM
This is actually a nice article as it deals with some of the pre-requisites of a healthy economy - a stable and well-run financial sector.
Calmo wrote;
"Our pros could use the work as the Western market looks to be close to saturation judging by the latest numbers. 'Time to get our mitts on those Chinese reserves and make hay'"
- Well, as the article points out that depends on how we
(read: experts) are greeted in Beijing. We need to do a serious anglo-saxon charm campaign, but it might pay off in the end :).
Anne wrote;
"China can be negotiated with on trade issues, as we negotitate with the European Union."
- That requires furhter evaluation of the Yuan I would say. As I said in a recent comment on http://neweconomist.blogs.com it will be interesting to see how the new fed chairman will narrate the account deficit - lack of consumer thrift or unfair Chinese currency levels.
See post here - http://neweconomist.blogs.com/new_economist/2005/10/china_contempla.html#more
I actually think the article from Economist was posted by Mark Thoma first, so this is a trackback of a trackback :S.
Posted by: Claus Vistesen | Link to Comment | Oct 17, 2005 2:20:23 PM
With respect to calmo and "pros" modernizing institutions, it appears that the thing Wall Street is most "pro" at is ripping off its clients.
One could infer from this article that China's appetite for US debt will not decrease anytime soon, as the source of China's foreign reserves is US consumer spending fuelled by low interest rates.
A truly comical statement in this article is the following:
"While what China has accomplished thus far in its banking reform is impressive, Chinese banking still has a long way to go to meet international best practices. ... More broadly, it will take time for Chinese banks to build a real credit culture in which lending decisions are made on the basis of the credit worthiness of the borrower and risk analysis, regardless of relationships and government policies."
The series of scandals that have hit the US financial system over the past few years(Enron, Refco, AIG) indicate that the best practices that China needs to live up to are a pretty low standard.
Posted by: Scott Peterson | Link to Comment | Oct 17, 2005 3:42:33 PM
We are on the same page Scott.
"Let the pros help forchrisake." was my flagged ("forchrisake") sarcasm that usually works (forchrisake).
G. Trudeau writes Doonsbury, a political cartoon strip that for many is a window on US fed politics. A lot of GOP affiliated newspaper chains cancelled this strip in the run-up to the last elections. He's that good.
"Spectacular" arose in the context of a comment about Mr Trump's? most recent wife. "Spectacle" is what is intended.
Ok, with all due respect Scott, don't make me do this again. Have mercy on this fledgling writer.
btw, thanks for reminding us about AIG, I'd forgotten that heist.
Posted by: calmo | Link to Comment | Oct 17, 2005 7:09:10 PM
