contemporary financial topics of china topic 1 china's

Contemporary Financial Topics of ChinaTopic 1 China’s Financial System

Zongxin Qian

School of Finance, Renmin University of China

July 1, 2014

目录

Introduction to financial system

Introduction to banking theory

China’s financial systemOverviewBanking reform ILoan discriminationFinance and developmentBanking efficiencyBanking reform IIInternationalizationDevelopments of financial markets in China

Function of the financial system

Source: Levine (1997)

How does a typical financial system look like: A chart fromMishkin

目录

Introduction to financial system

Introduction to banking theory

China’s financial systemOverviewBanking reform ILoan discriminationFinance and developmentBanking efficiencyBanking reform IIInternationalizationDevelopments of financial markets in China

Basics of banking theory

I Liquidity risk: invested in a long-term project but need to useyour money now

I Adverse selection: ex ante problem of finding the right type

I Moral hazard: interim problem of monitoring the action

I Costly state verification: ex post problem of verifying thefinancial status

Basics of banking theory

I Liquidity risk: invested in a long-term project but need to useyour money now

I Adverse selection: ex ante problem of finding the right type

I Moral hazard: interim problem of monitoring the action

I Costly state verification: ex post problem of verifying thefinancial status

Basics of banking theory

I Liquidity risk: invested in a long-term project but need to useyour money now

I Adverse selection: ex ante problem of finding the right type

I Moral hazard: interim problem of monitoring the action

I Costly state verification: ex post problem of verifying thefinancial status

Basics of banking theory

I Liquidity risk: invested in a long-term project but need to useyour money now

I Adverse selection: ex ante problem of finding the right type

I Moral hazard: interim problem of monitoring the action

I Costly state verification: ex post problem of verifying thefinancial status

Basics of banking theory

I Liquidity risk: invested in a long-term project but need to useyour money now

I Adverse selection: ex ante problem of finding the right type

I Moral hazard: interim problem of monitoring the action

I Costly state verification: ex post problem of verifying thefinancial status

Role of the bank

I Diversification of depositors provide liquidity insurance

I Adverse selection: you can signal that you are a less riskyborrower by putting in more own money in the project, butthat is going to be costly since you bare part of the risk

I Diversification of borrowers and their projects lowers the costof signaling since the risk of project failure is diversified

Role of the bank

I Diversification of depositors provide liquidity insurance

I Adverse selection: you can signal that you are a less riskyborrower by putting in more own money in the project, butthat is going to be costly since you bare part of the risk

I Diversification of borrowers and their projects lowers the costof signaling since the risk of project failure is diversified

Role of the bank

I Diversification of depositors provide liquidity insurance

I Adverse selection: you can signal that you are a less riskyborrower by putting in more own money in the project, butthat is going to be costly since you bare part of the risk

I Diversification of borrowers and their projects lowers the costof signaling since the risk of project failure is diversified

Role of the bank

I Diversification of depositors provide liquidity insurance

I Adverse selection: you can signal that you are a less riskyborrower by putting in more own money in the project, butthat is going to be costly since you bare part of the risk

I Diversification of borrowers and their projects lowers the costof signaling since the risk of project failure is diversified

Role of the bank

I Typically, a project is financed by many investors

I Without coalition, each investor has to pay a verification costK

I With coalition as a bank, the cost K only has to be paid once

I Through specialization, bankers can be a better monitor thanindividuals

Role of the bank

I Typically, a project is financed by many investors

I Without coalition, each investor has to pay a verification costK

I With coalition as a bank, the cost K only has to be paid once

I Through specialization, bankers can be a better monitor thanindividuals

Role of the bank

I Typically, a project is financed by many investors

I Without coalition, each investor has to pay a verification costK

I With coalition as a bank, the cost K only has to be paid once

I Through specialization, bankers can be a better monitor thanindividuals

Role of the bank

I Typically, a project is financed by many investors

I Without coalition, each investor has to pay a verification costK

I With coalition as a bank, the cost K only has to be paid once

I Through specialization, bankers can be a better monitor thanindividuals

Role of the bank

I Typically, a project is financed by many investors

I Without coalition, each investor has to pay a verification costK

I With coalition as a bank, the cost K only has to be paid once

I Through specialization, bankers can be a better monitor thanindividuals

The role of collateral

I Risky and less risky borrowers

I The role of collateral is similar to self-finance

I Put your own-stake in the project if it is good

The role of collateral

I Risky and less risky borrowers

I The role of collateral is similar to self-finance

I Put your own-stake in the project if it is good

The role of collateral

I Risky and less risky borrowers

I The role of collateral is similar to self-finance

I Put your own-stake in the project if it is good

The role of collateral

I Risky and less risky borrowers

I The role of collateral is similar to self-finance

I Put your own-stake in the project if it is good

Firms’ external finance

I Least risky can borrow directly from markets

I Intermediate ones have to use financial intermediaries such asbanks

I Most risky one has to rely on its own fund

Firms’ external finance

I Least risky can borrow directly from markets

I Intermediate ones have to use financial intermediaries such asbanks

I Most risky one has to rely on its own fund

Firms’ external finance

I Least risky can borrow directly from markets

I Intermediate ones have to use financial intermediaries such asbanks

I Most risky one has to rely on its own fund

Firms’ external finance

I Least risky can borrow directly from markets

I Intermediate ones have to use financial intermediaries such asbanks

I Most risky one has to rely on its own fund

目录

Introduction to financial system

Introduction to banking theory

China’s financial systemOverviewBanking reform ILoan discriminationFinance and developmentBanking efficiencyBanking reform IIInternationalizationDevelopments of financial markets in China

China’s Financial System (Allen et al., 2011)

Source: Allen et al. (2011)

Main features (Allen et al, 2011)

I Dominated by a large banking system

I Financial Markets relatively small and inefficient and lessimportant than the banking system

I Most successful part: neither banking nor markets

I Alternative finance: internal finance, informal sector, tradecredit, coalitions

Main features (Allen et al, 2011)

I Dominated by a large banking system

I Financial Markets relatively small and inefficient and lessimportant than the banking system

I Most successful part: neither banking nor markets

I Alternative finance: internal finance, informal sector, tradecredit, coalitions

Main features (Allen et al, 2011)

I Dominated by a large banking system

I Financial Markets relatively small and inefficient and lessimportant than the banking system

I Most successful part: neither banking nor markets

I Alternative finance: internal finance, informal sector, tradecredit, coalitions

Main features (Allen et al, 2011)

I Dominated by a large banking system

I Financial Markets relatively small and inefficient and lessimportant than the banking system

I Most successful part: neither banking nor markets

I Alternative finance: internal finance, informal sector, tradecredit, coalitions

Main features (Allen et al, 2011)

I Dominated by a large banking system

I Financial Markets relatively small and inefficient and lessimportant than the banking system

I Most successful part: neither banking nor markets

I Alternative finance: internal finance, informal sector, tradecredit, coalitions

China vs. other EMs (2001-2007)

Source: Allen et al. (2011)

Comparison between banks (billion)

Source: Allen et al. (2011)

Banks vs. other FIs (billion)

Source: Allen et al. (2011)

Early banking Reforms

I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)

I 1984, separate deposit and loan business from the PBC andestablished it as the central bank

I 1994, PBC stopped lending to firms

I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china

I 1998, mandatory credit plan was abandoned

Early banking Reforms

I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)

I 1984, separate deposit and loan business from the PBC andestablished it as the central bank

I 1994, PBC stopped lending to firms

I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china

I 1998, mandatory credit plan was abandoned

Early banking Reforms

I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)

I 1984, separate deposit and loan business from the PBC andestablished it as the central bank

I 1994, PBC stopped lending to firms

I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china

I 1998, mandatory credit plan was abandoned

Early banking Reforms

I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)

I 1984, separate deposit and loan business from the PBC andestablished it as the central bank

I 1994, PBC stopped lending to firms

I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china

I 1998, mandatory credit plan was abandoned

Early banking Reforms

I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)

I 1984, separate deposit and loan business from the PBC andestablished it as the central bank

I 1994, PBC stopped lending to firms

I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china

I 1998, mandatory credit plan was abandoned

Early banking Reforms

I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)

I 1984, separate deposit and loan business from the PBC andestablished it as the central bank

I 1994, PBC stopped lending to firms

I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china

I 1998, mandatory credit plan was abandoned

State Commercial Banks: The Big Four

Since 1912; Initial specialization: foreign trade/investment

Since 1984; Initial specialization: commercial transactions

Since 1979; Initial specialization: rural area

Since 1954; Initial specialization: fixed investment

Growth of other financial intermediaries in the 1980s

I Regional banks

I RCCs and UCCs

I TICs

Growth of other financial intermediaries in the 1980s

I Regional banks

I RCCs and UCCs

I TICs

Growth of other financial intermediaries in the 1980s

I Regional banks

I RCCs and UCCs

I TICs

Growth of other financial intermediaries in the 1980s

I Regional banks

I RCCs and UCCs

I TICs

Breakdown of loans

Source: Allen et al. (2011)

Finance of listed firms

Source: Allen et al. (2011)

Finance of SOEs

Source: Allen et al. (2011)

Finance of non-listed, non-state-own firms

Source: Allen et al. (2011)

Sources of loan discrimination

I policy lending

I bailout possibility

I SOE and political promotion of local gov. officials

I Bankers’ incentive to have a good relationship with localgovernments

Sources of loan discrimination

I policy lending

I bailout possibility

I SOE and political promotion of local gov. officials

I Bankers’ incentive to have a good relationship with localgovernments

Sources of loan discrimination

I policy lending

I bailout possibility

I SOE and political promotion of local gov. officials

I Bankers’ incentive to have a good relationship with localgovernments

Sources of loan discrimination

I policy lending

I bailout possibility

I SOE and political promotion of local gov. officials

I Bankers’ incentive to have a good relationship with localgovernments

Getting out of loan discrimination

Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms

I have lower interest expenses

I more likely to get short-term loan when the monetary policy istight

I have better economic performance

However,

I integration of industry and finance is not limited to thenon-state owned sector.

I Many SOEs enter the financial industry for profit anddiversification

Getting out of loan discrimination

Many non-state owned non-financial firms hold significantownership in commercial banks.

Those firms

I have lower interest expenses

I more likely to get short-term loan when the monetary policy istight

I have better economic performance

However,

I integration of industry and finance is not limited to thenon-state owned sector.

I Many SOEs enter the financial industry for profit anddiversification

Getting out of loan discrimination

Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms

I have lower interest expenses

I more likely to get short-term loan when the monetary policy istight

I have better economic performance

However,

I integration of industry and finance is not limited to thenon-state owned sector.

I Many SOEs enter the financial industry for profit anddiversification

Getting out of loan discrimination

Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms

I have lower interest expenses

I more likely to get short-term loan when the monetary policy istight

I have better economic performance

However,

I integration of industry and finance is not limited to thenon-state owned sector.

I Many SOEs enter the financial industry for profit anddiversification

Getting out of loan discrimination

Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms

I have lower interest expenses

I more likely to get short-term loan when the monetary policy istight

I have better economic performance

However,

I integration of industry and finance is not limited to thenon-state owned sector.

I Many SOEs enter the financial industry for profit anddiversification

Getting out of loan discrimination

Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms

I have lower interest expenses

I more likely to get short-term loan when the monetary policy istight

I have better economic performance

However,

I integration of industry and finance is not limited to thenon-state owned sector.

I Many SOEs enter the financial industry for profit anddiversification

Integration of industry and finance

Integration of industry and finance

 Holding institutions Bank Securities company Insurance company Trust company Others

State Grid

Yingda Securities Yingda Taihe Life Insurance, Yingda Taihe

Property Insurance, Yingda Changan

Insurance Brokers Group

Yingda

International

Trust

China Power Financial co., LTD,

Yingda Futures

China National

Petroleum

Bank of Kunlun Generali China Life Insurance, Generali

China Insurance, Petrochina's exclusive

general insurance co., LTD

Kunlun Trust China Petroleum Finance, Kunlun

financial leasing co., LTD

China National

Offshore Oil

Corporation

Zhonghai insurance co., LTD Zhonghai Trust Zhonghai Fund

China Merchants

Group

China Merchants Bank China Merchants

Securities, China

Merchants Securities (HK)

China Merchants Insurance (HK), Houlder

Insurance Brokers Far East ltd, CIGNA &

CMC Life Insurance

China Merchants China Direct

Investments, China Merchants Fund

Chian Resources China Resources Bank China Resources

Trust

China Resources Investment, China

Resources Capital Management,

Harvest Capital Partners

China Huaneng Bank of communications,

Bank of Hangzhou

Great Wall Securities All Trust Insurance Huaneng Trust China Huaneng Fiance, Great Wall

Fund, Baocheng Futures

Minmetals capital

holdings LTD

Bank of communications Minmetals Securities Minmetals

International

Trust

Minmetals Futures, Minmetals finance,

China National Foreign Trade Financial

& Leasing

AVIC Capital AVIC Securities Groupama Avic Insurance AVIC Trust AVIC Future, AVIC Leasing, AVIC

Fund

Source: Huang (2013) 

TVEs and the Rise and Fall of the ”Su nan” (SouthJiangsu) Model

I 1985-1997, TVEs grew more than 6-fold in real terms

I Rapid privatization in the mid-1990s: TVEs with joint liabilityfell from 78% to 43% in Zhejiang and Jiangsu

TVEs and the Rise and Fall of the ”Su nan” (SouthJiangsu) Model

I 1985-1997, TVEs grew more than 6-fold in real terms

I Rapid privatization in the mid-1990s: TVEs with joint liabilityfell from 78% to 43% in Zhejiang and Jiangsu

TVEs and the Rise and Fall of the ”Su nan” (SouthJiangsu) Model

I 1985-1997, TVEs grew more than 6-fold in real terms

I Rapid privatization in the mid-1990s: TVEs with joint liabilityfell from 78% to 43% in Zhejiang and Jiangsu

Economics of Joint Liability

I Self-selection

I Peer-monitor

I Social sanction

I Chinese feature: local gov. involvement

I Chinese feature: high profitability to reduce the likelihood ofcoordinated default

I Chinese feature: low real interest rate

Economics of Joint Liability

I Self-selection

I Peer-monitor

I Social sanction

I Chinese feature: local gov. involvement

I Chinese feature: high profitability to reduce the likelihood ofcoordinated default

I Chinese feature: low real interest rate

Economics of Joint Liability

I Self-selection

I Peer-monitor

I Social sanction

I Chinese feature: local gov. involvement

I Chinese feature: high profitability to reduce the likelihood ofcoordinated default

I Chinese feature: low real interest rate

Economics of Joint Liability

I Self-selection

I Peer-monitor

I Social sanction

I Chinese feature: local gov. involvement

I Chinese feature: high profitability to reduce the likelihood ofcoordinated default

I Chinese feature: low real interest rate

Economics of Joint Liability

I Self-selection

I Peer-monitor

I Social sanction

I Chinese feature: local gov. involvement

I Chinese feature: high profitability to reduce the likelihood ofcoordinated default

I Chinese feature: low real interest rate

Economics of Joint Liability

I Self-selection

I Peer-monitor

I Social sanction

I Chinese feature: local gov. involvement

I Chinese feature: high profitability to reduce the likelihood ofcoordinated default

I Chinese feature: low real interest rate

Economics of Joint Liability

I Self-selection

I Peer-monitor

I Social sanction

I Chinese feature: local gov. involvement

I Chinese feature: high profitability to reduce the likelihood ofcoordinated default

I Chinese feature: low real interest rate

Why TVEs Change

I Monitoring and enforcement become easier

I More collateral

I Increasing competition and less profitability

I Rising real interest rate

I Banking competition

Why TVEs Change

I Monitoring and enforcement become easier

I More collateral

I Increasing competition and less profitability

I Rising real interest rate

I Banking competition

Why TVEs Change

I Monitoring and enforcement become easier

I More collateral

I Increasing competition and less profitability

I Rising real interest rate

I Banking competition

Why TVEs Change

I Monitoring and enforcement become easier

I More collateral

I Increasing competition and less profitability

I Rising real interest rate

I Banking competition

Why TVEs Change

I Monitoring and enforcement become easier

I More collateral

I Increasing competition and less profitability

I Rising real interest rate

I Banking competition

Why TVEs Change

I Monitoring and enforcement become easier

I More collateral

I Increasing competition and less profitability

I Rising real interest rate

I Banking competition

Financing the Poorer

I Financial sustainability vs. Outreach

I Regional development vs. helping the very poor

I Incentive: repayment rate + stochastic auditing

Financing the Poorer

I Financial sustainability vs. Outreach

I Regional development vs. helping the very poor

I Incentive: repayment rate + stochastic auditing

Financing the Poorer

I Financial sustainability vs. Outreach

I Regional development vs. helping the very poor

I Incentive: repayment rate + stochastic auditing

Financing the Poorer

I Financial sustainability vs. Outreach

I Regional development vs. helping the very poor

I Incentive: repayment rate + stochastic auditing

NPL problem

I We talked about this before. Some more here

I Central Huijin Company injected foreign reserve money intothe big four since 2003

I Too-big-too-fail problem?

I Four AMCs: assume and liquidate the NPLs for the big fourbanks

NPL problem

I We talked about this before. Some more here

I Central Huijin Company injected foreign reserve money intothe big four since 2003

I Too-big-too-fail problem?

I Four AMCs: assume and liquidate the NPLs for the big fourbanks

NPL problem

I We talked about this before. Some more here

I Central Huijin Company injected foreign reserve money intothe big four since 2003

I Too-big-too-fail problem?

I Four AMCs: assume and liquidate the NPLs for the big fourbanks

NPL problem

I We talked about this before. Some more here

I Central Huijin Company injected foreign reserve money intothe big four since 2003

I Too-big-too-fail problem?

I Four AMCs: assume and liquidate the NPLs for the big fourbanks

NPL problem

I We talked about this before. Some more here

I Central Huijin Company injected foreign reserve money intothe big four since 2003

I Too-big-too-fail problem?

I Four AMCs: assume and liquidate the NPLs for the big fourbanks

Liquidation by AMCs

Source: Allen et al. (2011)

Bank Efficiency

I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)

I Germany: 0.998

I not quite comparable country

I India: 0.10; Malaysia: 0.285; Philippines: 0.313

Bank Efficiency

I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)

I Germany: 0.998

I not quite comparable country

I India: 0.10; Malaysia: 0.285; Philippines: 0.313

Bank Efficiency

I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)

I Germany: 0.998

I not quite comparable country

I India: 0.10; Malaysia: 0.285; Philippines: 0.313

Bank Efficiency

I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)

I Germany: 0.998

I not quite comparable country

I India: 0.10; Malaysia: 0.285; Philippines: 0.313

Bank Efficiency

I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)

I Germany: 0.998

I not quite comparable country

I India: 0.10; Malaysia: 0.285; Philippines: 0.313

Sources of inefficiency

I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques

I Chinese featureState ownershipDominance of big banks?

Sources of inefficiency

I General sources

Credit rationingToo-big-too-failAgency problems in banksLack of techniques

I Chinese featureState ownershipDominance of big banks?

Sources of inefficiency

I General sourcesCredit rationing

Too-big-too-failAgency problems in banksLack of techniques

I Chinese featureState ownershipDominance of big banks?

Sources of inefficiency

I General sourcesCredit rationingToo-big-too-fail

Agency problems in banksLack of techniques

I Chinese featureState ownershipDominance of big banks?

Sources of inefficiency

I General sourcesCredit rationingToo-big-too-failAgency problems in banks

Lack of techniques

I Chinese featureState ownershipDominance of big banks?

Sources of inefficiency

I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques

I Chinese featureState ownershipDominance of big banks?

Sources of inefficiency

I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques

I Chinese feature

State ownershipDominance of big banks?

Sources of inefficiency

I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques

I Chinese featureState ownership

Dominance of big banks?

Sources of inefficiency

I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques

I Chinese featureState ownershipDominance of big banks?

Increasing the efficiency of the banking sector

I Structural changes in business: consumer loan, housingmortgages, cars, etc

I Privatization: IPOs

I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)

I Better governance

I Bankruptcy law: bankruptcy as a way to evade debt!

Increasing the efficiency of the banking sector

I Structural changes in business: consumer loan, housingmortgages, cars, etc

I Privatization: IPOs

I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)

I Better governance

I Bankruptcy law: bankruptcy as a way to evade debt!

Increasing the efficiency of the banking sector

I Structural changes in business: consumer loan, housingmortgages, cars, etc

I Privatization: IPOs

I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)

I Better governance

I Bankruptcy law: bankruptcy as a way to evade debt!

Increasing the efficiency of the banking sector

I Structural changes in business: consumer loan, housingmortgages, cars, etc

I Privatization: IPOs

I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)

I Better governance

I Bankruptcy law: bankruptcy as a way to evade debt!

Increasing the efficiency of the banking sector

I Structural changes in business: consumer loan, housingmortgages, cars, etc

I Privatization: IPOs

I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)

I Better governance

I Bankruptcy law: bankruptcy as a way to evade debt!

Increasing the efficiency of the banking sector

I Structural changes in business: consumer loan, housingmortgages, cars, etc

I Privatization: IPOs

I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)

I Better governance

I Bankruptcy law: bankruptcy as a way to evade debt!

Look at the title of this piece of news

I 国企破产重组带来生机一片(锦州日报，2010-04-27)

I In English: Bankruptcy and Restructuring brings a new chance(Jinzhou Daily, 2010-04-27)

Look at the title of this piece of news

I 国企破产重组带来生机一片(锦州日报，2010-04-27)

I In English: Bankruptcy and Restructuring brings a new chance(Jinzhou Daily, 2010-04-27)

Look at the title of this piece of news

I 国企破产重组带来生机一片(锦州日报，2010-04-27)

I In English: Bankruptcy and Restructuring brings a new chance(Jinzhou Daily, 2010-04-27)

Why bank internationalization?

I Diversify risk

I Improve efficiency: learning effect

I Help customers ”go out”

I Do banks simply follow the step of their customers?—who”go out” first?

Why bank internationalization?

I Diversify risk

I Improve efficiency: learning effect

I Help customers ”go out”

I Do banks simply follow the step of their customers?—who”go out” first?

Why bank internationalization?

I Diversify risk

I Improve efficiency: learning effect

I Help customers ”go out”

I Do banks simply follow the step of their customers?—who”go out” first?

Why bank internationalization?

I Diversify risk

I Improve efficiency: learning effect

I Help customers ”go out”

I Do banks simply follow the step of their customers?—who”go out” first?

Why bank internationalization?

I Diversify risk

I Improve efficiency: learning effect

I Help customers ”go out”

I Do banks simply follow the step of their customers?—who”go out” first?

Risk during internationalization: A case from MinshengBank

I Target: acquire shares of the United Commercial Bank

I A illusion: that the UCB is a solvent bank only in temporaryproblem

I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment

I However, Sept. 2009, UCB was caught for misreporting itsfinancial status

I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan

Risk during internationalization: A case from MinshengBank

I Target: acquire shares of the United Commercial Bank

I A illusion: that the UCB is a solvent bank only in temporaryproblem

I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment

I However, Sept. 2009, UCB was caught for misreporting itsfinancial status

I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan

Risk during internationalization: A case from MinshengBank

I Target: acquire shares of the United Commercial Bank

I A illusion: that the UCB is a solvent bank only in temporaryproblem

I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment

I However, Sept. 2009, UCB was caught for misreporting itsfinancial status

I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan

Risk during internationalization: A case from MinshengBank

I Target: acquire shares of the United Commercial Bank

I A illusion: that the UCB is a solvent bank only in temporaryproblem

I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment

I However, Sept. 2009, UCB was caught for misreporting itsfinancial status

I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan

Risk during internationalization: A case from MinshengBank

I Target: acquire shares of the United Commercial Bank

I A illusion: that the UCB is a solvent bank only in temporaryproblem

I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment

I However, Sept. 2009, UCB was caught for misreporting itsfinancial status

I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan

Risk during internationalization: A case from MinshengBank

I Target: acquire shares of the United Commercial Bank

I A illusion: that the UCB is a solvent bank only in temporaryproblem

I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment

I However, Sept. 2009, UCB was caught for misreporting itsfinancial status

I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan

Bank internationalization: Foreign assets

Bank internationalization: Number of Foreign Affiliates

RMB internationalization: Why? The Dollar Trap

I Current account surplus and the accumulation of dollar—losecontrol of monetary policy

I Dollar depreciation—lose of money

I FDI in China pays a high return while the US treasury billgives a low interest payment

RMB internationalization: Why? The Dollar Trap

I Current account surplus and the accumulation of dollar—losecontrol of monetary policy

I Dollar depreciation—lose of money

I FDI in China pays a high return while the US treasury billgives a low interest payment

RMB internationalization: Why? The Dollar Trap

I Current account surplus and the accumulation of dollar—losecontrol of monetary policy

I Dollar depreciation—lose of money

I FDI in China pays a high return while the US treasury billgives a low interest payment

RMB internationalization: Why? The Dollar Trap

I Current account surplus and the accumulation of dollar—losecontrol of monetary policy

I Dollar depreciation—lose of money

I FDI in China pays a high return while the US treasury billgives a low interest payment

RMB internationalization: Trade settlement using RMB

Obstacles for firms to use RMB: competition in exportmarket

Obstacles for firms to use RMB: Bargaining power ofexporters

I Among exporters, 75% are small firms, large firms onlyaccounts for 3%

I Around half the trade are processing trade

I Around half of the trade are done by firms with foreigninvestors

I High proportion of labor-intensive goods export

I Exports in machinery and electronics have low value added

Obstacles for firms to use RMB: Bargaining power ofexporters

I Among exporters, 75% are small firms, large firms onlyaccounts for 3%

I Around half the trade are processing trade

I Around half of the trade are done by firms with foreigninvestors

I High proportion of labor-intensive goods export

I Exports in machinery and electronics have low value added

Obstacles for firms to use RMB: Bargaining power ofexporters

I Among exporters, 75% are small firms, large firms onlyaccounts for 3%

I Around half the trade are processing trade

I Around half of the trade are done by firms with foreigninvestors

I High proportion of labor-intensive goods export

I Exports in machinery and electronics have low value added

Obstacles for firms to use RMB: Bargaining power ofexporters

I Among exporters, 75% are small firms, large firms onlyaccounts for 3%

I Around half the trade are processing trade

I Around half of the trade are done by firms with foreigninvestors

I High proportion of labor-intensive goods export

I Exports in machinery and electronics have low value added

Obstacles for firms to use RMB: Bargaining power ofexporters

I Among exporters, 75% are small firms, large firms onlyaccounts for 3%

I Around half the trade are processing trade

I Around half of the trade are done by firms with foreigninvestors

I High proportion of labor-intensive goods export

I Exports in machinery and electronics have low value added

Obstacles for firms to use RMB: Bargaining power ofexporters

I Among exporters, 75% are small firms, large firms onlyaccounts for 3%

I Around half the trade are processing trade

I Around half of the trade are done by firms with foreigninvestors

I High proportion of labor-intensive goods export

I Exports in machinery and electronics have low value added

Obstacles for firms to use RMB: Growth pattern

I investment leads growth

I Overinvestment requires sales outside the country, whichlowers bargaining power

I Overinvestment also push up demand for input, increasingbargaining power of foreign input suppliers

Obstacles for firms to use RMB: Growth pattern

I investment leads growth

I Overinvestment requires sales outside the country, whichlowers bargaining power

I Overinvestment also push up demand for input, increasingbargaining power of foreign input suppliers

Obstacles for firms to use RMB: Growth pattern

I investment leads growth

I Overinvestment requires sales outside the country, whichlowers bargaining power

I Overinvestment also push up demand for input, increasingbargaining power of foreign input suppliers

Obstacles for firms to use RMB: Growth pattern

I investment leads growth

I Overinvestment requires sales outside the country, whichlowers bargaining power

I Overinvestment also push up demand for input, increasingbargaining power of foreign input suppliers

Obstacles for firms to use RMB: Transaction cost of RMB

Obstacles for firms to use RMB: Higher funding cost forbanks

I RMB deposit interest rates are higher than the USD depositrates

I That means a higher funding cost of lending in RMB

I Higher RMB loan rates means the same amount of money canbe used for more profitable business

Obstacles for firms to use RMB: Higher funding cost forbanks

I RMB deposit interest rates are higher than the USD depositrates

I That means a higher funding cost of lending in RMB

I Higher RMB loan rates means the same amount of money canbe used for more profitable business

Obstacles for firms to use RMB: Higher funding cost forbanks

I RMB deposit interest rates are higher than the USD depositrates

I That means a higher funding cost of lending in RMB

I Higher RMB loan rates means the same amount of money canbe used for more profitable business

Obstacles for firms to use RMB: Higher funding cost forbanks

I RMB deposit interest rates are higher than the USD depositrates

I That means a higher funding cost of lending in RMB

I Higher RMB loan rates means the same amount of money canbe used for more profitable business

Obstacles for firms to use RMB: Arbitrage opportunities

I RMB more expensive in Hong Kong than in Mainland China

I RMB interest rate higher than dollar rate

I Space for arbitrage

Obstacles for firms to use RMB: Arbitrage opportunities

I RMB more expensive in Hong Kong than in Mainland China

I RMB interest rate higher than dollar rate

I Space for arbitrage

Obstacles for firms to use RMB: Arbitrage opportunities

I RMB more expensive in Hong Kong than in Mainland China

I RMB interest rate higher than dollar rate

I Space for arbitrage

Obstacles for firms to use RMB: Arbitrage opportunities

I RMB more expensive in Hong Kong than in Mainland China

I RMB interest rate higher than dollar rate

I Space for arbitrage

Example

I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter

I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank

I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)

I It will be positive is i RMB is much larger than i USD andE’/E is very small

I That is RMB interest rate is higher than the USD rate andRMB appreciates

Example

I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter

I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank

I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)

I It will be positive is i RMB is much larger than i USD andE’/E is very small

I That is RMB interest rate is higher than the USD rate andRMB appreciates

Example

I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter

I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank

I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)

I It will be positive is i RMB is much larger than i USD andE’/E is very small

I That is RMB interest rate is higher than the USD rate andRMB appreciates

Example

I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter

I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank

I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)

I It will be positive is i RMB is much larger than i USD andE’/E is very small

I That is RMB interest rate is higher than the USD rate andRMB appreciates

Example

I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter

I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank

I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)

I It will be positive is i RMB is much larger than i USD andE’/E is very small

I That is RMB interest rate is higher than the USD rate andRMB appreciates

Obstacles for firms to use RMB: Investment opportunitieswith RMB

RQFII

I RMB Qualified Foreign Institutional Investors

I 2011, 20 billion RMB quota, up to 20% can be used to buystock

I Nov. 2012, quota increased to 270 billion

RQFII

I RMB Qualified Foreign Institutional Investors

I 2011, 20 billion RMB quota, up to 20% can be used to buystock

I Nov. 2012, quota increased to 270 billion

RQFII

I RMB Qualified Foreign Institutional Investors

I 2011, 20 billion RMB quota, up to 20% can be used to buystock

I Nov. 2012, quota increased to 270 billion

RQFII

I RMB Qualified Foreign Institutional Investors

I 2011, 20 billion RMB quota, up to 20% can be used to buystock

I Nov. 2012, quota increased to 270 billion

Development of financial markets in the 1990s

I 1990, SHSE and SZSE

I 1996, unified inter-bank market

I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)

I More information on the capital market from remaininglectures

Development of financial markets in the 1990s

I 1990, SHSE and SZSE

I 1996, unified inter-bank market

I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)

I More information on the capital market from remaininglectures

Development of financial markets in the 1990s

I 1990, SHSE and SZSE

I 1996, unified inter-bank market

I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)

I More information on the capital market from remaininglectures

Development of financial markets in the 1990s

I 1990, SHSE and SZSE

I 1996, unified inter-bank market

I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)

I More information on the capital market from remaininglectures

Development of financial markets in the 1990s

I 1990, SHSE and SZSE

I 1996, unified inter-bank market

I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)

I More information on the capital market from remaininglectures

The Money Market

The Money Market

I Net lenders: State owned commercial banks, Joint-Stockcommercial banks, Policy banks

I Net borrowers: City commercial banks, securities companies,RCCs

The Money Market

I Net lenders: State owned commercial banks, Joint-Stockcommercial banks, Policy banks

I Net borrowers: City commercial banks, securities companies,RCCs

The Money Market

I Net lenders: State owned commercial banks, Joint-Stockcommercial banks, Policy banks

I Net borrowers: City commercial banks, securities companies,RCCs