Category Banking & Finance

Shanghai:Time ripe for welfare reform

China’s high savings rate and sound public finances offer the right conditions for the authorities to proceed with social security and healthcare system reforms, People’s Bank of China Governor Zhou Xiaochuan said.

Speaking to the Xinhua News Agency in Sydney, where he was attending a Group of 20 meeting of finance ministers and central bankers, the head of China’s central bank said the nation’s social security system should include all members of society.

Social security fund reform should involve government support, individual accounts and commercial insurance, Xinhua quoted Zhou as saying.

People with adequate savings should be encouraged to invest in personal pension and medical insurance schemes, Zhou said, stressing that the government should offer more support to poorer citizens.

The central bank governor said that pension funds, which are currently mainly held by banks, should be invested in capital markets to increase their value and generate higher returns.

The government is currently working on a plan to transfer 10 per cent of any domestic shares in listed State-owned companies to the national pension fund, the National Council for Social Security Fund.

The council, which had total assets of 230 billion yuan (US$29 billion) at the end of August, currently invests mainly in bonds and bank deposits and is planning to start overseas investment in the near future.

Zhou said the current healthy state of the nation’s finances also offered good opportunities for further steps to be taken in foreign exchange rate reform.

He added that the nation’s financial sector was now in a much stronger position than it was three or four years ago, noting that it was now better equipped to cope with interest rate reform and a more flexible yuan.

In another development, the People’s Bank of China announced yesterday it had opened a representative office for the South Pacific in Sydney.

The office will improve communications with monetary authorities in the region and promote financial co-operation, the central bank said.

Foreign insurance agencies booming in China

Chinanews, Beijing, Nov. 18 – “Currently (before November 15), there are 121 branches of 47 foreign insurance agencies from 47 countries and regions in China,”said Li Kemu, deputy director of China Insurance Regulatory Commssion, at the 4th Sino-US Insurance Talks.

China’s rapid economic growth has injected unparalleled vigor into its insurance industry, and allowed it to grow at an average annual rate of 17.3%. In fact, insurance is one of the fastest-growing of all industries in China.

Last year alone, insurance made a revenue of 49.27 billion yuan, and it will surely gain more by the end of 2006. The total capital of all the 100 insurance agencies in China is as much as 1.84 trillion yuan, an amazing figure.

However, there are problems in China’s insurance industry. First, the market conditions are not perfect, thus regulations and laws must be made as soon as possible to bridge the gap of transparency and fairness of the market between China and developed countries. Second, local insurance agencies must work hard to improve the quality of their services, and the general public should know more about the importance of insurance.

As Chinese only spent 376 yuan per capita on insurance in 2005 (much lower than the average international level), the market will boom even faster in the future.

China:Foreign banks plan local incorporation

China’s announcement Thursday that foreign banks can soon deal in renminbi retail business has prompted a flurry of international lenders to announce their plans to incorporate in China. [Read full text of the regulation]

The rule, which marks the implementation of one of China’s banking commitments to the World Trade Organization (WTO), allows foreign-funded banks to deal in the renminbi retail business across the country after December 11.

In order to better protect the interests of domestic depositors, the Chinese Government is encouraging foreign banks to incorporate locally when dealing in renminbi retail business.

The release of the rule yesterday was welcomed by foreign banks, with a few immediately announcing they are ready to become among the first to incorporate in China.

According to Xu Feng, the director in charge of overseeing foreign banks for the China Banking Regulatory Commission (CBRC), more than 10 foreign banks are ready to change their branches to local corporations following the issuance of the rules.

Foreign lenders including HSBC, Standard Chartered, Bank of East Asia, and Hang Seng Bank have all expressed their willingness to transfer operating branches into locally registered corporations.

“It is a historic milestone to mark the fifth anniversary of China’s entry into the WTO and its commitment to fully open the financial market,” said Richard Yorke, China CEO of HSBC.

“We believe that local incorporation will enable us to further expand our network and service range, in particular our renminbi financing ability for the benefit of our customers in the China market,” he said.

HSBC, Europe’s largest bank, is aimed to become one of the first to incorporate in China based on its experience in other countries.

Katherine Tsang, CEO of Standard Chartered Bank China also announced the bank had submitted its application to China’s banking regulator for local incorporation yesterday.

Hang Seng Bank said it planned to invest more than HK$1 billion (US$128 million) to expand its mainland network and service capabilities, including increasing its number of outlets to 30 from 15 by the end of 2007.

“The total assets of those banks who are willing to transfer to local corporations are accounting for 60 per cent of the combined assets of foreign lenders in China,” said CBRC’s Xu.

According to Wang Zhaoxing, assistant chairman of the CBRC, in order to lower the time and cost of local incorporation, the government will try to guide foreign banks. The procedure will normally take one to three months, Wang said.

Not an immediate threat

Though foreign banks are likely to siphon off renminbi services from local banks, which have grown by an annual average of 2 trillion yuan (US$246 billion) in recent years, experts say they won’t pose an immediate threat to domestic banks.

Wang Yu, a 40-year-old lawyer who has years of experience overseas, said he does not plan to deposit most of his earnings into foreign banks.

“Currently the service in domestic banks are almost at the same level with those of foreign banks, and I don’t feel there is a need to change my bank,” he said.

He did say he would consider buying a few wealth management products from foreign banks once they start dealing in renminbi.

“Foreign banks are more sophisticated in providing wealth management service,” Wang said.

A recent AC Nielsen survey said Chinese customers are increasingly interested in foreign bank services, especially young people.

But Yi Xianrong, a researcher from the Chinese Academy of Social Sciences, says Chinese banks already have a strong hold on the market. “Local banks have already built a nationwide network across the country, making it hard for foreign banks to compete,” Yi said.

Deng Chun, vice-president of Bank of Communications, said he expects “there will be more co-operation than competition” between foreign and domestic banks.

However, analysts pointed out that foreign banks might encounter conflicts in their business strategies. In recent years, international banks have become strategic investors in Chinese banks. Now, they will be in direct competition with those banks.

HSBC, which holds a 19.9 per cent stake in Bank of Communications (BoCom), helped the Chinese bank establish a credit card centre in October 2004.

Now, as the foreign bank expands its own network in the country, analysts worry HSBC will siphon clients away from the card centre.

“I’m afraid with HSBC’s expanding of its own operating branches in China it is not likely to share its clients with BoCom, especially from the high-end clients,” said She Minhua, a banking analyst at CITIC China Securities.

Shanghai is ‘the first choice’

With yesterday’s announcement, Shanghai is expected to get the largest benefit from foreign banks locally incorporating.

Foreign banks currently concentrate their business in the country’s eastern areas such as Shanghai, Shenzhen, Beijing and Guangzhou.

Statistics from the CBRC shows the number of foreign bank branches and bank corporations in Shanghai totalled 60. The overall number of foreign banks and non-bank financial institutions have reached 103 in the city.

Shanghai has 30 per cent of all foreign banking institutions, which accounts for 55 per cent of its total business revenue.

Now, Citibank, HSBC, Standard Chartered Bank, Bank of East Asia, and Hang Seng Bank all said they were considering setting up headquarters in the country’s largest city.

Some foreign firms have expressed concerns that incorporation in Shanghai may take a long time due to complex legal procedures.

In response, the local government established a special financial office to help foreign banks efficiently incorporate.

China’s retail sales surge 14.3% in October

BEIJING — China’s retail sales surged 14.3 percent from the previous year to 699.8 billion yuan in October, the National Bureau of Statistics (NBS) said on Tuesday.

The retail sales of oil and oil products registered the highest growth of 32.7 percent, with that of construction and decoration materials second with 30.4 percent. Retail sales of home electrical appliances increased by 25.8 percent.

The NBS said retail sales had been on the increase ever since the beginning of the year.

The growth of retail sales for the first half of the year was 13.3 percent. It rose to 13.7 percent in July, 13.8 percent in August and 13.9 percent in September.

The retail sales for the first 10 months stood at 6.2089 trillion yuan, up 13.6 percent on the previous year.

Although the growth of retail sales has risen, analysts said it was still far behind the growth of investment. The country’s fixed assets investment shot up by 27.3 percent in the first three quarters.

This means China still has a long way to go if it wants consumption to replace investment as the main engine of its economic growth, the analysts said.

ICBC makes gains after world-record listing

Shares of the Industrial and Commercial Bank of China (ICBC) have posted modest gains two weeks after investors scrambled to get in on the world’s largest ever initial public offering.

The dual listing of the bank’s shares in Hong Kong and Shanghai, the first of its kind for China, sparked frenzy as top rank foreign and domestic investors sought to get a piece of the Chinese growth miracle.

The demand was so intense that the lender, China’s largest, decided to exercised its over-allotment option this week, increasing the number of shares on offer to raise a world record-breaking 21.1 billion dollars.

While the state-owned ICBC staged a strong debut in Hong Kong last month with Shanghai lagging behind, two weeks on, its shares have only managed to score modest gains, analysts said.

They have risen 19 percent from their offer price in Hong Kong and 12 percent higher than the issue price in Shanghai with many individual investors having taken profit, they said.

Although fresh fund inflows are flooding the Chinese and Hong Kong stock markets, pushing them to record highs as investors bet on a further strengthening of the Chinese yuan, the money has also gone to other China-related stocks.

“I am a little disappointed with its performance,” said Francis Lun, general manager of Fulbright Securities. “It’s a big bank. I expected it would perform better.”

In Shanghai however, Gu Junlei, banking analyst with Orient Securities, said ICBC’s performance matches its expectations: “It offered a lower initial public offering price, which paved the way for further steady increase.”

Kitty Chan, director of Hong Kong-based Celestial Asia Securities Holdings, said its performance was “acceptable” and remained within her expectations given the many problems that have dogged the sector.

International investors have jumped at the chance to buy into a piece of the Chinese financial sector despite mountains of bad debt, poor management and a lack of transparency.

But Chan said: “Investors will continue to be attracted by a country that has good economic growth and that will go for its banks.”

ICBC is the third of China’s big four banks to go offshore after Bank of China and China Construction Bank as part of government-driven sector reform.

(Source: AFP)

Investing in China’s banking system requires act of faith

BANKERS and lawyers who operate in Beijing came down to earth with a thump last week. For months, they were the kings of town as they bunkered down to prepare the record $US21.9 billion ($28.46 billion) listing of Industrial & Commercial Bank of China.
With the job done (for shared fees of $US400 million), the advisers find themselves lower down the pecking order: behind important visitors such as African heads of state, 48 of whom arrived for the weekend’s China-Africa “summit”.

To allow African delegations easy movement, Beijing’s authorities closed major roads and much else, creating traffic that has trapped bankers (and yours truly) in jams across the city. While the importance of advisers may have dropped, the share prices of Chinese banks continue to defy gravity.

The stock prices of ICBC, Bank of China, China Construction Bank and China Merchants Bank have all risen handsomely since floating, as shareholders gamble that lenders have reformed and will benefit from continuing double-digit economic growth. But how long before investor optimism falls?

China’s largest banks have listed in near-perfect conditions, against a backdrop of record global liquidity. On the mainland, corporate profits are high, inflation is tame and economic growth is stable. In spite of the reforms, banks face little real competition and enjoy juicy spreads between deposit and lending rates.

It was only two years ago that bad loans at ICBC represented 21 per cent of the portfolio. Only gigantic re-capitalisations and loan write-offs by the state have enabled the large banks to become solvent.

Imagine the scale. ICBC runs 18,000 branches nationwide, some with managers friendly to the capital requirements of local industrialists. Investors are betting that banks’ internal risk management culture and systems have, overnight, become sophisticated enough to stop poor lending or downright fraud.

In the words of Hong Kong governance activist David Webb, China has taken out the bad loans but has it taken out the bad lenders? Investors got a reminder of the not-too-distant past yesterday when it was announced that the former head of China Construction Bank had been given 15 years’ jail for taking $US500,000 in bribes to arrange loans.

Zhang Enzhao abruptly quit in June 2005, four months before CCB became the first of China’s big state-owned lenders to list in Hong Kong.

In short, it is remarkable that China’s biggest banks have raised tens of billions of dollars from international and domestic investors, given that their recent trading history has been so abysmal and the banking sector is so immature.

The banking system remains deficient in several key respects, such as proven risk management. The banks have entered a new world, where they also have to tackle market risks such as foreign exchange and interest rate volatility.

China’s legal environment is not mature enough, with huge improvements required in areas such as classification of property rights. The country has no independent ombudsman to adjudicate on consumer banking disputes.

Corporate governance within banks is largely untested, despite their efforts to hire independent non-executive directors.

While the banks have indeed been listed, the state retains about 80 per cent of the stock in each company. Will the state be a passive or active investor?

The Government wants banks to cool lending to prevent over-investment. But what if the banks have a commercial desire to create shareholder value by expanding lending?

Inside each bank is a Communist Party-controlled committee whose role is largely opaque. Banking executives claim that the chief role of the committees is to help enforce “discipline” among staff. Investors will have to take their word for it.

There is also a need to improve training, attract fresh talent and introduce performance targets and incentive schemes.

There is little doubt that the banks have made huge improvements compared with just two years ago. They have not felt ashamed to summon outside help, be it from McKinsey or foreign strategic partners such as Bank of America and Royal Bank of Scotland.

However, investors are either ignoring the risks in the rush for a fast buck or calculating that they can sell at the first sign of a slowdown.

Hong Kong-based Jing Ulrich, JP Morgan’s star China equity-watcher, remains bullish on Chinese banks – in the short term. She says cash-rich global investors remain desperate to increase their China exposure.

But she also says many fund managers are judged on a quarterly basis and so could hardly miss out on the likes of ICBC. Quite.

Sound monetary policy remains key

China will continue to pursue a sound monetary policy, which will be more closely linked to its industry, taxation and foreign exchange policies, a top central bank official said Thursday.”

In order to maintain stable and healthy national economic growth, we will continue to stick to a sound monetary policy,” Su Ning, deputy governor of the People’s Bank of China, said yesterday.

“And we will seek more and effective co-ordination with industry, taxation and foreign exchange policies when drafting our monetary policies,” the deputy central bank governor said, without elaborating.

The central bank would continue, as it did before, to employ a host of measures to curb expansive money supply and credit growth.

The measures may include open market operations, as well as interest rate and bank reserve ratio adjustment, Su told the BusinessWeek CEO Forum in Beijing.

The central bank has so far raised the interest rate twice and bank reserve ratio deposits that commercial banks are required to make with the central bank once this year in a bid to cool the sizzling economy.

Su said that macroeconomic tightening measures had already succeeded in reining in red-hot economic growth.

The Chinese economy grew 10.9 per cent in the first half of this year, with this growth slowing to 10.4 per cent in the third quarter.

But the economy still faces several challenges if it is to maintain robust yet healthy growth, Su said, pointing to slumping consumption, the soaring trade surplus and escalating fixed-assets investment.

The overall proportion of consumer spending in the national economy has been on a downward spiral for some time, which may pose problems for economic development, Su told the forum.

The proportion, Su said, has slid from 62 per cent in the 1980s to 52 per cent last year.

Problems related to the international balance of payments remain serious, with the foreign trade surplus continuing to soar this year, he said.

And the risk still remains that fixed-assets investment, which is “still bigger than it should be,” may rebound again, as local governments and enterprises continue to invest more money in projects, the deputy central bank governor said.

China’s fixed-assets investment grew by a spectacular 29.8 per cent in the first half of this year and increased 27.3 per cent in the first nine months of 2006.

The central bank, Su said, will put expanding domestic consumption high on its policy agenda.

The bank will also work to improve the credit structure, Su said.

Reserves set to surpass US$1 trillion

Oct. 30 – China’s foreign exchange reserves look set to hit the US$1 trillion mark at the end of this month or beginning of November. But as the figure rises, so does the debate over how to best manage it.

The reserves, already the world’s biggest, surged to US$987.9 billion at the end of September, largely driven by a burgeoning foreign trade surplus and massive inflow of foreign direct investment (FDI).

In the first nine months of the year FDI stood at US$42.59 billion, although this was a 1.52 per cent drop year-on-year.

Reserves grew on average US$18.8 billion each month from January to September, statistics from the central bank show.

“How to manage such a huge reserve is a big challenge,” said Yi Xianrong, a research fellow at the Institute of Finance Research under the Chinese Academy of Social Science.

“The crux of the problem is that you have to keep the value stable or increasing,” Yi said.

The ballooning foreign reserves, many economist say, is a major reason behind the loose money supply. This is because the central bank has to issue additional money to mop up the excess US dollars in the market, resulting in excessive liquidity in the banking system.

And the fluctuating foreign exchange rate also poses a huge risk, economists say.

In a bid to minimize such risks, the central bank should diversify its existing US dollar-dominated foreign reserves structure, and increase its holdings of euros or other major international currencies, said Li Yongsen, a finance professor at Renmin University of China.

The central bank, he said, could also buy more state bonds issued by other major economies and decrease holdings of US Treasury bills.

“It’s better to spread the risks, and not put all your eggs in one basket,” Li said.

The professor also suggested that the country might consider using the huge foreign reserves to purchase some strategic resource reserves such as oil.

But such a plan should proceed with caution, both Li and Yi warned, citing the huge risks involved due to changing resource prices.

In the short term, increasing imports is an effective way to decelerate foreign reserves, economists said. This would also reduce trade frictions with some countries that have a high trade deficit with China.

Economists also said the country should further relax controls on capital outflow, in order to create a better balance of international payments.

In a bid to ease foreign reserves and broaden investment channels, China has introduced a QDII (Qualified Domestic Institutional Investors) scheme, allowing them to invest overseas.

By October 10, the foreign exchange regulator had granted quotas worth US$11.6 billion to QDIIs.

“This is the right approach for creating a two-way capital corridor,” said Yi. “We used to put too much emphasis on attracting foreign investment and feared capital outflow.”

China is also shifting from a long-held policy of stockpiling foreign reserves in State coffers, and instead encouraging households and businesses to hold more foreign currency.

Individuals, for example, are now allowed to buy up to US$20,000 in foreign exchange a year, up from the previous US$8,000.

Previously, China invested some foreign exchange reserves in banks.

Central Huijin Investment Company, an investment arm of the central bank, injected a total of US$45 billion in foreign exchange reserves into China Construction Bank and Bank of China in 2003.

It poured another US$15 billion into the Industrial and Commercial Bank of China in 2005.

China Launches Bank Compliance Risk-Management Guidelines

BEIJING -(Dow Jones)- China’s banking regulator Wednesday issued official guidelines aimed at strengthening Chinese banks’ compliance risk-management in a move seen as helping them combat increasing competition from foreign banks.

The guidelines ask the country’s banks to adopt better compliance risk- management practices, to boost their risk-management systems and corporate governance, the China Banking Regulatory Commission said in statements posted on its Web site.

The new policies are aimed at bringing China’s banks into line with global practices. Foreign banks will be able to carry out a full range of local- currency services starting Dec. 11 as part of China’s World Trade Organization commitments.

The guidelines – a draft of which was first reported by Dow Jones Newswires last week – are effective immediately. They apply to Chinese commercial banks, foreign banks and their branches operating in China, the CBRC said.

Other financial institutions such as policy banks, fund asset management companies and trust cooperatives aren’t required to abide by the guidelines, but should take them as references, it said.

Banks are required to set up a sound compliance system, and the top management should file a compliance risk-management report to the board of directors annually, it said.

The compliance practice should receive regular checks from independent internal audit department, and banks should submit their compliance management plans and assessment report to the CBRC in a timely manner, it said.

Deutsche Bank plans China property JV -sources

SHANGHAI, Oct 27 (Reuters) – Deutsche Bank AG is set to establish a property venture in China, in which Germany’s biggest lender expects to take a 50 percent controlling stake, industry sources and the venture’s Chinese partners said on Friday.

Zhongzhu Real Estate, based in the southern Chinese city of Zhuhai near Hong Kong, plans to take 20 percent of the new joint venture, said a senior executive at Zhongzhu who is familiar with the situation.

“We’re finalising the deal and we will sign an agreement” in the next few days or weeks, the Zhongzhu executive, who declined to be identified, told Reuters by telephone.

The sources declined to say how much Deutsche Bank would pay to invest.

A Shanghai-based banking source said Deutsche Bank had been negotiating with Zhongzhu and other parties for about half a year, though no final decision had been made yet.

The sources said a Macau company would take 25 percent of the joint venture, and another Chinese company would take 5 percent. ADVERTISEMENT

A spokeswoman in Sydney for Deutsche Bank’s asset management division, which deals with property investment in Asia, declined to comment on Friday.