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Tuesday, March 6, 2012

Summary and Presentation

Welcome to my blog!


For the design

For the content, it is based on the Chinese banking system and I divided it into two parts.

In the first part of 6 blogs, I focus on some hot issues debated in current news with respect to the Chinese Banking industry. The issues I follow include:

1. Extravagant profit (also called windfall profit)

Inspired from the statement of  windfall profit in Chinese bank industry has outstripped the profit in industry of tobacco and petroleum” and the report form the central bank, the growing speeds of the commercial banks’ profits are all exceed the market expectation and its side-effect followed is an overtop salary pay.

I conclude that usurious interest margin, high transaction cost, great growth on financial products conducting is the root and I put on more words on the first abnormal interest margin.

2. Foreign exchange reserves

FER is a double-edged sword for China,, in one hand,  China has 3.2 trillion US dollars which  is sufficiently capable to buy whatever he is willing to, but in another hand, with the Europe crisis brings about and the downgrade of the US credit rating, Chinese Government was seriously worried about the security and capital maintenance (hedging) of the store reserves as the US Government Bond is the main investment and transaction products.

3. Slowdown of Chinese economy and the downgrading of the reserve ratio

Recent statistics states a slowdown in China’s economy and the claim by the vice president seems to verify this fact during his visit to Ireland. However, meanwhile, Chinese central bank downgrades the reserve ratio by 0.5%, aiming at enlarging the funds available to banks for lending.

I explain some reasons for why the reserve ratio is downgraded including stabilize the economic development, liquidity supply, protection of real estate market and finally the consideration for the balance of foreign exchange reserves.

In the second part, I summarized and detailed the banking system with Chinese characteristics. The features are:

1. The banking system to the risk of the buffer is not mainly relying on capital mechanism, but the government credit.

2. China's credit cycle is mainly driven by the  government policy, but not commercial banks.

3. Financial repression and insufficient innovation.

In the last blog, after reading two literatures given in the blog, I put forward some introspection for the Chinese banking system briefly. They are

1. The limitations of financial supervision and deregulation.

2. The incapacity of withdrawing lending

Saturday, March 3, 2012

Introspection: Chinese Baning System

Times senior reporter Michael Schuman released an article aiming at the future of Chinese economic development on February 27,2012. Schuman supposed that if china does not transform the economic development pattern, it is unavoidable that the economic crisis will be addressed in nearly future.

http://business.time.com/2012/02/27/why-china-will-have-an-economic-crisis/

Coincidentally, with World Bank President Robert B. Zoellick visiting China early this week, in one hand, he was pleased with China’s economy recovery; in another hand, he was anxious about China’s economic mode and issued that China should be urged to redefine the economic growth model in the World Bank Official site.

I am prudently agreed with this view. Since I have introduced some characteristics of Chinese Banking System in last blogs, but some potential problems appeared are also huge and affected profoundly.

1. The limitations of financial supervision and deregulation.

This is an institutionalized moral hazard. To say, if the state-owned departments and local governments borrow hugely and make blind expansion based on a thinly capitalized banking system, which will consequently aggravate the debt quality firstly. Furthermore, it is inevitably that the debt risk will be shifted to the banks, worsen the banks’ assets and then lay the sin on the depositors finally so on and so for. Since that all the systemic risks will be upgraded and classified as the national risks and are tied to the confidence and patience the public gives to the government. While in this way, moral hazard becomes a main growth driver of Chinese economy, but also the important source of Chinese financial systemic risk.   

2. The incapacity of withdrawing lending

This is a fundamental problem. In these years, Chinese banks come across massive bad loans and such loans are viewed as part of the bank’s assets. To solve this problem, Chinese central bank takes financial stimulus using high lending profits to replenish capital, but to my honestly, I do not think China can clean up the bad debt quickly, because the financial stimulus is only the measure masking the symptoms, but not at root.

In addition, as Chinese government does not allow the banks be bailout, in other words, there is no systemic risk in Chinese banking system, so banks can only make profits by lowering the deposit rate and increasing the lending interest, while lowering the deposit rate is “stealth taxes”. Consequently, such banking system cannot be kept on sustainable development because low interest rate will decrease the proportion the consumption in the national GDP. To say, if the government cannot satisfy the increase in the purchasing power from the consumers, it may only rely on more exports.

Friday, March 2, 2012

Chinese banking system (2)

3. The basic characteristics of China's banking industry are financial repression and insufficient innovation.

Financial repression typically performed as the interest rate non-marketization and this system causes the resources allocation low efficiency and somewhat distorted. For example, it is not wise to keep the stage of bank’s net interest margin by artificially lowering the bank’s saving and lending rate. Because this behavior is actually subsidizes borrowers and banks within depositors. Additionally, when in high inflation, this benefit transportation is closer to “plunder”.

Furthermore, owing to the artificially low level of interest rates on bank loans, there has been an excess demand for the bank loans which makes the loans more scarcity. Compare to the small and medium-sized enterprises, the larger ones and government-backed borrowers are more likely to get a loan, so that widened the gap between rich and poor. To make even worse, this may limit the normal credit risk pricing and fund the financing capital asset bubbles which leads to an irrational resource allocation.

The other form of financial repression includes credit limit control and lending scale limit. Besides traditional limit control, the supervisory authority is more concentrated on some specific borrowers, products and areas, institutionally and regularly. Such supervised limit control has become the decisive factor in affecting the bank’s credit business.

In a word, there is no innovation for this financial institution under circumstances of such bound and direct-control financial system, since everything is keep on the rails and acted regularity and sequentially.

Thursday, March 1, 2012

Chinese banking system (1)

Since my blog is based on the overview of Chinese banking system, then I will briefly outline the essential features in this specific industry. Generally, Chinese Banking system is not a kind of commercial banking system in fully-marketized or market driven at the moment.

The arguments are as follows:

1. The banking system to the risk of the buffer is not mainly relying on capital mechanism, but the government credit.

After the clean-up of NPA and NPL in 1999, state-owned Banks gradually fulfill getting listed. However, this is not fundamentally changing the risk buffer mechanism based on the government credit, because Chinese government still hold most state-owned banks’ equity and their effective control. In addition, as there is no direct correlation between banks' property rights and banks' performance, we should take a rational attitude towards the state-owned' banks listed on the stock. Finally, due to lack of institutionalized liquidation withdrawal mechanism and deposit insurance system, Chinese policy banks’ supervision does not allowed any form of bank failure.  


2. China's credit cycle is mainly driven by the government policy, but not commercial banks.

Since the reformation and opening in 1980s, China has experienced three credit cycles (198419861992199420082010)which are all driven and implemented by government power. During the credit expansions, the volatility of net value of state sector assets is far less than that of fixed asset investment and bank loan, and they are independent to each other. While in contrast with the local government, there exists high correlation between budgeted investment and fixed investment, even bank loan, which is more pilot-strategic. Furthermore, in terms of the credit supply, banks are more likely to meet the credit demand within the system, for the sake of risk aversion. (State sector and state-owned banks are in the same system, so the government-backed borrowers’ default risk can be easier supervised and controlled relatively so that banks have no reason not to priority support them.)

Apart from this, the credit supply also follows government’s macro-control policy. For example, the financial stimulus in 2009 with respect to that banks ‘massive lending and credit releasing



Sunday, February 26, 2012

Why central bank downgrades the reserve ratio at this moment?

As I mentioned in last blog, Chinese central bank decided to cut the bank deposit reserve ratio over again by 0.5% since last November, implemented from Feb 24, 2012. After this adjustment, large financial institutions’ deposit reserve ratio will drop to 20.5% while the small ones will be as lower as 17%.

The reserve requirements are the amount of money and liquidity assets which banks must hold in cash or on deposit with the Federal Reserve System, usually a specified percentage of the demand deposits and time deposits. This is also the holding deposits saved in central bank to guarantee the customers withdrawing money, clearing and financial settlement. According to the central bank’s report last year, China’s RMB deposit balance was 80.9 trillion Yuan (8.09 trillion pounds), based on this, the money released by this cut was about 40.45 billion pounds.

Back to the title question, in my point of view, the reasons are as follows:

1) This is CB’s adjustment for fine-tuning and presetting monetary policy. As I have talked in last blog, because the macroeconomic indicator is not optimistic for months, many indices are quite low. In order to keep stable economic growth and economic environment, government should take this adjustment.

2) New loan scale in January was much lower than expected. This was mainly due to some small and medium-size banks have a tight liquidity and inadequate capital requirement situation. Decreasing the ratio can increase the liquidity of funds.

3) Aggressive easing of monetary and credit policy can prevent hard landing of real estate market. As the increasing liquidity will tend to release some money to the real estate market, this fills the cash flow gap and helps dampen price pressure.

In addition, Of the Central University of Finance and Economics Professor Tian Yong, Guo (2012) said, at present, Chinese macroeconomic dilemma of liquid expansion is induced by funds outstanding for foreign exchange reserves. In the context of foreign exchange reserves jumped and large amount of foreign capital flowed in, that would let the funds outstanding for foreign exchange enhance. If the RMB exchange rate levels remain unchanged, the rise will increase inflationary pressures. On the other hand, since the less optimistic situation in Europe, reduced trade surplus, the decline in foreign exchange, making the future market liquidity continues to tighten up the possibility of existence. Alternatively, it is the large holding foreign exchange hedged and the high growth rate of M2, wide currency that is the further development of RMB.

Thursday, February 23, 2012

China Economy-----in Queer Street?

Recent statistics states a slowdown in China’s economy; the quarterly economic growth suffers a slight decrease from 10.4% in 2010 to 9.2% in 2011, due to China’s macro-control measures. Such decline may have negative impact on the external and domestic investment demand to some extent.

When addressed whether the slowdown in China’s economy may postpone the global economic recovery, Chinese vice-president Jinping, Xi responds this from “Irish Times” (February 18, 2012) during his visit to Ireland last week.

As he said

Starting from this year, we have lowered the target of economic growth. This will help reduce the pressure in terms of price, energy, resources and the environment. It will also help us accelerate the shift in growth model and increase the quality and efficiency of economic development.”

From Mr XI’s statement, is this supposed that China intends intentionally interested in the slowdown of the economy growth??

I am quite confused. For example, in the investment-intensive,a leading indicater economic power consumption of the whole society decreases year-on-year by 7.5%; alternatively, Chinese society total financing slumps sharply, reduced by nearly 50%, the new lending and loan scale in January fell to its lowest level in five years. In another hand, the inflation rate increased significantly from 4.1% to 4.5% since last December.

In response to the reports in January, Chinese central bank on February 19th, 2012 decided to lower bank deposit reserve ratio by 0.5%, implemented from Feb 24, 2012. This claim is expected to release 400 billion Yuan (about 40 billion sterling) and aimed at enlarging the funds available to banks for lending, for instance, high leveraged investment banks can make more disposal lending when credit is easy and pull back faster in the crash.

This is the second time the central bank drops down the reserve ratio since last November but as far as I am concerned, cut interest rate or take fiscal stimulus will be more efficient, normally involving increased public spending and lower taxation which give a positive jolt to economic activity. The decline in the reserve ratio is unlikely to lead to lasting recovery unless accompanied by strong measures to further stabilize and strengthen the financial system, so a new downturn with a massive fiscal stimulus package should be taken. (E.g. China last adopted a big stimulus package during the Asian financial crisis, when it succeeded in holding annual GDP growth at almost 8 %.)

However, perhaps the debate of the fiscal policy has not come to an agreement and need more studies in Chinese government. In addition, yet the Chinese government transition is near, it looks like the government will still spill over a little bit on the economy and the most important thing at the moment is the realization of steady and smooth transition, nor the positive and aggressive measures.

Monday, February 13, 2012

The Vexation of $3.2 trillion - to the Chinese Foreign Exchange Reserves (FER)


As every coin has two sides, it is also applied in Chinese FER.

With the Eurozone debt crisis spread to other Eurozone countries violently, (e.g. from BBC news on Feb 13, 2012, Greek bailout crisis and street violence has become a main topic among the Euro, further austerity measures about a 130bn euro bailout package was support by EU leaders.) and the US has not driven out the dark clouds of the debt default risk, Chinese finance ministers look like ambivalent and complicated, which is a kind of agitated, helpless and anxious.

As I have analyzed the liquidity, adequacy and diversity for Chinese FER in last blog, now I will talk about the annoyance for this large amount capital.

As we all know, from the $3.2 trillion US bucks, the dollar assets take account of about 70% (among them 1.16 trillion is US bonds), Euro assets is estimated as much as 20%. In addition, With the Standard & Poor downgraded the US Credit Rating to AA-Plus on April 18, 2011, Chinese Government was seriously worried about the security and capital maintenance (hedging) of the store reserves as the US Government Bond is the main investment and transaction products.

Furthermore, China, the largest foreign-government creditor should claim against the US government to solve out the structural debt problems and the US Congress to safeguard the National debt investment security and market well- functioning. So that reducing the volatility to the international financial markets and realizing diversified sources of investment strategy within the FER.

In a short, my conclusion is that:

“The US kidnap the global economy, and Chinese Foreign Exchange Reserves is the hostage.”


Saturday, February 11, 2012


Today, I was chatting with a friend about Chinese Foreign Exchange Reserves (FER), he asked “since China holds as much as 3.18 trillion US dollars FER, do you think it looks too fat and why not rescue the EU debt crisis with part of them? What does $3.18 trillion mean in real life?


 What I told him was as follows:

It cannot deny that the central bank of China has massive money, but it is some kind of a general lack of imagination. Quite a large part of the foreign exchange reserves are held in form of the US Government Bond. Whether China has a thought of “Buy Europe Out” or not, it is certain that China has sufficient appetite and capable to buy whatever he is willing to buy, though Chinese Premier J.B. Wen stated that it is such a ridiculous joke for china’s intention for a buyout of Europe when he met with German Chancellor Angela Merkel in Guangzhou on Feb.3.2012.

With such substantive foreign exchange reserves,

 1)      China can purchase the sum of the national debt among Spain, Ireland and Greece so that solve out the EU debt crisis shortly. And if China did it, it can still keep half of FER.


2)      China can send a Tata Nano( the cheapest car in the world) generously to every Indian( 1.27 billion Indians) and the remaining money can even buy one-year petrol, which is easily “accelerate” India and solve the paralyzed and congested traffic in India.

3)      Rather than purchase large amount of US Government Bond, China can buy corporate stocks as much as he likes. Suppose if China “swallow up” Apple, IBM, Microsoft and Google with merely no more than 1 trillion US dollars, how could it be in the Internet world? Monopoly?

4)      Like some Arab sheik and Russian oligarches, China can purchase the UK football clubs. According to Forbes, the gross value of world’s 50 most valuable Sports Organizations in 2010 was just 50.4 billion US dollars, less than 2% of China’s FER

5)      When take account of the real estate investment, China’s FER can totally purchase the whole Manhattan with a payment of $0.287 trillion and $0.232 trillion for Washington DC!! Since China is accustomed to be the creditor of Washington, why not change the role to the landlord?

6)       Finally, theoretically, China can also buy the US Department of Defense! According to the balance sheet acquired in 2010, the value of the organization is about 1.9 trillion which includes the plant, equipment and entities, while the gross value of the weapon is just $0.4137 trillion dollars.

Friday, February 10, 2012

The Brief Analysis On the Reason Why the Windfall Profits Appeared?

Since the first blog was talking about the windfall profit appeared in the Chinese bank industry, now I will concentrate on the reason why and how this abnormal profit produced.

As my first blog has mentioned that usurious interest margin, high transaction cost, frequently and overwhelmingly growth on financial products conduction has become the root of this windfall profit.

In detail, I will place the main emphasis on the first usurious interest margin. It says that the gap of saving and loan has become the big source of bank’s extravagant profit. For example, the one year time deposit interest rate in 2011 was 3.5%, while the loan rate for 1-3 year was as high as 6.65%. Under this policy, the banks can guarantee a difference of 3% between loan and saving rate, which is what the specialist called “sit-in money”.

In the first three quarters of 2011, the revenue earned from net interest rate margin in the 5 nationalized banks took up 75.7% of the gross, which the other equity banks account for the percent of more than 90%.

In terms of the gain on interest, most banks maintained their robust growth with a year-on-year rises of around 30%. In addition, on Feb.4, 2010, when talked about the reform of Chinese marketization of interest rates, the Vice Chairman of Financial and Economic Committee of People’s Congress, X.L. Wu, pointed out that, in order to carry out the reform steadily, we should leave them to market forces, optimize the allocation of financial resources, meanwhile, the central bank should regulate and control the upper limit of the saving rate and lower limit of the loan rate to supervise the interest rate premium on saving and loans, as the richness interest rate premium has become the important headstream to make the profit in the financial markets.

Thursday, February 9, 2012

Harshly denounced on Chinese Banking System----Why always people foot the bill for its monopolized windfall profit ?


Recently, the Vice Secretary General of China Centre for International Economic Exchanges (CCIEE), Y.J. Chen stated that “the windfall profit in Chinese bank industry has outstripped the profit in industry of tobacco and petroleum”. Since then, a remark caused great controversy immediately in the society. The bank industry again has been harshly denounced by major people due to its extravagant profits and monopolized power. In addition, the summarized report of Bank Performance in 2011 indeed verified this “windfall profit” statement. Usurious interest margin, high transaction cost, frequently and overwhelmingly growth on financial products conducting has become the root of the phenomenon, to make things even worse, the major victims are the vast number of depositors, lenders and Chinese real economy, who foot this bill unwillingly.


The windfall profit and overtop salary makes banking the most popular industry. We can explain it with Performance Report in Banking Industry of 2011 as a reference, for example, the bans of “Shenzhen Development” in 2011 declared that the net profit assigned to the shareholders in quoted company is around 1 billion to 1.061 billion pounds, year on year growth rate was about 60% to 70%; the Shanghai Pudong Development Bank attained the net profit of shareholders assigned to the parent company is about 2.724 billion pounds, year on year growth rate was 42.02%; the China Industrial Bank has earned 2.515 billion pounds in 2011, year on year growth rate was 37.74%. Above all, the growing speeds of Listed Commercial Banks’ profit are all exceed the market expectation, respectively.


According to the statistical data of China Banking Regulatory Commission (CBRC), in the first three quarters of 2011, the accumulated net income of Chinese commercial banks was 81.73 billion pounds, year on year growth rate is 35.4%, quite near to the after-tax net income of the whole year of 2010, the average capital profit ratio is about 22.1%, the operating costs have increased by 20.85 billion pounds; profit per capita is around 40 thousand pounds. As rough estimation and prediction based on this results , the accumulated net income of Chinese commercial banks will increased to 100 billion pounds by the end of year 2011, so does the profit per capita will up to 50 thousand.


But compared to this, the net profit of large scale major industrial enterprises in the first three quarters are merely around 368 billion pounds, spread and distributed by 87 million people (workers), the profit per capital is just no more than 4,000 pounds.


Meanwhile, under the high net income, the high salary and year-end bonus in bank industry also leave others too far behind to catch up with. For example, in 2011, the regular staffs with up to 3 years’ working experience can get a year-end bonus for around 8000 pounds. Notably, the staffs employed in small and medium size equity banks always attain more than those in the large scale nationalized bank.


Furthermore, in the Various Sectors of Salary Ranking List, financial sector is still unbeatable. From the report, Minsheng Bank ranked the top with respect to the labor payoffs of first half year of 2011, which is as higher as 19.07 thousand pounds; come next is the China Merchants Bank, which is 17.89 thousand pounds. Among the 16 Listed Commercial Banks, there are 10 banks with employee payoff exceed 10 thousand pounds, the other 6 are consists of 5 major nationalized banks and Beijing Bank.