Global Export

1


Global Export Project Finance (GEPF) Global
Corporate Banking
CHINA The Chinese Banking system survival or
collapse ? 5 December 2002 V. Reusens
2
INTRODUCTION

• Solvency
• Liquidity
• Confidence

3
HISTORY

• Until 1979 monopoly of the Peoples Bank of
  China
• 1979 shortly after Deng Xiaoping came to power
• Start economic reforms and
• Start of the reorganisation of the Banking
  system
• In 1983
• PBOC central bank
• Creation of 4 State-owned commercial banks
  active in commercial banking and policy lending

4
HISTORY

• By 1993
• Key state entities are setting up smaller
  national and regional banks to supplement
  lacking banking facilities
• In 1994
• Creation of three policy banks
• 4 State-owned banks start their
  transformation into commercial banks

5
HISTORY

• In 1995
• A series of regulations were issued - the
  Law of the PRC on the Peoples Bank of China
  (the Central Bank Law) - the Law of the PRC on
  Commercial Bank (the Commercial Bank Law)
  December 2001
• Accession to WTO there is an avalanche of
  new regulations regarding the banking sector
• Time table to gradually open up the market to
  the entrance of foreign banks
• December 2006
• Free all restrictions removed

6
The structure of the Chinese banking system

• The Peoples Bank of China (PBOC) Central Bank
• Three policy banks
• Four state-owned commercial Banks - the BIG
  FOUR
• 10 Shareholding Commercial Banks also called
  Joint Stock Commercial Banks
• 190 City commercial banks
• 40 000 Rural credit co-operatives
• Foreign Banks

7
The structure of the Chinese banking system

• Three policy banks
• The State Development Bank of China
• The Export-Import Bank of China
• The Agriculture Development Bank of
  ChinaFour state-owned commercial Banks - the
  BIG FOUR
• The Industrial and Commercial Bank of China
  (ICBC)
• The Bank of China (BOC)
• China Construction Bank (CCB)
• Agricultural Bank of China (ABC)

8
The structure of the Chinese banking system

• The 10 Shareholding Commercial Banks also called
  Joint Stock Commercial Banks
• Bank of Communications
• China Merchants Bank
• China Everbright Bank
• CITIC Industrial Bank
• Guangdong Development Bank
• Shanghai Pudong Development Bank
• China Minsheng Banking Corporation (CMBC)
• Hua Xia Bank (HXB)
• Fujian Industrial Bank
• Shenzhen Development Bank

9
The structure of the Chinese banking system
City commercial banks 190 Rural credit
co-operatives some 40 000 Foreign Banks
10
Structure of Chinas financial system
11
Structure of Chinas financial system
Nb some ofthe figures mentioned in the Banker do
not match other infomation sources
12
Asset Quality - NPLs - AMCs

• 1. Accounting rules - Classification
• NPLs old versus new system rule on accruing
  interest
• Loan Loss reserves Loan Loss Reserves to total
  loans ratio 1 regulatory guidelineWrite-offs
  accounting rules
• 2. Ratios indicating Solvency
• Loan Loss Reserve as a of Total Loans
• Loan Loss Reserve as a of Total NPL
• Net impaired loans (NPL - Loan loss
  reserve) as a of Equity

13
Asset Quality - NPLs - AMCs
3. Non Performing loans (NPLs) end 2001 of the
Big Four PBOC figures 25.36 of total loans
RMB 3 000 billion (USD 362 billion) 31 of the
GDP (2001) Other sources Could it be more?
Some observers pertain that the NPL is much
higher. 40 to 50 of total loans?Loan Loss
reserves PBOC rule minimum 1 of total
loans Tax rule only 1 tax deductible
14
Asset Quality - NPLs - AMCs

• Causes Lending to SOEs - policy
  lending Inadequate risk analysis Accounting
  not transparent4. Measures already taken to
  improve solvency of the Big Four
• --gt 1998 Capital injection RMB 270 billion
  (USD 32.6 billion)
• --gt Assets Management Companies (AMC)
• Set up in 1999
• Characteristics - Independent legal
  entities - Wholly owned by the MOF - Capital
  RMB 10 billion per AMC

15
Asset Quality - NPLs - AMCs

• Details Total NPLs transferred Estimated
  NPL/ total loans (99) RMB billion USD
  billion transferredXinda CCB 373.0 45 21.7Or
  iental ICBC 267.4 32.3 16.8China Great
  Wall BOC 345.8 41.8 19.3Huaron
  ABC 407.7 49.3 21.8
• Total amount transferred 1 400.0 bln 168 bln
• Transferred at book value
• in exchange for a 10 year bond issued by the MOF
• (coupon 2.25 p.a.)

16
Asset Quality - NPLs - AMCs

• Disposals (situation end 2001)How
  Rescheduling / auction (sale of assets of the
  debtor) / debt - equity swapsAmount disposed
  off RMB 170.7 billion (12 of the total NPLs
  of the AMCs)Amount recovered in cash RMB
  35.77 billion (a 21 cash recovery rate)
• Are NPLs going down ?PBOC targets for the
  reduction of NPLs of the Big Four 3 p.a.

17
Chinese banks ratings fitch and moodys
Method- Individual Rating Intrinsic
value How the Bank would be viewed if it was
entirely independent and could not rely on
external support- Support Rating Whether
the Bank would receive support should this be
necessary
18
Chinese banks ratings fitch and moodys
19
Challenges

• 1. The system
• Clean up the SOEs
• Stop inappropriate interference in management
  of the Banks- Continue to develop an efficient
  banking supervision system
• 2. The State-owned commercial banks
• Improve corporate governance
• Face Competition of other domestic banks
• Improve financial transparency Disclosure
  problem loans and loss reserves Off balance
  sheet transactions

20
Challenges

• Prudence concept Recognition of revenues only
  when reasonable certainty Provisions allocated
  to known losses
• Reporting accounting according to IAS
• Improve asset quality reduce NPL ratio by good
  internal risk control
• Improve profitability new products / customer
  service
• Increase equity to reach capital adequacy
  criteria (Basel), while setting up loan loss
  reserves and writing off bad loans
• Improve technology
• Innovation regarding products electronic
  banking
• HRM personnel management systems, establish
  an adapted incentive mechanism
• Cost control
• Turn the corporate culture around in order to
  focus on profit maximisation
• Streamline the distribution network
• Cope with the competition from the Foreign banks
  

21
Challenges

• 3. The Joint stock commercial banks and the city
  commercial banks?
• How to grow without making mistakes
• As their funding relies less on savings deposits
  from individuals they are more vulnerable
• Face competition of the foreign banks
• 4. All Chinese Banks
• Develop the market
• Bank card business
• Online banking
• Consumer credit Car financing
• Mortgage loans

22
Foreign banks in China - WTO effect

• Entry Strategy- Greenfield
• - Alliance with a domestic bank
• Ways available
• Establish one or more branches
• Establish a wholly owned Subsidiary
• Acquire a stake in a Chinese bank
• Set up a JV Bank with a Chinese partner
• Present presence
• 214 representative offices
• 158 foreign bank branches
• 13 JV banks

23
Foreign banks in China - WTO effect

• Small market share
• Around 2 of total banking assets in 2001
• 15 of the foreign currency loans
• Current Rules WTO time tableBank License
  regulationsType of activity
• Foreign currency business
• Renminbi business

24
Foreign banks in China - WTO effect

• Customers - Foreign Invested Companies (JVs
  and Wholly owned foreign enterprises)
• Foreign citizens
• Chinese enterprises
• Chinese individuals
• Geographical restrictions RMB business

25
Foreign banks in China - WTO effect
Time table of the planned liberalisation (type
activity / type of customer)
26
Foreign banks in China - WTO effect
Timetable of Phase-in by Geographical Areas As
from accession, the geographical restrictions for
foreign currency business was lifted. For the
creation of new Branches and the geographical
restrictions for RMB business the following
opening up has been plannedBefore
WTO Shanghai, Shenzhen At WTO accession
Tianjin, Dalian, WTO accession 1 year
Guanzhou, WTO accession 2 years Jinan,
Fuzhou, Chengdu and Chongqing WTO accession
3 years Kunming, Zhuhai, Beijing and
Xiamen WTO accession 4 years Shantou, Ningbo,
Shenyang and Xïan WTO accession 5 years no
geographical restrictions anymore
27
Foreign banks in China - WTO effect
Restrictions - Complains - WTO Compliance? 1.
One branch a year. 2. Working Capital
requirements - RMB 100 million (USD 12
million) -for a simple foreign currency
licence - RMB 200 million (USD 24 million) - for
a RMB license - RMB 600 million (USD 72.5
million) - for the full activity list without
customer restriction (by 2006). 30 of the
amount to be deposited at a domestic bank. A
working capital requirement per branch.3. A
Capital adequacy ratio of 8 for RMB
loans imposed per branch
28
Foreign banks in China - WTO effect
4. Foreign currency transactions remain
controlled by the SAFE5. RMB interbank funding
source capped at 40 6. Foreign companies can
receive shareholder loans only on accounts
opened with Chinese state-owned banks. 7.
Companies in China may usually only hold one
bank account. If they want to move this account
outside the area where thy are located, the SAFE
need to give approval. 8. Interest rates on
deposits in foreign currency below USD 3 million
are not freely determined by the deposit-taking
bank but are imposed by the PBOC.
29
Examples of foreign investment in the Chinese
bank market

• NEWBRIDGE CAPITAL a US Investment firm --gt
  Shenzhen Development Bank
• CITIGROUP --gt Shanghai Pudong Development
  Bank
• BNP PARIBAS --gt International Bank of Paris
  and Shanghai. JV bank with ICBC
• HONG KONG SHANGHAI BANKING CORP (HSBC) --gt
  the Bank of Shanghai. --gt Beijing City
  Commercial Bank.
• INTERNATIONAL FINANCE CORP (IFC ) Worldbank
  group --gt Nanjing Commercial Bank --gt
  Beijing City Commercial Bank.

30
Conclusions

• Banking is fundamental to the health of the
  nation
• Reforms already applied upto now enormous
  effort
• The Big Four have large market share. We expect
  they will lose market share but not in a
  disruptive manner
• Letting go of the policy lending move from
  unhealthy relationship banking to healthy
  relationship banking

31
Conclusions

• Competition for the Big Four will increase but
  the authorities will be able to control
  Many regulations exist that protect the
  market - interest rate control - foreign
  exchange control (SAFE) - bank licensing -
  financial markets limitations - non
  convertibility of the RMB
• State Owned Commercial Banks will not be able
  to arrive at Capital Adequacy (Basle rules) on
  their own in a short period even if they
  increase profitability dramatically. The
  government will need to help through capital
  injections and the AMC system.

32
Conclusions

• This intervention by the Government will be
  costly. We expect that the government can
  afford the intervention.
• Time
• Economic growth
• Capacity to increase indebtedness
• Large amounts of FDI
• Large exchange reserves
• Capacity to increase taxation
• Foreign banks will inject capital by taking
  participations in domestic banks (greenfield
  project is not efficient)

33

Your international transactions Our international
expertise
Global Export Project Finance (GEPF) Global
Corporate Banking