China s Financial System: Past, Present and Future

Transcription

1 China s Financial System: Past, Present and Future Franklin Allen Wharton School China Week March 27, 2008

2 Conventional Wisdom China s Legal and Financial Systems are its weak link Unless they are rapidly improved there will be a financial crisis and China s growth will drop significantly China needs to adopt US style institutions to continue its success 2

3 Alternative View China s formal legal and financial systems have significant problems but this has not stopped growth so far Internal finance and alternative finance do a good job in supporting growth There may be a financial crisis but the government should be able to manage it The reason for China s success may be the flexibility of its current system 3

4 GDP with simple Exchange rates GDPs with PPP * GDP with constant prices GDP per capita with constant prices Rank Country /Region GDP 2006 (US$ bil.) Country /Region GDP 2006 (Int l $ bil.) Country /Region GDP annual growth ( ) Country /Region GDP per capita annual growth ( ) 1 U.S.A U.S.A China 10.2% China 9.2% 2 Japan 4367 China 9984 Vietnam 7.6% Vietnam 5.9% 3 Germany 2897 Japan 4171 Malaysia 6.2% Korea 4.8% 4 China 2630 India 4159 India 6.1% Taiwan 4.5% 5 U. K Germany 2559 Korea 5.5% India 4.2% 6 France 2232 U.K Taiwan 5.3% Malaysia 3.7% 7 Italy 1853 France 1935 Bangladesh 5.2% Poland 3.7% 8 Canada 1269 Italy 1791 Sri Lanka 4.9% Sri Lanka 3.7% 9 Spain 1226 Russia 1727 Sudan 4.9% Thailand 3.7% 10 Brazil 1068 Brazil 1701 Thailand 4.7% Bangladesh 4 3.1%

5 Comparison of Major Economies: GDP and Growth GDP in 2006 GDP in 2006 on PPP basis* Annual growth rate of GDP constant prices ( ) Rank Country GDP (US $ bil.) Country GDP (Int'l $ bil.) Country Growth rate (%) 1 US 13,245 US 13,201 China Japan 4,367 China 9,984 Vietnam Germany 2,897 Japan 4,171 Malaysia China 2,630 India 4,159 India UK 2,374 Germany 2,559 Korea France 2,232 UK 2,122 Taiwan Italy 1,853 France 1,935 Bangladesh Canada 1,269 Italy 1,791 Sri Lanka Spain 1,226 Russia 1,727 Sudan Brazil 1,068 Brazil 1,701 Thailand 4.7 * The PPP conversion factor is obtained from The World Bank Development Indicator (Table 5.6, World Bank. For details on how to calculate the indicator, see Handbook of the International Program, United Nation, New York

6 Other successful countries Only three large countries have been as successful: Japan South Korea Taiwan China can probably do better but no large country has done so by a significant amount 6

7 Why is China s economy so successful? Conventional wisdom is that what is needed for a successful economy and a high growth rate is: Good legal system Good financial system Good corporate governance 7

8 Why is China s economy so successful? But Legal system is not good Financial system does not work well Corporate governance is poor 8

9 China s legal system Creditor rights: China 2 vs English common law 2.3 for all countries Shareholder rights: China 3 vs. 4 for English common law 3 for all countries Legal infrastructure: Poor and corruption endemic 9

10 China s Financial System Banks: Bank credit/gdp 1.11 vs for other countries Overhead Cost/Assets 0.12 vs NPLs Peak 22.5% of GDP vs. 16% for Japan 10

11 Banking System: Non-performing Loans Non-performing loan as a percentage of GDP Year China U.S. Japan S. Korea India Indonesia Taiwan (Q2)

12 (NPLs + Net Government Debt)/GDP Year China U.S. Japan S. Korea India Indonesia Taiwan Note: Government debt uses Net Government Debt for US and Japan; Outstanding Treasury Bonds for China, Korea, Indonesia, and Taiwan; Total Government Debt for India. 12

13 Banking System: Reforms Solve NPL problem Reduce cost structure Emphasize lending to Private/Hybrid sector 13

14 China s Financial System (cont.) Stock Markets Market cap/gdp 0.32 vs 0.47 for average of other countries Float/GDP 0.1 vs

15 Rank Stock Market Total Market Cap (US$ billion) Concentration (%) Turnover Velocity (%) 1 NYSE 12,707, Tokyo SE 3,557, Nasdaq 3,532, * 4 London SE 2,865, Euronext 2,441, Osaka SE 2,287, Deutsche Börse 1,194, TSX Group 1,177, BME Spanish Exchanges 940,672.9 NA Hong Kong Exchanges 861, Swiss Exchange 826, Borsa Italiana 789, Australian SE 776, India (BSE+NSE) 749, China(Shanghai+Shenzen) 447,

16 Selling off Government Shares Government has started to sell off state owned shares Benefits of the reform Enhance corporate governance mechanisms Reduce conflict of interest between small and large shareholders, better protection of small shareholder Management/state government will be more marketvalue oriented maximize shareholder value Increase liquidity Capital market advancement 16

17 Selling off Government Shares (cont.) In order to minimize the impact on the stock market when the state shares become tradable Current tradable shareholders get some form of subsidy: This helps increase the % of non-state ownership CSRC limit the sales of these newly tradable shares (the old non-tradable shares) CSRC imposes: Non-tradable shareholders cannot sell their shares within certain period of time after their shares become tradable When they are allowed to sell, they can only sell one small proportion at a time, NOT a large amount at one time; 17

18 Other Financial Markets and Institutions Public debt market Reasonable size Needs to develop complete yield curve Corporate debt market Almost non-existent Insurance sector Very early stage of development Pension and mutual funds Also at early stage 18

19 China s Corporate Governance Majority of shares in most listed companies are owned by the government or government entities Government determines appointment of directors System is opaque Government has broader objectives than wealth maximization 19

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21 Financial Markets: Reform Stick to plan to sell off state holdings of shares. Encourage the development of financial institutions such as insurance companies, pension, and mutual funds that can help provide some stability and professionalism to the markets Continue regulatory reforms and corporate governance reforms 21

22 Why is China s economy so Three sectors: successful? (cont.) State Owned Enterprises (SOE s) Listed Companies (mostly former SOE s) Private/Hybrid Sector 22

23 Why is China s economy so successful? (cont.) Growth rates for Industrial Output : State and Listed Sectors: 5.4% Private/Hybrid Sector: 14.3% Approximate shares Industrial Output 2002: State and Listed Sectors: 33% Private/Hybrid Sector: 67% 23

24 Reason for China s success Private/Hybrid sector has been extraordinarily successful Counterexample to conventional wisdom Standard mechanisms in terms of the financial system, legal system and corporate governance as bad or worse than in the State and Listed sectors 24

25 Private/Hybrid Sector: Survey Evidence Summary mean min max Std.dev Statistics Age of the firm # of employees Size (Total Assets in mil. US$) D/E ratio Net income (in mil. US$) Return on Assets

26 Survey Evidence on Financing Channels Startup financing Financing in growth period (year 3-8) 50% 40% Banks 30% Friends Private Credit Agent 30% 20% 10% Founder /family Friends private credit agent VC Ethnic Chinese Others FDI 20% 10% State/local Budget Trade Credits VC Ethnic Chinese FDI Others 0% 0% 26

27 Survey Evidence on Corporate Governance 70% 60% 50% 40% 30% 20% 10% 0% Possibility of being acquired possible Very likely not possible 100% 80% 60% 40% 20% 0% Concerns of loss in case of failed business Economic loss in vrious sense Reputation in various sense Legal /Safety consequenc e Relationship with local government 50% 40% 30% 20% 10% 0% Government invest/own partially support, return not demanded demand profit sharing no relationship 27

28 Alternative Financial Sector: Reforms Do not regulate or impede the operation of this sector Encourage the development of this sector as much as possible 28

29 How does the Private/Hybrid Sector function? Historically, China did not use the legal system in commerce However, it had a highly commercialized society How did this operate? Other systems for dispute resolution were used instead 29

30 Alternatives to the legal system in 19 th Century China Dispute resolution (see Kirby 1995): Longstanding custom Regulation of Guilds and Families Local notables We need to understand the modern equivalents 30

31 What should China do going forward? The modern corporation on a Western model would be the essential vehicle for private economic development 31

32 What should China do going forward? This was not written today but rather was the view of the drafters of China s first Company Law in 1904 (Gongsilu) It turned out to be very wide of the mark (Kirby 1995) Chinese firms on the mainland and later in Taiwan did not use the provisions of the law but again conducted commerce outside the legal system 32

33 Conclusions China s formal legal and financial systems have significant problems but this has not stopped growth so far Internal finance and informal finance do a good job in supporting growth There may be a financial crisis but the government should be able to manage it The reason for China s success may be the flexibility of its current system 33