China s Financial Circles: Banks, Borrowers and the Na7onal Budget. Grant s Conference. Carl E. Walter. October 26, The Plaza New York

Transcription

1 China s Financial Circles: Banks, Borrowers and the Na7onal Budget Carl E. Walter Grant s Conference October 26, 2011 The Plaza New York

2 What doesn t the market know about China s banks? CCB ABC BOC ICBC Rebased to 100 January 2011 Sep-05 May-06 Jan-07 Sep-07 Jun-08 Feb-09 Oct-09 Jun-10 Feb-11 Nov-11 Source: Bloomberg; Chinese bank H- shares 1

3 Outline of remarks The challenge - enthusias7c, innova7ve and excessive credit crea7on The solu7ons look to the past The problem China s banks are part of the na7onal budget 2

4 Part 1: The problem

5 Banks are China s financial system Corporate capital raised in Chinese markets Banks account for over 90% of corporate finance Equity capital is about power not financing Source: PBOC The State controls all banks outright Foreign holdings of Chinese financial assets = < 2% % Low Income China Lower Middle Upper Middle High income State controlled commercial bank assets as % of total commercial bank assets 3

6 Banks executed China s response to the global financial crisis New$Loans$RMB$billion$ 12,000# 10,000# 8,000# 6,000# 4,000# 2,000# 35%# 30%# 25%# 20%# 15%# 10%# 5%# New$Loans/GDP$%$ New bank loans reached nearly 30% of GDP in 2009 then seem to be brought under control in # 2000#2001#2002#2003#2004#2005#2006#2007#2008#2009#2010# 0%# Source: PBOC New#Loans# Total outstanding bank loans reached 131% of GDP in 2010 New#Loans/GDP# Loans*RMB*billion* 60,000# 50,000# 40,000# 30,000# 20,000# 10,000# 0# 2000#2001#2002#2003#2004#2005#2006#2007#2008#2009#2010# 140%# 120%# 100%# 80%# 60%# 40%# 20%# 0%# Loans/GDP*%* Year2end#Loans# Year2end#Loans/GDP# Source: PBOC 4

7 but credit is more than a product called bank loans Total lending credit, P 20,000# 45%# 18,000# 40%# Financing+Value+RMB+billion+ 16,000# 14,000# 12,000# 10,000# 8,000# 6,000# 4,000# 2,000# 0# 1993# 1994# 1995# 1996# 1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# Fitch# 2011P# RMB#bank#loans# FX#bank#loans# Entrusted#loans# Trust#loans# Bankers#acceptances# Corporate#bonds# NBFI#stock#issues# Insurance#company#payouts# Insurance#company#property#investments# Other# Credit Growth CAGR = 36% TSF/GDP# 35%# 30%# 25%# 20%# 15%# 10%# 5%# 0%# Financing/GDP+%+ Source: PBOC/Wind Informa7on; Fitch 5

8 and it becomes liquidity M2 and Capital Markets Turnover, June June ,000$ 25,000$ Stock$(Monthly)$ InterBank$(Monthly)$ CM$Liquidity$(Monthly)$ M2$ M2 = 2x GDP 80,000$ 70,000$ Interbank,$Stock$&$CM$Turnover,$BNs$RMB$ 20,000$ 15,000$ 10,000$ 5,000$ 0$ Jun/04$ Sep/04$ Source: Wind Informa7on Dec/04$ Mar/05$ Jun/05$ Sep/05$ Dec/05$ Mar/06$ Jun/06$ Sep/06$ Dec/06$ Mar/07$ Jun/07$ Sep/07$ Dec/07$ Mar/08$ Jun/08$ Sep/08$ Dec/08$ Mar/09$ Jun/09$ Sep/09$ Dec/09$ Mar/10$ Jun/10$ Sep/10$ Dec/10$ Mar/11$ Jun/11$ 60,000$ 50,000$ 40,000$ 30,000$ 20,000$ M2$RMB$billions$ 6

9 Part 2: The solu7ons

10 Bad loans now and then 60,000& 131%& 140%& 50,000& 3,954& 2,140& 120%& Bank'Loans'RMB'billions' 40,000& 30,000& 20,000& 75%& 100%& 80%& 60%& 40%& Perecnt'%' 10,000& 25%& 1,483& 20%& 20%& 0& 1997& 2010&Est.& Performing&Loans& Local&gov't&NPL& NonBlocal&gov't&NPL& NPL/Total&Loans& Total&Loans/GDP& Source: 1997: historical data; 2010 es7mate based on Na7onal Audit Office, PBOC total social finance data around RMB3 trillion in bad loans were moved off bank balance sheets on a GDP sized about RMB 13.5 trillion assume RMB6 trillion in bad loans on a GDP sized about RMB36.6 trillion and total bank capital of RMB2.2 trillion 0%& 7

11 China s banking system Central Government Postal Savings Bank 5 large state- owned banks 3 policy banks Provincial Governments 12 medium- sized state- owned banks 63 trust and investment cos. Local Governments 147 city commercial banks 85 rural commercial banks 223 rural coopera7ve banks XXXX? guarantee companies 3,769 financial en77es, 196,000 outlets, 3,000,000 staff Provincial bank General Managers are appointed by the local Party 86

12 1. Asset Management Company put to use again for certain banks Ministry of Finance AMC Loans PBOC Bad Loans Cash Bonds China Development Bank Bonds Inter- bank Bond market Bonds Cash Big 4 Banks Loans removed from CDB balance sheet on 1- to- 1 basis funded by loans from PBOC and the Big 4 Banks. Cash 9

13 2. Provincial governments issue bonds allevia7ng local government pressure Bonds Bonds Provincial Government Inter- bank Bond market Big 4 Banks Cash Cash Restructure Loan ObligaMon Cash Financing Plamorm Financing Plamorm Financing Plamorm Financing Plamorm Provinces refinance short term local debt via long term bond issues 10

14 3. Ministry of Finance aggregates obliga7ons from weak provinces Bonds Bonds Ministry of Finance? Cash Inter- bank Bond market Cash Big 4 Banks IOU payment MOF IOU Transfer Bad Loan porqolio Transfer Bad Loan porqolio Local Banks IOU MOF/Local Banks Co- Managed Account Bad Loan disposal proceeds Bad Loan disposal services MOF issues its IOU to local banks on a 1- to- 1 value basis an and assumes bad loans in a special account Problem: how does MOF make good its IOU? 11

15 4. Big 4 Banks buy and hold MOF, Corporate, AMC and Provincial Debt The Big 4 bond pormolios as % of total assets 100%$ 90%$ 80%$ 70%$ 60%$ 50%$ 27%$ 30%$ 25%$ 24%$ 40%$ 30%$ 51%$ 51%$ 52%$ 20%$ 46%$ 10%$ 0%$ CCB$ ICBC$ BOC$ ABC$ Loans$ Bonds$$ Other$Assets$ Source: Bank H- share financial statements, FY

16 4. the Big 4 hold all the bonds 90%# 80%# 70%# Holdings)of)Obligor)Assets)by)Bank) 60%# 50%# 40%# 30%# 20%# 10%# 0%# State#Banks# China#Postal# Savings#Bank# Source: PBOC; as of FY2010 Policy#Banks# Shareholding# Banks# City#Commercial# Banks# Rural# Commercial# Banks# MOF# PBOC# Banks# NonGBanks# Corporates# Other# Foreign#Banks# Urban#Credit#CoG ops# Rural#Credit#CoG ops# 13

17 4. because the Big 4 have the funding 100%# 90%# Bank%Sources%of%Funding%as%%%of%Total%Source%Funding%% 80%# 70%# 60%# 50%# 40%# 30%# 20%# 10%# 0%# State#Banks# China#Postal# Savings#Bank# Policy#Banks# Shareholding# Banks# City# Commercial# Banks# Rural# Foreign#Banks# Urban#Credit# Commercial# CoGops# Banks# Rural#Credit# CoGops# Corporate#deposits# Household#deposits# PBOC# Banks# NonGBanks# Bonds# Overseas#debt# Capital# Source: PBOC; as of FY

18 4. Yields on investment securi7es pormolios Yields'on'loans,'investment'and'restructuring'bonds,'2008$2010'!! 2008' 2009' 2010' AMC/MOF AMC/MOF' ' ' AMC/MOF'! Loans' Bonds' Loans' Bonds' Bonds'' bonds' Loans' Bonds' Bonds' CCB! 7.16! 3.64*! 2.01! 5.35! 3.11*! 2.13! 5.07! 2.83*! 2.25! BOC! 6.12! 3.63*! 2.1! 4.44! 2.73*! 2.25! 5.07! 2.78*! 2.25! ICBC! 7.07! 3.88! 2.23! 5.21! 3.38! 2.19! 4.99! 3.07! 2.16! ABC! NA! NA! NA! 5.25! 2.98! 3.18! 5.22! 3.01! 3.15!!!!!!!!!!!!!!!! Source:!Bank!financial!statements! Note:!*!CCB!and!BOC!bond!rates!are!calculated!on!portfolios!that!include!the!restructuring!securities,! hence,!returns!are!less;!icbc!rates!separately!calculated.!! Investment securi7es are held to maturity and are not marked to market 15

19 5. Other means In first half of 2011 the banking regulator sent works teams to all provinces and restructured RMB2 trillion of local government loans, extending maturi7es and redefining the loans as corporate, thereby freeing bank risk capital. Banks can simply roll over local debt and extend maturi7es Trust companies can con7nue to package local debt as long as banks make a true sale 16

20 Part 3: The problem

21 Commercial banks, policy lending and the Na7onal Budget 70%# 60%# 50%# 40%# 1988: grants changed to loans 1994: Budget reform pushed expense to local gov ts 2007: Budget reform recategorized all items; CapEx eliminated??? 30%# 20%# 10%# 0%# Source: Wind Informa7on 1979# 1980# 1981# 1982# 1983# 1984# 1985# 1986# 1987# 1988# 1989# 1990# 1991# 1992# 1993# 1994# Economic#Construc8on# Government#Administra8on# Social#Security,#Employment,# EPA,#Agriculture,#Forestry#and#Water# Other# 1995# 1996# 1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# Na8onal##Defence# Social,#Culture,#Educa8on#Development# Industrial#Affairs# Public#Security# 2006# 2007# 2008# 2009# 17

22 Scope of Na7onal Budget narrowed as revenue difficul7es increased Fiscal'Revenues/GDP'%' 35$ 30$ 25$ 20$ 15$ 10$ 5$ 31.1$ 25.5$ Fiscal woes force out CapEx 22.2$ 15.7$15.7$ 14.5$12.9$12.3$ Budget reform in 1994 squeezes local gov ts and CapEx 10.8$ 10.3$10.4$ 11$ 11.7$ 12.8$13.5$ 17.3$ 20.4$ Fiscal problems resolved in favor of Beijing by squeezing local gov ts and CapEx This is why China s sovereign debt = 20% of GDP 0$ 1978$ 1985$ 1990$ 1992$ 1994$ 1996$ 1998$ 2000$ 2009$ Source: China Sta7s7cal Yearbook With minimal budget contribu7on SOEs and local governments are forced to rely on bank loans and self- raised funds. i.e., real estate Local banks can be willing cap7ves of local governments Source'of'CapEx'Funding'%' 100%# 90%# 80%# 70%# 60%# 50%# 40%# 30%# 20%# 10%# 0%# 1981# 1985# 1990# 1995# 2000# 2005# 2006# 2007# 2008# 2009# Budget# Loans# Foreign# Self>Raised#and#Other# Source: China Sta7s7cal Yearbook 18

23 Scope of Na7onal Budget narrowed Local&Gov't&&Revenues&&&Expenses&as&%&of& Total&Na8onal&Budget& 90%# 80%# 70%# 60%# 50%# 40%# 30%# 20%# 10%# 0%# 1978# 1985# 1990# 1992# 1994# 1996# 1998# 2000# 2002# 2004# 2006# 2008# From 1994 revenues declined but obliga7ons increased forcing local governments into deficit Infrastructure, health and social security programs Local#Revenues# Local#Expenditure# Source: China Sta7s7cal Yearbook 6,000" And quasi government bond issuance by policy banks and SOEs explode onto bank balance sheets Annual&New&Bond&Issues&RMB&billions& 5,000" 4,000" 3,000" 2,000" 1,000" 0" 1992" 1994" 1996" 1998" 2000" 2002" 2004" 2006" 2008" 2010" CGBs" Policy"Banks" Corp"Bonds" Local"Govt" Sub"Debt" Source: PBOC 19

24 To sum up: the financial cycle in China Taxa7on capacity conflicts with desire for rapid economic growth - pushes capital expenditures out of na7onal budget and onto SOEs and the banks Budget reform in 1994 squeezes tax base of local governments - personnel appointment authority plus bank profit mo7ve align local and bank interests Interna7onaliza7on of major banks requires compliance with interna7onal asset quality standards - bonds placed in investment accounts and held to maturity - problem loans moved off onto AMC balance sheet or into MOF con7ngent liabili7es or special accounts Weak taxa7on capacity forces MOF con7ngent obliga7ons to be repaid largely by bank dividends and not by bond issues included in the Na7onal Budget: sovereign debt seems not to increase 20

25 The Big 4 banks: from paid US$84 billion in cash dividends 100$ 80$ 60$ 40$ 20$ US$$billion$ 0$!20$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ Total$!40$!60$!80$!100$ Total$cash$dividends$ Special$Bond$interest$ Source: bank H- share annual reports for the Big 4 banks Minority$dividends$paid$ Total$MOF$IOU$repaid$ The four banks raised US$106 billion in IPO proceeds = ABC 2010 IPO of US$22 billion + US$84 billion in cash dividends 21

26 Major Chinese banks face a financing gap of up to RMB500 billion: former senior PBOC official, August % minimum CAR per CBRC 8% minimum CAR Core%Capital%Adequacy%Ra2o%%% 9.89$ China Bank Capital Raising Cycle $ 9.86$ 9.3$ 10.75$ Pre-IPO IPO Year 1 Year 2 Year 3 Recap Trends'in'Core'Capital'Adequacy'Ra5o,'2004$ $1H$2011$ % H 2011 CCB BOC ICBC ABC Source:(bank(audited(reports( 22

27 Where will economic growth come from? 100%# 18.00## 80%# 16.00## %(Contribu4on(to(GDP(Growth( 60%# 40%# 20%# 0%# 1980#1982#1984#1986#1988#1990#1992#1994#1996#1998#2000#2002#2004#2006#2008#2010# )20%# )40%# Investment# Consump7on# Net#Exports# GDP#Growth# Source: Wind Informa7on; State Bureau of Sta7s7cs 14.00## 12.00## 10.00## 8.00## 6.00## 4.00## 2.00## 0.00## Nominal(GDP(Growth(%( 23