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Source: www.asiaecon.org |


In what would have seemed impossible only ten years ago, the strength of China's economy seems to be hinging on the apparent strength of its banking system

In what would have seemed impossible only ten years ago, the strength of China’s economy seems to be hinging on the apparent strength of its banking system.

Former World Bank official Pieter Bottelier noted, “The irony is that 10 years ago, China’s banks were among the weakest in the world and today they are among the strongest.”

With the global economic crisis starting to have its effects in China, the banking system seems to be holding strong, while European banks are struggling and American banks are folding.

While many factors have contributed to the success of Chinese banks, one major factor is the way risk has been managed. New risk capital requirements have been introduced and the criteria for nonperforming loans has been tightened.

Although China does have its massive $200 billion surplus to fall back on, the fact is, the banks do not need it. As of September 20th, 2008, nonperforming loans accounted for only two percent of the loan total for every Chinese listed bank.

Another factor was the relative increase in transparency compared with that of pre-1998. In 2003 regulators allowed foreign investment of Chinese banks to increase to 20 percent, up from 15 percent. This enabled banks to increase their capital and credibility, and perhaps more importantly, gain access to initial public offerings in 2005.

Now while some may argue that access to Western management styles improved banking regulations, a more important point is the fact that Chinese banks did not copy the excessive risk-taking behavior of their Western counterpoints. Because of this, banks in China missed the sub prime crisis.

Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, notes that at most, China will have to write off 0.1 percent of their assets. And these loses are mostly due to owning US securities.

On the other hand, there is a contrasting opinion about the Chinese banking system that is starting to emerge from the more cynical critics. They argue that perhaps China’s good fortune has more to with weak accounting and regulation than it does with superior management. Perhaps the Chinese banking system is more opaque than we have been led to believe?

Critics argue that the collapse of demand in Europe and America for Chinese goods must have had a direct impact on banks. Since factories have started closing in China, its obvious the demand has not been met domestically.

Chinese banks are still expanding their loan portfolios. Questioners of China’s banking health argue that perhaps the new loans are just China’s way of providing inefficient life support to previous mistakes.

Because the banking system is only partially driven by private investors, it is impossible to check the health of these banks on the equity market. Furthermore, China Investment Corporation, the country’s sovereign-wealth fund, has been purchasing large shares of major domestic banks, essentially renationalizing the very banks the government sold off only a few years ago.

Another interesting development is the fact that UBS, RBS and Bank of America have recently sold billion dollar stakes in Chinese banks. One may argue that this is simply to free up capital, but the cynic may also argue that these corporations have lost faith in the Chinese banking system.

As great as Chinese banks have fared so far, they are not invincible from the growing economic crisis that has only recently begun in China. Their double digit growth may have obscured problems in the banking sector, but these problems may come to light as the economy slows down to an estimated five to eight percent.

Whether or not Chinese banks are obscuring certain details, as a small but growing number of people believe, it is safe to say that the banking system in China is vulnerable. However, a full scale crisis similar to 1998 is still rather unlikely.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |

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