总览
与许环森先生交流有感 A Walk Along Tianjin’s Eco-City 以包容心接受不同文化思维 到中国经商之路陡峭、崎岖、到处是墙 北京大学突击记 Attitude Matters 2010 回顾通商中国冬令营 我对中国高等教育的反思 Chinese Constitutionalism and Political Structure 给世界的一份中国情谊 The Increasing Economic Importance of Banks in China 关系与围墙 炽热的心 新加坡年轻人应有的自我定位 缘分 豆汁驴打滚那些事儿 2010冬游北京有感 Kudos to Hanban(汉办)The Increasing Economic Importance of Banks in China
This article examines the efficiency of China’s banking system in implementing monetary policy to resolve its economic woes.
Non-Performing Loans
Recently, Fitch Ratings revised the outlook on China's local currency outlook from stable to negative, citing elevated credit growth, sharp rise in real-estate valuations, and emergence of inflation. The rating for China's yuan-denominated debt currently stands at AA-, four notches below its top classification. Concerns of increasing risk to macro-financial stability have emerged as a result of rapid credit growth against the backdrop of rising real estate valuations and emergence of inflationary pressures.
Apprehension over the quality of credit has also amplified due to rapid increase in new poorly disclosed off-balance sheet credit channels. Banks helped arrange 320 billion yuan of unrecorded loans in the lenders’ balance sheets between companies in the first quarter this year. Data from the People’s Bank of China (PBOC) suggests that off-balance sheet loans have increased by 110 percent as global financial regulators requires more transparency and PBOC restricts credit to cool inflation.
While the bank acts as the middleman with no direct credit risk, the lending financial institution is still vulnerable should the final borrower trigger a chain of defaults, especially low credit quality borrowers that can/should never get bank credit but are levered through entrusted loans. Stock exchange filings show that companies are charging interest of as much as 21 percent – three times higher the benchmark one-year lending rate of 6.31 percent. The interest rates could be much higher for unfiled transactions.
Given that the non-performing loan (NPL) ratio might have stretched to 6.0 percent (conservative estimates) as of 2010 – although officially it is only 1.1 percent, the former would effectively exhaust the estimated loss-absorption capacity of the banks. Coupled with expected economic slowdown, banks could be saddled with more non-performing loans.
As such, sovereigns could be compelled to support the banking system if NPL ratio increases to 15-30 percent over the next three years, this could create perverse ‘too big to fail’ incentives for state-owned banks that expects a bailout whenever they run into future financial distress. However the Chinese government tends to assume the NPLs via Asset Management Companies (AMC) and liquidate them. The recovery rate for cash is 6.9-35 percent while asset recovery fares slightly better (for the period of 2001-2006). But without cutting off credit ties, issuing new loans the same old borrower make this method counterproductive.
Inflationary Pressure
At the same time, China has entered a phase where the adoption of an innovation-driven self-relying growth model was necessary to sustain further development. Restructuring of the economy involving reforming energy management, environmental protection, reforming resource price, and increasing workers' wage has induced cost increases and inflationary pressure.
To fight inflation, a combination of two policy tool was employed. The benchmark deposit and loan rates of financial institutions were increased by 0.25 percentage points in April. This latest hike – the fourth in this round of rate hike cycle starting from October 2010 – will raise the one-year lending rate to 6.31 from 6.06 percent. However the Consumer Price Index (CPI) still grew 5.5 percent in May to a nearly three-year high, squeezing the budget of working families as food, fuel and housing prices increase, prompting a raise in the Reserve Requirement Ratio (RRR) by 0.5 percent to a record 21.5 percent.
The six RRR increases have resulted in funding difficulties for small and medium-sized enterprises and increased the cost of business. But weak regulations have not prevented property developers from accessing entrusted loan packages via financial intermediaries. As the government of Beijing and Shanghai impose purchase restrictions, the housing boom shifted to smaller secondary cities which fortunately are in need of urbanization.
The source of inflation this year arises mainly from food items such as meat where prices rose by 20.6 and 23.5 percent, and fruit prices rose by 30.2 and 30.5 percent (in urban and rural areas respectively) compared to the previous year. Housing prices on the other hand were tamed in 23 out of 70 cities compared to the previous month. Although empty towns have been reported, these constructions were based on the expected urbanization of China’s vast population hence the risk of property bubble forming is minimal given that most home purchases were funded by savings, not debt.
Challenges and Limitations
Increasing interest rates deprives small business owners from cheap credit, resulting in high business cost that does not contribute to decreasing prices of daily essentials. A supply-side approach could be considered to resolve inflation in food prices by examining and dealing with factors leading to food shortage and food safety. For instance, price controls could have forced producers to cut corners, reducing food supply further. Hence the government needs to start by reforming the regulation of food safety.
In conclusion, monetary policy would not be efficient as long as regulation of the financial industry remains weak. Credit tightening and increasing interest rates would only induce businesses to seek entrusted loans from unregulated financial intermediaries. These intermediaries charge even higher interest rates which increase the cost of borrowing. The interest of the self-employed, such as small business owners must be taken care of, the economy needs to grow further in order to provide sufficient employment opportunities for its urban population.
Non-Performing Loans
Recently, Fitch Ratings revised the outlook on China's local currency outlook from stable to negative, citing elevated credit growth, sharp rise in real-estate valuations, and emergence of inflation. The rating for China's yuan-denominated debt currently stands at AA-, four notches below its top classification. Concerns of increasing risk to macro-financial stability have emerged as a result of rapid credit growth against the backdrop of rising real estate valuations and emergence of inflationary pressures.
Apprehension over the quality of credit has also amplified due to rapid increase in new poorly disclosed off-balance sheet credit channels. Banks helped arrange 320 billion yuan of unrecorded loans in the lenders’ balance sheets between companies in the first quarter this year. Data from the People’s Bank of China (PBOC) suggests that off-balance sheet loans have increased by 110 percent as global financial regulators requires more transparency and PBOC restricts credit to cool inflation.
While the bank acts as the middleman with no direct credit risk, the lending financial institution is still vulnerable should the final borrower trigger a chain of defaults, especially low credit quality borrowers that can/should never get bank credit but are levered through entrusted loans. Stock exchange filings show that companies are charging interest of as much as 21 percent – three times higher the benchmark one-year lending rate of 6.31 percent. The interest rates could be much higher for unfiled transactions.
Given that the non-performing loan (NPL) ratio might have stretched to 6.0 percent (conservative estimates) as of 2010 – although officially it is only 1.1 percent, the former would effectively exhaust the estimated loss-absorption capacity of the banks. Coupled with expected economic slowdown, banks could be saddled with more non-performing loans.
As such, sovereigns could be compelled to support the banking system if NPL ratio increases to 15-30 percent over the next three years, this could create perverse ‘too big to fail’ incentives for state-owned banks that expects a bailout whenever they run into future financial distress. However the Chinese government tends to assume the NPLs via Asset Management Companies (AMC) and liquidate them. The recovery rate for cash is 6.9-35 percent while asset recovery fares slightly better (for the period of 2001-2006). But without cutting off credit ties, issuing new loans the same old borrower make this method counterproductive.
Inflationary Pressure
At the same time, China has entered a phase where the adoption of an innovation-driven self-relying growth model was necessary to sustain further development. Restructuring of the economy involving reforming energy management, environmental protection, reforming resource price, and increasing workers' wage has induced cost increases and inflationary pressure.
To fight inflation, a combination of two policy tool was employed. The benchmark deposit and loan rates of financial institutions were increased by 0.25 percentage points in April. This latest hike – the fourth in this round of rate hike cycle starting from October 2010 – will raise the one-year lending rate to 6.31 from 6.06 percent. However the Consumer Price Index (CPI) still grew 5.5 percent in May to a nearly three-year high, squeezing the budget of working families as food, fuel and housing prices increase, prompting a raise in the Reserve Requirement Ratio (RRR) by 0.5 percent to a record 21.5 percent.
The six RRR increases have resulted in funding difficulties for small and medium-sized enterprises and increased the cost of business. But weak regulations have not prevented property developers from accessing entrusted loan packages via financial intermediaries. As the government of Beijing and Shanghai impose purchase restrictions, the housing boom shifted to smaller secondary cities which fortunately are in need of urbanization.
The source of inflation this year arises mainly from food items such as meat where prices rose by 20.6 and 23.5 percent, and fruit prices rose by 30.2 and 30.5 percent (in urban and rural areas respectively) compared to the previous year. Housing prices on the other hand were tamed in 23 out of 70 cities compared to the previous month. Although empty towns have been reported, these constructions were based on the expected urbanization of China’s vast population hence the risk of property bubble forming is minimal given that most home purchases were funded by savings, not debt.
Challenges and Limitations
Increasing interest rates deprives small business owners from cheap credit, resulting in high business cost that does not contribute to decreasing prices of daily essentials. A supply-side approach could be considered to resolve inflation in food prices by examining and dealing with factors leading to food shortage and food safety. For instance, price controls could have forced producers to cut corners, reducing food supply further. Hence the government needs to start by reforming the regulation of food safety.
In conclusion, monetary policy would not be efficient as long as regulation of the financial industry remains weak. Credit tightening and increasing interest rates would only induce businesses to seek entrusted loans from unregulated financial intermediaries. These intermediaries charge even higher interest rates which increase the cost of borrowing. The interest of the self-employed, such as small business owners must be taken care of, the economy needs to grow further in order to provide sufficient employment opportunities for its urban population.