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

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.

http://www.worldbank.org/en/news/2012/02/27/china-case-for-change-on-road-t-030

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.

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.

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 (1984－1986，1992－1994，2008－2010)，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