The word crisis in the Chinese language is made up of two characters, peril and opportunity. Given the global economic crisis, the key question in China is whether the world's third largest economy can withstand the global downturn and return to the high growth rates of recent years. In short, can the current peril be turned back into an opportunity for further growth and jobs?
After estimates earlier this year that 20 million domestic migrant workers would lose their jobs, analysts suggest that such estimates were too pessimistic and that the government's Rmb4000bn ($586bn) fiscal stimulus programme, announced last November, was beginning to have an impact.
According to the June report from the Washington, DC-based Institute of International Finance (IIF), the stimulus package launched earlier this year, which included 53,000 new investment projects, will raise the state budget deficit in 2009 to a three-decade high of 3% of gross domestic product (GDP), from 0.4% in 2008.
According to the report: "A surge in financing opportunities associated with the public infrastructure programme, along with deep cuts in interest rates and reserve requirements, boosted the year-on-year increase in bank lending to almost 30% in April 2009, from less than 19% in December and 14.5% in September. Banks extended Rmb5200bn in new loans in the first four months of 2009, exceeding Rmb4900bn extended in all of 2008."
Although exports have stopped contracting, they were still about 21% lower in the first four months of 2009 than a year earlier, and the stimulus package and strong private consumption have bolstered the economy. The IIF forecasts that despite the downturn in late 2008, there is now sufficient momentum in the economy to generate real GDP growth of 7.5% this year and 9% in 2010, well up on the 6.1% year-on-year increase in the first quarter of 2009.
In mid-June, the World Bank also raised its GDP growth forecast for 2009, hiking it to 7.2% from its previous forecast in March of 6.5%. The World Bank attributed the increase to the government's stimulus package and predicted China's economy will grow 7.7% in 2010, much less than the 13% achieved in 2007 and the 9% in 2008, but still significantly more than most major economies.
The fiscal stimulus has not only boosted growth but also bank lending and while the IIF says that credit growth seems to have peaked after the sharp run-up in early 2009, it adds that China's central bank will continue to provide ample liquidity to help sustain bank lending.
Guo Shuqing, chairman of China Construction Bank
China Construction Bank
Guo Shuqing, chairman of China's third largest bank (in capital terms), China Construction Bank (CCB), describes 2008 as "a very special year" where the bank overcame the enormous difficulties of the global financial crisis and severe natural disasters, to achieve outstanding results: a 26.9% increase in pre-tax profits to Rmb119.9bn ($17.5bn) and a market-leading performance of 30.4% in return on average capital.
Although much smaller than the giant ICBC, Mr Guo says that CCB remains the bank with the fastest growth in fee and commission income for three consecutive years among the big domestic banks, growing 22.8% in 2008 to lead the sector.
Also, with the establishment of specialised units for businesses such as small and medium-sized enterprises (SMEs), cash management and investment banking, CCB is expanding its core retail base and wholesale activities where it remains number one in infrastructure financing and mortgage issuance.
Even though CCB is the 12th largest bank in the world, according to The Banker's Top 1000 World Banks listing, it remains concentrated, with 98% of business domestic. Nevertheless, it is expanding externally with 10 operations outside China, including a new London subsidiary and a new branch in New York, both of which opened in June.
CCB is a major force in retail banking, with a staggering 13,374 branches, at various levels, on the mainland at year-end 2008. It also has the largest network of ATMs of any bank in the world, with a remarkable 31,896 machines, which expanded by 33.7% in 2008. And its e-banking customer base reached 111.8 million in 2008, a 58.2% increase on the previous year.
Mr Guo says that CCB is the first among the big banks to set up a SME financial services department at headquarter level. CCB, with the assistance of its foreign shareholder, Bank of America, which still holds 11% of the bank after selling 8.3% of CCB to boost capital, has built 83 SME business centres or 'credit factories'.
With its increasing focus on SMEs, CCB has jointly launched a low-interest loan service for SMEs with Chinese online trading website Alibaba.com, the world's largest business-to-business marketplace. Mr Guo is enthusiastic about the Alibaba link, which connects the bank to about 13 million small businesses.
"Forty per cent of our loans go to SMEs and we believe it is good business as you can charge higher margins than when lending to big firms," Mr Guo explains. "We can charge 7% margins on SME business and while non-performing loans (NPLs) may be 4%, it is still a good profit."
CCB is positioning SMEs as the bank's strategic business, with the average growth rate of SME lending in recent years exceeding 20%. Meanwhile, following the huge government stimulus package of last November, CCB is demonstrating its traditional strengths in infrastructure finance and mortgage loans.
For the first quarter of 2009, infrastructure construction loans grew 18.8% (over end-2008) to reach Rmb1412bn, which was higher than the growth of all types of loans. Personal mortgage loans grew 14.3% to Rmb603bn, with CCB's mortgage performance ranked number one among its peers, and the bank taking the largest market share of personal provident housing fund loans.
In 2008, CCB ranked first in credit card issuance with 18.7 million cards issued, and the sales of personal wealth management products reached Rmb384bn, more than five times that of the previous year, making it the leading bank in funds under management.
With the bank's NPL ratio down 0.3% to 1.9% as at the end of March 2009 for the quarter, CCB's NPL ratio is relatively low among large Chinese banks. And with net profit for the first quarter described as 'normal', the bank forecasts that profit for 2009 will be stable.
Speaking of the concept of a new reserve currency to replace the dollar, Mr Guo explains: "Ideally speaking, we need a more balanced structure but there is no model to replace the old model. Some think we should strengthen the International Monetary Fund (IMF) special drawing rights system into a world currency but it is not so easy and would take a long time."
On China's global role, Mr Guo, who has recently visited the IMF, says that China would contribute $40bn to the $750bn funding increase to the IMF and would also increase its IMF voting rights to nearly 4%. "China should be taking more responsibility. It can play a bigger role in the international community and contribute more to multilateral institutions," he says.
Ma Wei Hua, president of China Merchants Bank
China Merchants Bank
The seventh largest bank in the country, China Merchants Bank (CMB), is not only the best performing of the medium-sized banks, it is also a leader in innovative services such as debit and credit cards. Led by its president, Ma Wei Hua, the 22-year-old Shenzhen-based bank has been at the forefront of banking innovation in the country and has managed to achieve outstanding results despite the latest financial crisis.
In 2008, CMB managed to post pre-tax profits of Rmb26,759m ($3915m), a 35.9% increase on the previous year and an impressive 41% return on average capital. It had also, by September 2008, issued 48 million debit cards with the highest deposit-per-card ranking in China, and had issued 25 million credit cards, again leading in the Chinese market.
For CMB, which considers itself to be a leading retail bank, with operations in 45 major cities in China, management is critical. Mr Ma is adamant that while Chinese banks have developed organically over the past 30 years and the regulatory environment has improved, the big difference between Chinese and foreign banks is management.
"Management concepts are fundamental for banks to operate well in an economic crisis," says Mr Ma. And he emphasises that what went wrong with banks in the West recently was that they allowed themselves to get manipulated by too many non-market factors. "There was too much freedom in the markets, banks forgot the basics, they did not maintain integrity and the reason they went wrong was too much liberalism."
"Banks disobeyed their principles," says Mr Ma. "Alan Greenspan [former US Federal Reserve chairman] believed that markets could heal themselves but, when regulations were relaxed, that was when moral problems occurred and a lot of people were damaged." Mr Ma adds: "Our bank is not manipulated by too many non-market factors and we are subject to proper regulation, so the vessel is travelling in the right direction."
Mr Ma believes that balanced achievements come from clear principles and it is a mistake to grow too fast. "We found that if loans grow at more than 20% a year, risk management will decline." He also emphasises the quality of profit. "We never treat long-term interests with short-sighted views of profit and we believe the difference between a good bank and a great bank is that the great bank has social responsibility and can deal with key social issues such as poverty relief."
For CMB, according to Mr Ma, the transformation towards working with SMEs began five or six years ago. At the end of 2008, he says that lending to SMEs accounted for 44% of the loan book, the highest of any bank. "Because SMEs account for 99% of Chinese companies, they are very important for jobs in our society," he says, adding that asset quality is relatively good for SME lending, at 2.5%.
CMB, like some other banks, is altering its business model, moving its focus from large companies to smaller ones, shifting from wholesale to retail activities and also moving from interest-led operations to more non-interest income. CMB is rated among China's best retail banks, applying its strategy of 'cement plus mouse' through its relatively modest integrated network. The bank has 44 branches and 623 sub-branches along with 1567 self-service banking centres and more than 1400 off-bank self-service machines or ATMs in its mainland network.
CMB has also recently agreed to acquire the Hong Kong-based Wing Lung Bank (WLB) for a total cash consideration of Rmb17.2bn. This represents an important milestone in the bank's international expansion. "WLB is a quality banking franchise that has served customers in the neighbouring Hong Kong market for more than 75 years," says Mr Ma. "The acquisition of WLB plays an important role in our expansion strategy. CMB will integrate respective strengths from both sides, such as distribution capability, brand name and product innovation, to enhance our overall competitiveness."
Hong Qi, president of China Minsheng Banking Corporation
China Minsheng Banking Corporation
The eighth largest bank in the country, China Minsheng Banking Corporation, is unique in that it is not only the first non-state-owned bank but is also the youngest of the major banks, established in 1996. Private investors account for more than 50% of the shareholding and although state investors exist, they are only minorities. The bank focuses carefully on selecting customers and regards itself as a largely corporate bank able to attract talent and provide innovative financial services.
Although Minsheng's president, Hong Qi, says that the bank has been affected by the global financial crisis, it was still able to produce Rmb10.5bn ($1.5bn) in pre-tax profits, well down on the previous year but still a healthy 23% return on average capital.
Mr Hong says that this year, interest margins have declined by 20% and the NPL ratio has increased slightly from the 1.2% level posted at the end of 2008. Mr Hong explains that Minsheng's structure at end-2008 was broadly 80% corporate banking, with retail accounting for 15% of bank business and trade and other activities making up the remaining 5%. Like the other medium-sized banks, Minsheng's network of 374 branch units is relatively small when compared with the large banks.
Although Minsheng claims to be more competitive than other banks, it is also clear that, like other banks, it is adjusting its strategy and focusing more on retail and the increasingly popular SMEs. Over the next three years Mr Hong says the bank's business balance will shift, reducing the corporate focus from 80% to 60% while increasing retail from 15% to 25% and putting up to 15% into SMEs.
Mr Hong echoes other bankers when he says that SMEs have the greatest potential of any market segment. He adds that the SME sector accounts for 57% of employment, 60% of GDP, 50% of taxes and 80% of expenditure and the government is placing increasing importance on it.
What differentiates banks like Minsheng? Mr Hong says that the differentiator is the professional services that the bank provides for its large customers: "Our special business units are better than the other banks." He adds that Minsheng is non-state-owned but explains that private enterprises in China are quite different from those overseas because they operate on a political basis.
Minsheng announced plans in June to issue shares in Hong Kong to raise an estimated $2.9bn to help boost its core capital and capital adequacy ratio. Its Bank for International Settlements (BIS) capital ratio at the end of 2008 was relatively low at 9.2%.
Li Ren Jie, president of Industrial Bank
Industrial Bank
China's ninth largest bank, the Fuzhou-based Industrial Bank (IB), prides itself on its different business model and 'blue ocean' strategy. Its president, Li Ren Jie, is keen to discuss how this medium-sized bank, the 147th largest in the world, can compete effectively against China's 'big five' banks and how it can take advantage of its close proximity to Taiwan, which is just a few dozen miles from Fujian province. Mr Li is also proud of the bank's performance in 2008, with pre-tax profits rising 37.5% to Rmb14,037m ($2054m) and an impressive 34.7% return on average capital, the highest of the national banks.
Mr Li also explains that over the past five years the bank has achieved compound average growth rates of 25% a year in both borrowing and lending, as well as continuing to reduce its NPL ratio over the same period from 2.5% to a relatively low 0.83% at end-2008. So how has IB achieved these results? Clearly the big five banks, with more than 10,000 branches between them, have a huge size advantage over IB, which has 440 branches. But IB has a secret weapon, supplying small and medium-sized banks (SMBs) with IT systems, saving them money, and building a distribution network for its products. "IT helps us to build a network to compete with the big five," says Mr Li.
Described as a virtual agent network, IB has signed 206 SMBs and is connected with 143 banks. Wealth management products are being sold to those 143 banks, giving IB distribution to 10,000 branches across the country. This is IB's 'blue ocean' strategy, which focuses on fee income, with traditional lending and borrowing only accounting for 50% of the bank's business.
IB's distinctive model also extends to the capital markets, where it has an active presence, and to corporate governance, where the World Bank subsidiary, the International Finance Corporation, a minor shareholder in IB, has helped the bank to develop its approach to the Equator Principles and focus on reducing both social and environmental risks. IB is developing green credit throughout the nation, with Fujian province accounting for less than 20% of overall bank business and more than 80% in the rest of China.
Mr Li is particularly pleased that IB won the FT Emerging Markets Sustainable Bank of the Year for Asia award last month. The bank is particularly focused on responsible lending, conserving energy, social responsibility issues and climate change and, as Mr Li says, this award shows that banks in China have started to focus on these issues. IB is also planning to establish a representative office in Taiwan, an important growth area.
China Everbright Bank
What makes a good banker? China Everbright Group's chairman, Tang Shuangning, formerly vice-chairman of the China Banking Regulatory Commission (CBRC) between 2003 and 2007, says: "To be a good banker you have to be a good philosopher - philosophy can help you with everything."
A former regulator, an expert in Chinese literature and calligraphy, and a guest professor of finance and arts at several universities, Mr Tang brings a unique eclecticism to Chinese banking and demonstrates the huge diversity that is available within the expanding industry.
Mr Tang, who is happier discussing calligraphy than NPLs, is not to be underestimated. His 14 years at the People's Bank of China before joining the CBRC provided a formidable banking background before his move to the position of chairman of the troubled Everbright Group in 2007.
What exactly has he achieved? China's 12th largest bank (195th in the world), China Everbright Bank, which is the banking unit of China Everbright Group, is back in profit. At the end of 2008 the bank produced pre-tax profits of Rmb85,184m ($1159m), a modest 1% growth on the previous year, but providing a healthy return on average capital of 30.8%.
Mr Tang was happy to report at a recent group shareholders meeting a Rmb2bn cash dividend, a good sign of Everbright's reversal of fortunes.
In mid-June, China Everbright Bank announced plans to raise its capital adequacy to 10% this year (from the BIS capital ratio of 9.1% at the end of 2008) through the introduction of domestic strategic investors and the issuance of Rmb13bn in hybrid capital bonds.
Furthermore, China Everbright Bank is understood to be in talks with several domestic companies regarding capital injections and wants to build long-term co-operative relationships with them. The bank is not seeking to introduce foreign strategic investors at this time.
The Beijing-based bank has an extensive branch network covering more than 23 Chinese provinces and 36 cities, including Shanghai. It is clearly showing signs of recovery: in the first five months of this year, its net profit reached a reported Rmb3.7bn, well ahead of last year.
Under Mr Tang's leadership, Everbright is coming to the fore but he is wary of over-interpreting bank figures. "Figures only tell you whether a bank is ugly or beautiful; the key issue is assessing the soft capabilities of banks, we must make sure we are strong on the soft issues." The philosopher-banker is certainly making his mark.
China Forecast summary
