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China‘s Banking Sector
Old Problems Overcome – New Problems Ahead
Conference on European Economic Integration (CEEI) 2011
“European Integration in a Global Economic Setting – China, Russia and CESEE”
Vienna, 22 November 2011
Markus Taube
2
Storyline
I. State of the Chinese Economy
II. Banking Sector Development
III. Risk Assessment: The Real Estate „Bubble“
IV. Shadow Banking
V. The Way Ahead
3
Storyline
I. State of the Chinese Economy
II. Banking Sector Development
III. Risk Assessment: The Real Estate „Bubble“
IV. Shadow Banking
V. The Way Ahead
4
Slowing but still strong growth
Contribution to GDP growth%, annual average
10,610,1
9,0
6,86,2
7,9
9,1
10,7
11,5
10,3
9,29,8 9,7 9,5
9,1
0
2
4
6
8
10
12
14
1. Q 2008
2. Q 2008
3. Q 2008
4. Q 2008
1. Q 2009
2. Q 2009
3. Q 2009
4. Q 2009
1. Q 2010
2. Q 2010
3. Q 2010
4. Q 2010
1. Q 2011
2. Q 2011
3. Q 2011
GDP growth%, quarterly, yoy
NBS 2011, IMF 2011
5
Private investors are back
Fixed Asset Investment, yoy growth
IMF 2011
6
Strong exports and increasingly dynamic import activity
Trade Development, monthly, US$ billion
IMF 2011
7
-4
-2
0
2
4
6
8
10
01
.01
.20
07
01
.04
.20
07
01
.07
.20
07
01
.10
.20
07
01
.01
.20
08
01
.04
.20
08
01
.07
.20
08
01
.10
.20
08
01
.01
.20
09
01
.04
.20
09
01
.07
.20
09
01
.10
.20
09
01
.01
.20
10
01
.04
.20
10
01
.07
.20
10
01
.10
.20
10
01
.01
.20
11
01
.04
.20
11
01
.07
.20
11
01
.10
.20
11
Overall CPI y-o-y Urban CPI y-o-y Rural CPI y-o-y
Inflation is coming down
NBS 2011
CCB Int‘l 2011
8
Money supply and formal sector loans back to normal
0
5
10
15
20
25
30
35
01
.01
.20
07
01
.04
.20
07
01
.07
.20
07
01
.10
.20
07
01
.01
.20
08
01
.04
.20
08
01
.07
.20
08
01
.10
.20
08
01
.01
.20
09
01
.04
.20
09
01
.07
.20
09
01
.10
.20
09
01
.01
.20
10
01
.04
.20
10
01
.07
.20
10
01
.10
.20
10
01
.01
.20
11
01
.04
.20
11
01
.07
.20
11
01
.10
.20
11
M2, yoy
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
10000
20000
30000
40000
50000
60000
01
.01
.20
07
01
.04
.20
07
01
.07
.20
07
01
.10
.20
07
01
.01
.20
08
01
.04
.20
08
01
.07
.20
08
01
.10
.20
08
01
.01
.20
09
01
.04
.20
09
01
.07
.20
09
01
.10
.20
09
01
.01
.20
10
01
.04
.20
10
01
.07
.20
10
01
.10
.20
10
01
.01
.20
11
01
.04
.20
11
01
.07
.20
11
01
.10
.20
11
Mrd
. Y
ua
n
Total loans Change y-o-y
RMB loans
of financial institutions
CBRC 2011
Bloomberg 2011
9
Storyline
I. State of the Chinese Economy
II. Banking Sector Development
III. Risk Assessment: The Real Estate „Bubble“
IV. Shadow Banking
V. The Way Ahead
10
China‘s banking system
Increasing diversity,
but still dominated by the big-4IMF 2011
11
The ‘old’ problems are gone
The problem of NPLs
appears to have been
overcome
– and it remains an SOCB
issue.
0
2
4
6
8
10
12
14
16
18
01
.03
.20
04
01
.06
.20
04
01
.09
.20
04
01
.12
.20
04
01
.03
.20
05
01
.06
.20
05
01
.09
.20
05
01
.12
.20
05
01
.03
.20
06
01
.06
.20
06
01
.09
.20
06
01
.12
.20
06
01
.03
.20
07
01
.06
.20
07
01
.09
.20
07
01
.12
.20
07
01
.03
.20
08
01
.06
.20
08
01
.09
.20
08
01
.12
.20
08
01
.03
.20
09
01
.06
.20
09
01
.09
.20
09
01
.12
.20
09
01
.03
.20
10
01
.06
.20
10
01
.09
.20
10
01
.12
.20
10
01
.03
.20
11
01
.06
.20
11
NPL ratio in %
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
500
1000
1500
2000
2500
01
.03
.20
04
01
.06
.20
04
01
.09
.20
04
01
.12
.20
04
01
.03
.20
05
01
.06
.20
05
01
.09
.20
05
01
.12
.20
05
01
.03
.20
06
01
.06
.20
06
01
.09
.20
06
01
.12
.20
06
01
.03
.20
07
01
.06
.20
07
01
.09
.20
07
01
.12
.20
07
01
.03
.20
08
01
.06
.20
08
01
.09
.20
08
01
.12
.20
08
01
.03
.20
09
01
.06
.20
09
01
.09
.20
09
01
.12
.20
09
01
.03
.20
10
01
.06
.20
10
01
.09
.20
10
01
.12
.20
10
01
.03
.20
11
01
.06
.20
11
Mrd
. Y
ua
n
Total NPL (right) Share of SOCBs (left)
Total NPL and share of SOCB
(left) (right)CBRC 2011
Bloomberg 2011
12
Substantially strengthend, impressive crisis resistance
Thanks to the substantial decline of their NPL burden as well as strengthend
equity capital positions all banks would withstand a NPL-quadrupling crisis
upholding capital adequacy ratios of more than the required 8%.
IMF 2011
13
Post-crisis tightened monetary policy
With inflation coming down and GDP growth slowing down
China‘s monetary policy may have reached a turning point
allowing for a loosening of policies in the next months
– liquidity spillovers in the informal sector are to be prevented CBRC 2011
IMF 2011
14
Storyline
I. State of the Chinese Economy
II. Banking Sector Development
III. Risk Assessment: The Real Estate „Bubble“
IV. Shadow Banking
V. The Way Ahead
15
A bubble?
Residential housing100 = Dec 2006, sa
Housing affordabilityPrice-to-income ratio
IMF 2011
16
Local bubbles
Property Prices1000 Y RMB,/s.qm., sa, 3mma
Commercial Real Estate1000 Y RMB,/s.qm.
IMF 2011
17
Banking sector exposure
Real Estate Lendingquarterly
IMF 2011
Mortgage Loansyearly
Hovering on a high plateau ,
formal sector (!) real estate lending
has recently leveled off.
Informal inflows in the sector are
understood to have remained high.
18
Fighting fire with fire – and more …
Social housing in the 12th 5YP:
� Construction respectively renovation of 35 million housing units
� Provision of social housing for 20% of urban population from 7%
end of 2010
� 35% of all housing construction starts in 2011 based on government
housing initiatives
Additional measures:
− Increased downpayment-requirements for mortgage loans
− Higher interest rates (in general and depending on type of investment)
− Restrictive authorization procedures for purchase of 2nd and 3rd apartments
− Restrictive authorization of purchase requests by non-locals
− Real estate tax (pilot project in Shanghai und Chongqing)
− Charging of business tax for real estate resold during first 5 years after purchase
− Binding commitment of local governments to enforce price targets
(maximum price increases per year coupled to disposable income development)
19
Storyline
I. State of the Chinese Economy
II. Banking Sector Development
III. Risk Assessment: The Real Estate „Bubble“
IV. Shadow Banking
V. The Way Ahead
20
20
Global Financial System
Transaction-based
ChineseInformal Lending
Channels
Chinese Formal Financial System
Transaction-based
Additional dimension of financialinteraction – May serve as back-up in case of formal dis-intermediation(liquidity crunch)
Better equipped to serve the specificfinance requirements of the Chinese ‚start-up economy‘ (!?)
More than there seems to be
21
Negative real interest on savings accounts
1-year household savings deposit rate
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
18
.08
.20
06
18
.11
.20
06
18
.02
.20
07
18
.05
.20
07
18
.08
.20
07
18
.11
.20
07
18
.02
.20
08
18
.05
.20
08
18
.08
.20
08
18
.11
.20
08
18
.02
.20
09
18
.05
.20
09
18
.08
.20
09
18
.11
.20
09
18
.02
.20
10
18
.05
.20
10
18
.08
.20
10
18
.11
.20
10
18
.02
.20
11
-4
-2
0
2
4
6
8
10
01
.01
.20
07
01
.04
.20
07
01
.07
.20
07
01
.10
.20
07
01
.01
.20
08
01
.04
.20
08
01
.07
.20
08
01
.10
.20
08
01
.01
.20
09
01
.04
.20
09
01
.07
.20
09
01
.10
.20
09
01
.01
.20
10
01
.04
.20
10
01
.07
.20
10
01
.10
.20
10
01
.01
.20
11
01
.04
.20
11
01
.07
.20
11
01
.10
.20
11
CPI – overall
Negative real interest rates
on savings accounts in the formal sector
continue to drive savers into the
(informal) shadow banking sector,
draining the formal financial system
of resources
22
The ‘formal‘ shadow banking sector
Trillion
Y RMB
PBOC 2011
China Economic
Watch 2011
*
*
“Social Finance”-Concept of NBS, * No shadow banking
23
The informal dimension of Chinese banking
hard information soft information
third party enforcement
‘Transaction-based lending’.
Standard object of analysis in the law,
finance & growth literature.
Standardized information regimecombined with highly formalized
universalistic legal system.
History (reputation) plays is
– in principle – of no importance.
‘Relationship lending’ of the law, finance
& growth literature. The evaluation of
potential financial transactions is
primarily based on information gathered by informal institutional arrangements (-> History rules!). Ensuing financial
transaction are embedded in formal justiciable contractual relations.
second party enforcement
Requires close relationship between
transaction partners in order to
facilitate property rights enforcement
inside a social network and without
recourse to an external ‘umpire’. Given
this close relationship hard information
can be expected to be systemically
less important than soft information for
most financial transactions.
-> Low empirical value: hostage
giving, pawnbroker
Obstacles to co-operation like adverse
selection and ex-post opportunism, i.e.
property rights enforcement, are solved
by informal mechanisms, first of all
social networks based on particu-
laristic ordering regimes. Information
required to make financing decisions is
gathered in non-standardized form in
the context of the underlying social
network by means of frequent and
multiplex interaction.
-> History rules!
24
Specific forms of China’s ‘shadow banking sector’
‘Formal’ Shadow Banking
− Off-balance-sheet lending
− Special Purpose Vehicle
lending
− Direct company-to-company
lending
− Trust companies / Wealth
management organizations
− Leasing companies
− Regulated pawnshops
− Loan guarantee companies
− Small loan companies /
microfinance organizations
− Offshore borrowing
− Private equity organizations
‘Informal’ Financial Intermediation
− Underground banks
− Private money houses
− Associations for mutual assistance
− Rotating savings and credit
corporations (ROSCA)
− Private peer-to-peer lending
− Unregulated pawnshops
− Unauthorized offshore borrowing
Total volume of ‘formal’ plus ‘informal’
shadow banking unknown,
but probably in the range of a minimum
20 trillion annual flow.
25
Storyline
I. State of the Chinese Economy
II. Banking Sector Development
III. Risk Assessment: The Real Estate „Bubble“
IV. Shadow Banking
V. The Way Ahead
26
Three major issues to look at
Property bubble
Are government policies adequate
and can they be fast enough to
deflate local bubbles
Political economy
Can the reform momentum be
upheld in the run up to China’s
leadership change in 2012/13
Shadow banking
Government must separately
address two types of shadow
banking
2727
University of Duisburg-Essen
Mercator School of Management
IN-EAST, Institute for East Asian Studies
Chair for the East Asian Economy / China
Prof. Dr. Markus Taube