the chinese banking system: structure, potential risks, and … · 2020. 7. 22. · Østockholding...
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The Chinese Banking System:Structure, Potential Risks, and Reforms
Professor Jun Qian (QJ)Fanhai International School of Finance, Fudan University
July 22, 2020Peterson Institute Online Forum
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Outlinel Structure of the Chinese banking system: a three-tier system
l Comparing the largest banks around the globel Different features of ownership and governance of banksl Case study of Baoshang Bank
l The growth of fintech lending:l Examples of “ecosystems” of fintech platforms with multiple functionsl What is special about fintech lending in China?
l Shadow banking sector: l Growth of banks’ wealth management products (WMPs)l Restructuring of the shadow banking sector
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Total Social Fundraising and GDP Growth (2006-2019)
Sources: PBoC, WIND
0
2
4
6
8
10
12
14
16
(5)
0
5
10
15
20
25
30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Undiscounted BA Bank Loans Trust Loans BondEquity ABS Others Real GDP Growth(%)
Trillion RMB
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lA three-tier structure:Ø “Big Four” banks (ICBC, BOC, CCB, and ABC), plus Bank of Communications and the
Postal Savings Bank; among the largest banks in the world; and policy banks
Ø Stockholding banks (most of these are listed): e.g., China Merchants Bank (招商银行)
Ø Regional, small & medium sized banks (SMBs); credit cooperatives; non-bank inst
Ø Support old growth model: absorbing social savings => (low cost) loans (investment) to key industries
lKey reforms in the recent two decades: IPOs of state-owned banksØ See, e.g., Allen, Gu and Qian (2017), for more details
lBanks’ business and risks: on- and off-balance sheet activitiesØ China’s shadow banking: formation, growth, roles and risks
Overview of China’s Banking System
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Largest Banks in the World (assets) (Source: Bloomberg, latest filings as of Dec. 2019)
Rank Bank Name HQ Country Total Assets ($trillion)
1 IND & COMM BK OF CHINA China 4.32
2 CHINA CONSTRUCTION BANK China 3.65
3 AGRICULTURAL BANK OF CHINA China 3.57
4 BANK OF CHINA LTD China 3.26
5 MITSUBISHI UFJ FINANCIAL GRO Japan 3.07
6 HSBC HOLDINGS PLC United Kingdom 2.72
7 JPMORGAN CHASE & CO United States 2.69
8 BANK OF AMERICA CORP United States 2.43
9 BNP PARIBAS France 2.16
10 CITIGROUP INC United States 1.95
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Largest Banks in the World (market cap)(Source: Bloomberg, latest filings as of Dec. 2019)
Rank Bank Name HQ Country Market Cap ($billion)
1 JPMORGAN CHASE & CO United States 429.91
2 BANK OF AMERICA CORP United States 311.21
3 IND & COMM BK OF CHINA China 294.12
4 WELLS FARGO & CO United States 222.43
5 CHINA CONSTRUCTION BANK China 217.70
6 AGRICULTURAL BANK OF CHINA China 182.40
7 CITIGROUP INC United States 168.90
8 HSBC HOLDINGS PLC United Kingdom 161.26
9 BANK OF CHINA LTD China 147.24
10 ROYAL BANK OF CANADA Canada 113.26
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Largest Banks in the World: ROA in 2019
Source: Wind
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
IND &
COMM BANK OF C
HINA
CHINA CONSTRUCTIO
N BANK
AGRICULTURAL BANK OF CHIN
A
BANK OF CHINA
MITSUBISHI U
FJ FIN
ANCIAL G
RO
JPMORGAN CHASE
HSBC H
OLDINGS
BANK OF AMERIC
A
CITI GROUP
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Data Source: WIND
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
2019-12-31 2020-01-31 2020-02-29 2020-03-31 2020-04-30 2020-05-31 2020-06-30
Top 10 Banks’ (by Total Assets) Stock Performance 2019.12.31 to 2020.07.16
IND & COMM BK OF CHINA-A
CHINA CONSTRUCTION BANK-A
AGRICULTURAL BANK OF CHINA-A
BANK OF CHINA LTD-A
MITSUBISHI UFJ FINANCIAL GRO
JPMORGAN CHASE & CO
HSBC HOLDINGS PLC
BNP PARIBAS
BANK OF AMERICA CORP
CITIGROUP INC
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IICCBBCC’’ss OOwwnneerrsshhiipp SSttrruuccttuurree ((aass ooff MMaarr..3311tthh,, 22002200))
Huijin, 34.99%
MOF, 31.14%
SSF, 5.89%
Ping An, 4.44%Temasek, 2.05%
CSF, 0.68%
Other H Shareholders,
16.46%
Other A Shareholders, 4.35%
Data Source: WIND
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CChhiinnaa MMeerrcchhaannttss BBaannkk’’ss OOwwnneerrsshhiipp SSttrruuccttuurree ((aass ooff MMaarr..3311tthh,, 22002200))
China Merchants Steam Navigation Company (Central
SOE), 13.04%China Ocean Shipping
Company (Central SOE), 6.24%
Hexie, 4.99%
Anbang, 4.99%
Shenzhen Yanqing, 4.99%
Shenzhen Zhaorong, 4.55%
Shenzhen Chuyuan, 3.74%CSF, 2.99%
Other H Shareholders,
18.20%
Other A Shareholders, 36.27%
Data Source: WIND
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lRole of government ownership stakes:Ø For profit goals and non-profit goals, including financial stability of the financial system
and implementation of macro-prudential policies
lRole of foreign institutional investors:Ø Improving operating efficiency and shareholder governance (serving on the board)
lWhat is the optimal structure of the banking sector:Ø For emerging markets, the optimal structure should perhaps include both public/state
large and private/smaller banks; or including government ownership stakes in some large institutions
Ø Competition and comparison among these banks can ensure public banks are efficiently run, and private banks do not take too much risk
Ø See Allen, Qian, Shan and Zhao (2011) for more details
Ownership and Governance of Large Banks
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lTaken over by CBRC on May 24, 2019:o Due to its credit risk, China Banking Regulatory Commission (CBRC) decided to
take over for one year, starting May 24, 2019
o On Apr. 30, 2020, Mengshan Bank(蒙商银行) was founded, and took all the assets and liabilities of Baoshang Bank in the region of Inner Mongolia
l Factors leading up to the failure of Baoshang Bank:o Capital was occupied/tunneled by it’s (ultimate) controlling shareholder
o Poor quality of assets: low capital adequacy ratios and provision coverage; lack ofhigh-quality of major loan customers
o Problematic regional economic development : low GDP growth rates; high leverage of local government; net outflow of population
Case Study: Baoshang Bank (包商银行)
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lOther banks that got in trouble:o Hainan Development Bank: took over by ICBC in 1998o Bank of Jinzhou (锦州银行, in Liaoning Province): reformed and
restructured in 2019o Some credit cooperatives went bankrupt due to different reasons
lRegional banks’ activities and capital flows typically concentratein a few cities/one or two regions:o Thus no strong contagion risks.
Case Study (cont’d): Baoshang Bank
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NNPPLLss ((oovveerr llooaannss)) ooff JJaappaann,, IInnddiiaa,, CChhiinnaa aanndd tthhee UUSS
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
USAJapanIndiaChina
%
Data Source: World Bank
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Performance of Listed Banks in China: NPLs (over GDP) and ROA(Dec 2008 to Dec 2020Q1)
Data Source: WIND
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2008
-12
2009
-06
2009
-12
2010
-06
2010
-12
2011
-06
2011
-12
2012
-06
2012
-12
2013
-06
2013
-12
2014
-06
2014
-12
2015
-06
2015
-12
2016
-06
2016
-12
2017
-06
2017
-12
2018
-06
2018
-12
2019
-06
2019
-12
NPLs/GDP ROA (Right Axis)
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Digital Economy and Financial Services: China’s Business Model
Source: Goldman Sachs ( 2018)
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Case Study: Ant (Financial) Technology
17
§History …
§Ownership
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What is special about platform lending?
18
n Fintech vs. traditional banking:
n Informational advantages
n Platforms as cheap distribution channel
n Platform recycles funds (“closed loop”)
n Enforcement mechanisms
SalesPerformance
ServiceQuality
CreditHistory
Non-salesPerformance
Credit Usage
OwnerCharacters
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l A broad definition of ‘shadow banking’:l All investment products off-the-balance sheet of (deposit-taking) banks
l Theoretical work on the role of shadow banking: Wang et al., (2016)—can be welfare enhancing
l Wealth management products (WMPs) issued by banks:l Acharya, Qian, Su and Yang (2019): understand the growth and risks of the WMPs
l Loans issued by non-bank institutions:l Chen, Ren and Zha (2018): monetary policies & issuance of entrusted loans; Allen, Qian, Tu and Yu (2018):
Properties of entrusted loans; Du, Li and Wang (2016): Non-financial firms as financial intermediaries
l Trust industry: Product level analysis: Allen, Gu, Qian and Qian (2018)
l Other credit/lending channels:
l Informal/private credit agencies: Allen, Qian and Xie (2019); Internet platforms (P2P, crowd-funding)
Related Work on China’s Shadow Banking
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0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
New Bank Loan as a Percentage of 2004 GDP
New Bank Loan/2004 GDP GDP (trillion RMB)
RRMMBB 44--ttrriilllliioonn SSttiimmuulluuss aanndd CCrreeddiitt EExxppaannssiioonn((nneewwllyy iissssuueedd bbaannkk llooaannss aanndd GGDDPP ggrroowwtthh;; 22000044--22001155))
4 trillion stimulus
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Banks’ Wealth Management Products: Principal-floating WMPs/Netassets (Acharya, Qian, Su, and Yang, 2019; largest 25 banks; 2008-2014)
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l After a series of reforms, large Chinese banks have become stalwarts of the financial system
l On-balance sheet activities: NPLs under controll Off-balance sheet activities: fast growth since the stimulus;
rollover risks; l Reforming the banking and shadow banking sectors:
Ø Liberalization of interest rates, Ø Downsizing of the risky part of the shadow banking sector Ø New regulations on asset managementØ Banks’ establishment of new asset/wealth management companies
Summary: Banks and Financial Institutions
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Thank You