Small banks suffer from finance crackdown – Sara Hsu

 

Sara Hsu

Ant Finance has been one of the more prominent victims of the current crackdown by the central government on the booming fintech industry. But small regional banks are another group getting into trouble, says financial analyst Sara Hsu in China-US Focus.

China-US Focus:

China’s small banks are under pressure as the fintech sector is experiencing increasing regulation. Regulations cracking down on deposit-taking in the sale of banks’ financial products through third-party platforms will soon result in a contraction of small banks’ loan bases. As larger banks shift from platform deposit-taking to other sources of funds, this regulation will likely compound an already-squeezed small banking sector.

China’s fintech sector is undergoing extensive scrutiny at present, from the sudden imposition of regulations on Ant Financial to the implementation of risk ratings on consumer finance companies. While small banks, which struggle to obtain deposits from their local customer base, had hoped to benefit from the fintech boom, they are facing increasing regulation. Banks overall have been found responsible for subverting financial regulations in order to grow their funding base.

On January 15, the China Banking and Insurance Regulatory Commission banned commercial banks from selling deposit products via third-party internet platforms. The regulatory body stated that China’s fintech sector has brought with it hidden risks regarding information disclosure and product management. Online third-party deposit sales have resulted in the potential for financial contagion.

Small banks in particular found that, by selling financial products through third-party platforms, they could break through geographical restrictions in order to obtain deposits from the entire country rather than from their own location. Products sold online included personal time deposits, with a focus on three and five-year maturities. Interest rates on these products were close to the upper limit of banks’ self-regulatory pricing mechanism, which is tied to the benchmark interest rate. Most products required an initial deposit of only 50 RMB and could be withdrawn at any time.

More in China-US Focus.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

Are you looking for more fintech experts at the China Speakers Bureau? Do check out this list.

Money laundering in China - Sara Hsu

Sara Hsu

Around 100 billion US dollar leaves China illegally each year, estimates financial analyst Sara Hsu. Only last year 380 banks were busted for money laundering. She discusses at CGTN what the government does to prevent those illegal transactions.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more financial analysts at the China Speakers Bureau? Do check out this list.

The outflow of capital, China's new banking challenge - Victor Shih

Victor Shih

Chinese banks bought in January 140 bn RMB worth of foreign exchange, but despite this hiccup, money leaving China is the real challenge for its banks, writes financial expert Victor Shih in the Financial Times.

Victor Shih:

In previous years, exporters and investors used every loophole to sneak dollars into China, resulting in much larger flows into China than normal trade and investment activities would have predicted. The data from the past few months, including the January data, suggest that they are no longer doing this. 

In fact, they are moving money out of China, or least out of the RMB. In a sense, China’s technocrats, who have fought hard to slow the inflow of “hot money,” have succeeded in shifting investor sentiment. After years of nominal and real revaluation (via higher inflation in China), the renminbi is no longer seen as a one-way bet, and the flood of money into China has suddenly dried up. 

Yet, the journey ahead for China’s central bankers will be just as challenging as during the years of large inflows. Instead of controlling the flood of new money coming into China, central bankers now must guard against a sudden and large withdrawal of liquidity from the banks, which may prevent banks from making needed loans in support of economy growth.

More in the Financial Times.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

More about Victor Shih and China's debts at Storify.

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Relaxing money lending is the wrong policy - Shaun Rein

Shaun Rein

In a surprise move China's financial authorities decided last week to abandon their tight money lending policy and losend the reigns for its banks again. Wrong policy, says business analyst Shaun Rein in CNBC, who has been praising the government handling of inflation and overspending in the past. Shaun Rein:

The net result [of past policies] is that China has so far staved off the worst of the world's economic ills. Retail sales have grown 16-18 percent annually. The stock market almost doubled from its lows, and GDP has grown around 9 percent annually. 

China’s good times, however, might end after a major policy mistake by the central bank last week that could spur rampant inflation and trigger a speculative and very dangerous bubble in the real estate sector. The central bank dropped the reserve ratio requirement for banks by 50 basis points,signaling an end to the tight monetary policies needed to stave off inflation... 

By loosening the monetary policy so early, China’s central bank also sent the signal to local officials that real estate would continue to be a major revenue stream – both by land sales and tax revenue. This is unhealthy as far too many local governments generate the majority of tax revenue from the real estate sector. This reliance on easy tax revenue has stopped them from promoting actively enough small and medium enterprises, which should be the backbone of job creation. 

The central bank should have kept a tight monetary policy not just to stave off inflation but also to send a clear message to real estate developers, speculators, and local officials that the real estate sector cannot play such an outsized role in the economy.

More in CNBC

More links to Shaun Rein opinions on China's economy in Storify  

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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New banking policy no reason to worry - Arthur Kroeber

Arthur Kroeber

The sudden loosing of the tight banking rules for lending came as a surprise, but economic analyst Arthur Kroeber sees no reason for panic about China's economy. In the Guardian he gives a historical perspective.

The Guardian:

In another sign that the world economy is taking a turn for the worse, analyst Arthur Kroeber of Beijing-based GaveKal-Dragonomics said the cut [ in the reserve ratio requirement (RRR) ]was a formal indication of the government's shift after two important hints. Vice premier Wang Qishan recently remarked that an unbalanced recovery was preferable to a balanced recession.   

He noted that adjustments to the RRR were usually made in response to foreign exchange inflows, which have slowed sharply, rather than to control domestic monetary conditions.

Despite the shift in policy, Kroeber challenged growing pessimism in the markets about China's prospects. "[People are saying] Oh, suddenly there are capital outflows, the trade surplus is going down, growth is slowing – isn't this terrible? My answer is no, it's not. "Going back three or four years, everyone said China was growing too fast, capital inflows were way too much and the trade surplus was way too big… We are getting the adjustment everyone thought was necessary."

More in The Guardian

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.  

More links to Arthur Kroeber's thoughts on China's economy at Storify.

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Why China's banks are different - Victor Shih

Victor Shih

China's banks and its bankers are totally different creatures than their Western counterparts, explains political analyst Victor Shih in Reuters. They not only closely follow the political line of the day, but are more politicians than bankers.

Reuters:

Despite all that, banks have reported strong earnings in the past year that often beat expectations. This may be a result of them putting less cash into the kitty to prepare for loans that may go sour. 

"This is unlike the late 1990s when the government forced the banks to admit to a huge amount of non-performing loans. This time round, the strategy is just to not admit to NPLs," said Victor Shih, a professor at Northwestern University in Chicago who has written a book on China's financial system. 

Many of the executives running China's banks may have accepted salaries their Western counterparts would disdain in return for the future political appointments that may further their influence, said Northwestern's Shih. 

For example, the current governor of the Chinese central bank, Zhou Xiaochuan, and Vice Premier Wang Qishan were both previously head of CCB, the country's No.2 lender. ICBC's Jiang is rumoured to be in the running to head China's bank regulatory commission, while CCB's Guo is tipped as possibly the next head of the central bank, of which he was previously a vice governor. 

"Many of them are aspiring politicians, and being a bank CEO is merely a stepping stone in their careers," Shih said. "Thus, they are willing to accept lower pay."

More in Reuters.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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China's melting bank deposits - Victor Shih

Victor Shih

China's consumers and companies are massively withdrawing their deposits from the banks, political analyst Victor Shih reports in the Financial Times. An explanation for this banking meltdown is still lacking.

Victor Shih:

In July this year, households and companies withdrew a total of Rmb1,100bn ($172.5bn) from China’s banks, equivalent to 2.5 per cent of GDP. In August, household deposits barely clinged to positive territory at Rmb26bn, despite receiving over Rmb188bn in new loans that month. 

Corporate deposits grew a bit more, but were still abnormally low. Although the September numbers are not out yet, Chinese press reports suggest that the deposits in the major state banks declined substantially in the first half of the month. Where did all the money go?...

 Although the mystery remains unsolved for the moment, solving the mystery is important for investors who want a sense of where the economy is heading.If large sums are indeed disappearing into the shadow banking system, then a rapidly rising share of the financial system is beyond the direct control of the government. 

If large sums are indeed flowing out of China, we may have the beginning of major, sustained outflows from China.

 More in The Financial Times

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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China can deal with its sky-high debts - Victor Shih

Victor Shih

China's debts could be as high as 150% of its GDP, higher than that of the US and Greece, says political analyst Victor Shih in Aljazeera. But is should reform its inefficient economy to deal with that debt.

The official numbers of China's aggregated debts vary a lot, but could be as high as 1.65 trillion US dollar. How can the country then still promise to buy up much of the European debt? China's largest problem is not the amount of debts, since it also has a huge deficit with other countries, but the way is has organized its economy, says Victor Shih. "Much of the control has been decentralized to local governments."

Also, much of the economy is dominated by State-Owned companies, who are still making nice money. But when they would default, the burden would be on the government. Lacking financial reform is a bigger problem than the debts, according to Shih.

More in Aljazeera.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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China's local debts still higher than officially estimated - Victor Shih

Victor Shih

China's financial institutions have been releasing assessments on the total of debts local governments have, writes Victor Shih in a guest blog at the Financial Times. But they are not yet close to the real debts of 15 to 20 trillion Renminbi.

Here is how we arrive at these numbers. First of all, we have to understand that the National Audit Office is like the Congressional Budget Office and only cares about debt directly owed by local government organs or debt directly guaranteed by local government organs.

It does NOT care about liabilities of central and local governmental entities, which were not guaranteed by the government. Chart 3 of the report states that the audit uncovered Rmb4,970bn in local government financing vehicle (LGFV) debt as of the end of 2010, and another Rmb5,700bn or so owed by local government organs and “business units subsidised by the budget.”

However, based on the figures previously released by the CBRC and the PBOC, we know that the Rmb4,970bn LGFV debt figure is way too low. The discrepancy between the CBRC and PBOC estimates and the NAO number arises from the fact that the NAO was only looking for LGFV debt in which the local government has issued decrees or guarantees to underwrite. Thus, LGFV debt which is guaranteed by another company or is collateralised by land was not part of the NAO audit.

More analysis from Victor Shih in the Financial Times

Victor Shih is a speaker at the China Speakers Bureau. When you need him at your meeting or conference, do get in touch.

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What about the underground financial bubble? - Victor Shih

Victor Shih

Victor Shih of the Northwestern University has been doing much of the legwork to find out how much China's debt actually is, much higher than China's financial authorities want to admit, he writes on this blog of the Financial Times. Much of the country's financial bubble remains underground.

At the end of April, Baotou-based Chinese billionaire Jin Libin set himself on fire to escape his creditors.  His method of dealing with the situation was disturbing enough, but the structure of his debt was equally shocking. Investigators found that his billion renminbi business owed banks only 150 million RMB, but owed individual creditors and informal banks Rmb1.23bn.

In other words, he owed private creditors and informal banks over eight times what he owed the banks. Although extreme, Jin’s debt situation suggests a highly risky debt bubble that seems to be growing without much control outside of the banking system.

More in the blog of the Financial Times.

Victor Shih is a speaker at the China Speakers Bureau. When you need him at your meeting or conference, do get in touch.

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Three reasons why China's banking system is fragile - Victor Shih

Victor Shih by Fantake via Flickr

Despite three trillion US dollar in foreign reserves, China's banking system is more fragile than you would think when you look at that figure only, tells Victor Shih at the Institute for New Economic Thinking. Much of China's wealth is concentrated with very few. (h/t Creditwritedowns.com)

Victor Shih is a speaker at the China Speakers Bureau. When you need him at your meeting or conference, do get in touch.

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Stress tests but no stress for bank sector - Shaun Rein

Shaun Rein     by Fantake via Flickr

Bot real estate prices and A-shares in China keep on getting investors attention, but as the country prepares for stress tests of their banks, Shaun Rein expects the government will be able to channel fears about the debts of central and local governments, he tells Bloomberg TV.
Rein foresees a soft lending for the real estate as sales dropped 70 percent over the past few months, indicating consumers are not taking too high risks. Total government debts is at 42 percent of China's GDP, much less than in some of the developed countries, putting it in a good position to deal with those debts with huge problems for the banks. Rein expects no problems as China will expose its banks to the stress tests earlier conducted in the US and Europe.
More at Bloomberg.

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Shaun Rein is a speakers at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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Where China is hiding its debts - Victor Shih

Victor Shih Fantake via Flickr

Professor Victor Shih from the Northwestern University is the main investigator, looking for China's sky high debts after its financial rescue operation. In Business Week Shih explains where China is hiding its debts, and why there might be more than even he can find, especially at the 8,000 local investment companies, who might have borrowed more than they can pay back.

Figuring out what projects the LICs have financed and how healthy they are is hard. Shih says LICs in the western city of Yinchuan, the capital of Ningxia autonomous region, have helped bankroll a building spree. New luxury villas and high-rise residential complexes, as well as a huge new soccer stadium, adorn the city. A science and technology center, a museum, and a library each occupy several football fields' worth of turf, while an almost-finished skyscraper resembles New York's Empire State Building. It's pretty ambitious for a region that depends on cash transfers from Beijing for 70 percent of its total revenues. Shih estimates Ningxia's debt at $15 billion—75 percent of the region's economy. "A soccer stadium in the middle of nowhere is not going to generate much cash flow," he says. "Without massive central government subsidies, I think many of these projects will not generate enough cash even to pay interest on their loans."

More in Business Week.

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Victor Shih is a speaker at the China Speakers Bureau. When you want to share his insights at your meeting or conference, do get in touch.

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Not bullish on AgBank - Shaun Rein

Shaun Rein     by Fantake via Flickr

Shaun Rein, managing director of the market research group CMR, might be in general optimistic about China's economic development, at CNBC he cautions against too many bears on the road for China's Agricultural Bank, also called AgBank or ABC. The bank performed poorly at its listing on Thursday at the Shanghai stock exchange. The bank is too much a political tool and might not help investors, says Rein.
Most of its customer'base are poor Chinese farmers, who might switch to more consumer-savvy banks like the China  Merchant Bank, when they actually start to make money in the decades to come. Also, of its customers currently already 90 percent is not satisfied about the banks performance.

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Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do let us know. 

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Banks refuse smaller companies

Today one of my colleagues went out to open a bank account for Chinabiz Speakers, something we thought would be a simple routine operation. We do expect to get some money in now and then and since our office is surrounded by branches of almost all banks, that seemed easy to do.
No so, he hold me just now: most banks refused him because the registered capital was too low in their eyes.
He then turned to the Bank of Shanghai, who was actually advertising themselves as the bank for the smaller and middle-sized companies. Not surprisingly, since they have their roots in the rural collectives of Shanghai's past. But my colleague was again refused, he then decided to argue. The employee talked to his boss and they reluctantly accepted the application.
Being a smaller company in China mean you just do not get the service you need.

A way to clean up the banking sector

Victor Shih detects a path Chinese authorities are following to clean up the banking sector:

I am beginning to detect a pattern where middle level and senior regulators and officials get to rotate to a commercial bank, where they enjoy a few years of high salary. Then, they can either choose to stay or return to poverty. If this can reduce corruption, I think that would be a pretty good system.