Q How do you see the change in the capitalisation of the banks, the influence of foreign shareholders and the role on non-performing loans and how this has altered the banking sector?
A In general we lay focus on the internal changes in the banks, at the corporate governance issues and internal control systems, if they are effective and efficient enough. We also take care of large exposures and impaired assets and see how the banks manage them because they are very significant in China.
The reduction in the non-performing loans (NPLs) is real and amazing, you cannot imagine how in one single year we have brought those NPLs down by more than 4% but the effort has received major help from the government because they carved off a lot of historic burdens from the reforming banks.
After such activities we can have more room for manoeuvre with new, higher standards of supervision, which can consolidate the results of reform. Thus it can become very rewarding but we still worry about progress on the banks’ customer side. Still we have a lot of state-owned enterprises (SOEs) and we have to quicken the pace to do the reform on the SOE customer side because if the customers do not change themselves with good corporate governance then I don’t think the banks’ reform and opening up can bring a fruitful result.
That is why the government wants to quicken the pace of SOE reform in China. This is the consensus of bankers in China.
The good news is that the reform is solid and real in every sector in every walk of life but we are still keeping a close eye on the speed of that reform. Also, to have a successful banking reform we have to quicken our pace to nourish a strong and solid capital market in China.
Q Are you happy with the recent initial public offerings (IPOs)?
A Yes, we are making progress and we have correct and accurate measures to guide the banks to have more market discipline, transparency and information disclosure. In return it will be good for corporate governance building. We are satisfied with the IPO process, the speed is one thing but actually we hope they can deliver some real results like improving their sustainable competitive advantages, such as service, product diversity, changing their business models and serving the community much better. The real story we want them to deliver is, in short, competitive advantages.
Q Are the Chinese banks prepared for the opening up of the banking market to foreign banks at the end of 2006 through the WTO?
A Yes, the Chinese banks are performing much better but still the gap between the Chinese and foreign banks is very conspicuous. We just have to alert the Chinese banks to get ready and speed up. The policy of opening up to the whole world is entirely helpful to Chinese banking reform and the construction of their competitive advantage. We need competition.
Q Are you using any new benchmarks to gauge your performance?
A Several banks are using new measures such as economic value added (EVA) and risk-adjusted return on capital (RAROC) to change the benchmark of the performance of their business units. This is the first time in Chinese banking history that people have used such a new benchmark. In the past they just measured credit growth, deposit growth and market share but these do not make sense now. I believe this change of benchmark is a very significant change. But that is not enough – work never stops.
Q Are you happy with the improvement in the non-performing loans and capital adequacy ratios you have achieved so far?
A I am happy because at the end of September 2005, 71.4% of the total assets of the banking industry have reached the 8% capital adequacy ratio and one year ago only 44% of the total assets reached that ratio and two years ago when the China Banking Regulatory Commission (CBRC) was established, only 0.54% of banking assets reached it. So the volume of banking assets reaching 8% has moved from 0.54% two years ago to 71.4% today, a significant change.
But the real point is this, not so much the speed, which makes sense, but the mindset change is more significant. Because nowadays banks will use their capital assets ratio to restrain themselves for credit expansion and they will be more careful and cautious in the face of the risks – market, credit or operational, etc – that is the change in mindset taking place.
Q What is the current level of NPLs at the major commercial banks and how has it changed in the first three quarters of 2005?
A The total level of NPLs at the major commercial banks by the end of September 2005 stood at Rmb1200bn ($148bn) or 8.7%. This is a significant reduction of 4.5% from the level at the beginning of 2005 when the ratio was 13.2%.
Q What is the capital injection by the government in three state-owned banks and have there been other key injections or equity stakes taken by the government in the state-owned banks?
A The government has injected a total of $60bn in the three state-owned banks, Bank of China (BOC), China Construction Bank (CCB) and Bank of Communications (BoCOM, excluding Agricultural Bank of China) while the Ministry of Finance has taken a $15bn equity stake in Industrial and Commercial Bank of China (ICBC).
Q What is the structure of China’s banking industry at present?
A So far, China’s banking industry consists of more than 30,000 institutions, including three policy banks, four state-owned commercial banks, 13 joint-stock commercial banks (including the newly-incorporated China Bohai Bank), 115 city commercial banks, 54 rural commercial and co-operative banks, 681 urban credit cooperatives, 30,000-plus rural credit co-operatives, 225 foreign bank branches and subsidiaries, four asset management companies, 59 trust and investment companies, 74 finance companies, 12 financial leasing companies, five auto financing companies, as well as a large number of postal savings institutions.
As of end-September 2005, the banking sector possessed an aggregate of Rmb36,000bn in assets, making up over 90% of the total financial assets of China.
Despite the shrinking market shares year-by-year, the big five commercial banks (ICBC, ABC, BOC, CCB and BoCOM) still dominate China’s banking sector, with their total assets, loans and deposits accounting for more than 50% of the system respectively.
Q Is there a policy by the government to merge smaller banks in particular areas or sectors?
A In terms of the city commercial banks and the city credit cooperatives, we would like in the next half year to push forward the reorganisation programmes in individual provinces. We would like to reorganise five or six city commercial banks into one, or organise several city credit cooperatives into one bigger credit union. The possible deadline for this is the first quarter of 2006.
Q Do you have a vision of the number of city commercial banks and credit cooperatives you would like to see in the future?
A We would like to reorganise the city credit cooperatives into city commercial banks or another organisational structure such as a unified legal entity or credit union. With the credit cooperatives that have bad performance perhaps we would like to ask them to leave the market.
For the city commercial banks we have two strategies. For the banks with huge risks we would urge them to reorganise and work together to improve their risk management and corporate governance. Also we would like the local government to issue some favourable policies to help these banks resolve their non-performing assets.
For the good commercial banks we would like them to reorganise with each other cross-border or cross-region so they can develop into big commercial banks.
Maybe this can happen in the next six months, maybe not – it is a long-term strategy. Lots of new concepts have been introduced in management and six to seven city commercial banks have introduced long-term strategic investors into the local banks. As a result, the local banks have changed their mindset and improved their corporate governance.
Q What are the key issues and challenges facing you in terms of supervision of the banks?
A Improving corporate governance is the key challenge facing us in relation to the banks and a critical issue is establishing the boundary between the board of directors and the executive committee. We are just at the beginning and we need more time to collect more accurate data.
Q How active are foreign banks in China?
A At present there are 18 cities fully opened to foreign banks’ engagement in renminbi business. As of end-September 2005, 138 foreign banking institutions were permitted to conduct renminbi business, 15 were authorised to engage in internet banking, 41 were allowed to conduct derivatives business, and five were permitted to offer custodian services for qualified foreign institutional investors (QFII). So far, more than 10 Chinese banks have received equity investment by the international banks such as Citibank and HSBC. Over the past year, the overseas banks have made commitments in providing $20bn funds arrangement. A win-win situation between the Chinese and foreign banks has taken place.
Interview includes comments from Yan Qingmin, director-general of banking supervision department I, and Lou Wenlong, director-general of banking supervision department II, at the CBRC.
