The Chinese Banking System and
the prospects of foreign banks and operators
China is in the process of
passing new laws aimed at bringing the country’s banking system up to
international standards.
These reforms will be in place by the middle of this
year, but at the moment there is no information available on pending
intervention in the central bank, the People’s Bank of China
(PBOC).
The present situation
60-80% of all loans
granted by the local banking system are currently granted in accordance to the
systems laid out in the five-year plans. The majority of these are to the
benefit of state owned enterprises (SOEs). The four major Chinese banks (Bank of
China, Agricultural Bank of China, Industrial and Commercial Bank of China,
China Construction Bank) handle 82% of all financial business.
The
complex industrial reorganizations of the SOEs that is currently in progress in
order to increase their competitiveness in preparation for the imminent entrance
of China to the WTO and that should place these enterprises in a favorable
position in comparison to foreign companies, makes it almost impossible, as well
as financially destabilizing, depriving them of the loans from state banks,
almost their only source of liquid assets.
The slow reorganization of the
state sector, which adsorbs most of the available credit from state banks, is
mostly paid for by up-and-coming Chinese private companies and foreign
investment enterprises which encounter little credit availability. This
situation may not rapidly be solved, keeping in mind that a credit deficit of
around 200 billion dollars has been estimated for Chinese state banks. Other
appraisals suggest an even larger deficit, but so far there are no fully
reliable estimates.
The chance, however, that this forced bond between SOEs
and banks might generate another financial crisis with similar magnitude to the
ones that have hit other South-Eastern Countries in Asia over the last four
years is very small if we keep in mind that:
- the source of domestic revenue by which the Chinese finance the public debt is conspicuous;
- the exposure of Chinese companies to international markets is proportionally controlled;
- the strong protection enjoyed by a currency anchored to the dollar makes it very hard to enact speculative attacks on the exchange system such as succeeded in 1997.
The limited convertibility
of the local currency makes it mandatory that all domestic payments – even those
between non-residents – be done in domestic currency. International trade (cross
border payments), however, can only be done in a strong currency. This harms
non-resident operators who want to work in the Chinese import-export
market.
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The best advice to Italian operators remains the adoption of a
cautious credit policy with the local trade partner and the support of a foreign
bank with long experience in the local market and an operational presence on the
local market.
Permission to operate in domestic currency is still limited
to 32 foreign banks, of which 24 are in Shanghai and 8 in Shenzhen - a very
obvious limitation if we keep in mind that there are 274 non local Credit
Institutions, of which 163 are Representative Offices that are not allowed to be
active.
The credit situation in China also presents some problems
relating to the fact that accountancy evaluation and monitoring of Chinese
companies is done in a not exactly transparent manner (and with a control
central of financial risks still to come). In relation to capital, retail
deposit activity directly in RMB is still forbidden to foreign banks and the
electronic transfer market doesn’t offer enough liquidity especially due to the
lack of shares that are needed as collateral for the operations of spot
terms.
Foreign banks often have to depend upon bilateral agreements with
Chinese banks to get any local currency.
Despite some limitations such as
the obligation to pay in RMB, infrequent use of cheques, absence of consumer
credit and installment plans and little or no use of credit means such as
leasing, different methods of payment are available to the private consumer in
China to satisfy spending requirements, although there is still room for
improvement.
Despite the promulgation of the law on negotiable means of
10th of May 1995, which regulates the issuing and circulation of cheques, drafts
and promissory notes in line with international conventions, the most common
method of payment is cash, both direct or through bank transfer (in some cases
cable transfer is also used). This is because a real clearing house does not
exist on a national level and so credit instruments and methods of payment are
neither discounted nor negotiated, with credit approval sometimes taking over a
month.
The major foreign banks in China are, however, able to offer
guarantees in favour of Chinese banks to assure funding in RMB to joint ventures
and to companies with only foreign capital. Thanks to these guarantees by
foreign banks, enterprises built on foreign investments in China have access to
financing in local currency without the often heavy burden of credit evaluations
by Chinese banks.
More sophisticated financial means are offered to those
who work in China by Italian or international banks in Hong Kong, a sector that
traditionally links the specificity of the most evolved capital markets with
those service centers for commerce in the region. In particular, the activity of
trade finance amongst which are discount operations of letters of credit issued
by primary Chinese banks in favour of international
exporters.
The banking system after the entrance in the
WTO
With the entry of China to the WTO, foreign banks should
be allowed to handle all the transactions of non resident clients in foreign
currency. Mixed-currency holdings in banks in the institutions’ capital should
be immediately available upon entrance of China to the WTO, with the chance of
total participation by non residents after five years.
Foreign banks will
also be allowed to work in corporate banking in local currency after two years
from entrance, and in the retail sector after five years. Regarding this last
area of activity, some provisions have recently been issued for the progressive
removal of geographic restrictions to the operational management in retail in
RMB by non residents.
Entrance into the WTO, useful to the country for
various reasons, will nevertheless force China to take measures to change
customs, financial, and legal procedures. These changes will necessarily occur
over a period of time and might not meet the expectations of foreign
investors.
Where the Chinese banking sector is concerned, the
disadvantages of entering the WTO currently seem greater than the actual
advantages, while carrying out the new regulations will maybe take longer than
expected (only 2% of the market is covered by foreign Credit
Institutions).
We will have to await patiently and with confidence the
evolution of the system that entrance to the WTO will bring.