编者按：2012年4月，《The Banker》就中国银行业目前的状态、所面临的危机以及面对危机 的解决方法等问题采访了我院朱宁副院长，并发布《Lifting the lid-Inside China‘s banks》一文。

China’s banks are growing rapidly, climbing up the global rankings, and could one day be the world leaders in the banking industry. Or they are institutions riddled with bad debt,propped up by the state, that could one day collapse in the Chinese equivalent of the subprime crisis. Views on China’s banking sector can lie anywhere on the spectrum between these two extremes, but whatever the view of China’s banks, their problems cannot be ignored because of the sheer size of these institutions.

Among the areas of concern are the rise of shadow banking and off-balance-sheet activity, the level of nonperforming loans (NPLs), and overexposure to local government debt and the property sector. While many agree on the problems, the degree to which they pose systemic risk and their potential to cause a banking crisis is hotly debated. Opinions vary on the true state of China’s banks and what lies inside them. They can be viewed as healthy and profitable with ample reserves,or they can be seen as part of a system where the level of risk and bad debt has been hidden.

Crisis point?
“China is the one place in the world where you are unlikely to get a banking crisis in the near future,” says Simon Gleave, partner in charge of financial services at KPMG. Mr Gleave, who is based in China, dismisses speculation of a banking crisis in China as hot air, but another view is that the problems in the Chinese banking sector have already reached crisis proportions: “We may be in a banking crisis and not even know it,” says Patrick Chovanec, a professor at Beijing’s Tsinghua University.

China’s banks, unlike their US or European counterparts,are part of a closed system where they are effectively viewed as levers by which the government can control the economy. On the one hand, this gives the state direct control to manage any problems, but also it means that problems could be manipulated and disguised so that their true scale is not obvious.

The closed nature of the system means that there is limited scope for global contagion, which affects what a crisis would look like. “What not to expect is the model like the Lehman meltdown,” says Mr Chovanec. “It is more like after the bubble burst in Japan and the banks sat for many years on bad loans and threw good money after bad, pretending it was not there.It was not a crisis but [Japan] did have zombie banks.”

Mr Chovanec adds that while the problems remain inside a closed system, they can be contained. However,in the past year the rise of off-balance-sheet activity has been a cause for serious concern. “Now the risk has metastasised and may not be as easy to contain as it was before,” he says.

Risk for returns
With a ceiling on deposit rates, Chinese investors have been looking for better returns.Deposits have been invested into off-balance-sheet vehicles, and because the funds are moving away from the regulated sector there is the potential for the funds to be mis-invested or mis-sold.

Mr Chovanec says that the banks have introduced would-be depositors to would-be lenders through trust companies, which make a range of investments, and the bank charges a fee for this service. “They packaged a lot of assets that the banks say are good, but they might not be. It is not clear where the risk lies, whether the risk is held by the bank or by the investor. Everyone assumes that everyone else holds the risk. You have repackaged the risk in the banking system and sold it to retail investors.”

Fitch Ratings notes that the advantages of such wealth management products (WMPs) include the lowering of banks’ reserve ratio requirements (RRR). “For banks, the benefits associated with WMP issuance stem from the ability to shift the assets and liabilities underlying the WMPs on and off balance sheet, which they typically do through strategically setting product start and end dates. This enables banks to lower deposit balances between periods to avoid high reserve requirements,while giving them the flexibility to bring the deposits bank on balance sheet at period-end to pad loan/deposit ratios,” says the ratings agency.

The rapid growth of these products is putting a strain on the banks when it comes to managing the payouts.Fitch says that liquidity has tightened resulting in a growing reliance oninterbank borrowing to repay product investors: “There has been an intensifying monthend scramble for cash to cover product payouts and the additional RRR allocation.”

Whether such products pose a systemic risk is debatable. “It all depends on the quality of the lending,”says Mr Chovanec. “If they are all good loans, then there is not a problem.”

Asset quality
Concerns about asset quality extend to other areas of the banks’ business. Research by Credit Suisse states: “A view on China’s banks is completely a call on the potential impairment.” The research cites real estate, manufacturing, local government and small and medium enterprises-sized as the main sources of credit risk, both on and off balance sheet.In terms of the level of NPLs at Chinese banks, Credit Suisse forecasts a NPL ratio of 8% to 12%, much higher than the levels that are being officially reported.Christine Kuo, vice-president and senior credit officer at Moody’s, says of the problems facing the Chinese banks as a whole: “We think the immediate challenge for Chinese banks would be to control asset quality. The banking industry’s NPLs were at a cyclical low in the third quarter of 2011 and then edged up in the fourth quarter. We expect that trend to continue in 2012.

“In particular we expect the increase in NPLs to be more pronounced in the real estate- and exports-related sectors. In addition, we would likely see more impaired loans among local government financing vehicles,although most of these loans may still be considered as performing after restructuring. For the banks, other challenges include further enhancing deposit bases, given the competition from non-bank financial institutions,and managing capital for growth.”

Despite these concerns, Ms Kuo does not believe that there will be a banking crisis in China.The level of bad debt is now the “hangover after the party” following the rapid credit expansion that China undertook as a response to the global financial crisis in 2008. Ning Zhu, deputy director Shanghai Advanced Institute of Finance, says that because of the credit expansion, “a lot of the banks were ordered to make loans which they did not think were creditworthy”.

Localised lending
Lending to local governments has been a concern to many observers. Since local governments are unable to borrow directly from banks, banks have been lending to local government financing vehicles (LGFV), which were set up to get around these rules. These loans, says Mr Zhu,were implicitly given guarantees by the government.

Standard Chartered research estimates that with about 10,000 LGFVs, local government sponsors are sitting on approximately Rmb10000bn to Rmb14000bn ($1500bn to $2100bn) worth of loans, of which Standard Chartered estimates Rmb2000bn to Rmb3000bn – the equivalent of 6% of China’s gross domestic product (GDP) – are in trouble. “We go further and assume that a large portion, if not the majority,CHINA cover story of these loans will not be repaid by the projects currently using the funds,” says the research, which foresees that the problem will need central government intervention. In February 2012, the Financial Times reported that the banks have been instructed to roll-over the loans, which buys the banks some time and postpones having to deal with the impact of the bad debt.

Stephen Green, Standard Chartered’s regional head of research for greater China, says that the problems with local government debt do not pose a systemic risk to the banking sector, an opinion echoed by Wei Yao, China economist at Société Générale Corporate and Investment Bank, who says: “Chinese banks have problems – that is very clear. They have problems with their exposure to local government debt and exposure to the property sector, but the risk of a banking crisis is very small this year and next year.”

She and analysts such as Mr Green are more concerned about the banks’ exposure to the property sector than the local government debt problem. Property prices are going through a serious adjustment and a sustained collapse would hit the banking sector hard.According to research by Standard Chartered, the property market is weak and the average land price has corrected 35% from the peak in late 2010. “Developers are feeling the pinch, but relatively few are on the verge of collapse, it seems,” says Standard Chartered.

Mr Green is confident that the government can control these problems and that there will not be a systemic impact on the economy. “Real estate is not leveraged on the household side,” he says.

Right provisions?
NPL levels within Chinese banks are still a concern for analysts, however. Qiang Liao, Standard Poor’s director of financial institutions ratings for Asia-Pacific,believes that the credit losses could be significantly higher in the next few years. “The banking system has to focus more on absorbing these potential losses rather than providing new credit. That could be a big headache for the Chinese economy,” he says.

A scenario where the Chinese banking sector is heavily hit is “relatively remote to narrow” , says Mr Liao. The reasons for this, he says, are the structural strengths of China’s banking system. “The liquidity profile of the banking system remains quite strong,” he says, pointing out that loans of Chinese banks are fully funded by customer deposits and most banks in China do not rely on wholesale funding. Mr Liao also points to the profit capacity of the sector and views the fact that the net interest spread is protected by the regulator as a strength.

This sentiment is shared by Karine Hirn, asset manager East Capital’s chief representative in China, who says that the banks are still worthy of investment. “If you look at the banks, we actually like them: they are very profitable, they have strong underlying earnings, good margins, and are regulated. We see a potential for organic growth – retail lending is still underdeveloped,” she says, arguing that the exposure to real estate is something to look at, and there are worries about the exposure to LGFVs and growing NPLs, but she believes these problems are manageable.

The provisioning of the Chinese banks could cover a fair amount of NPLs. Mr Liao estimates that the maximum provisions out of operating profits are sufficient to write off 350 basis points of NPLs every year. “Over three years that means that cumulative NPLs could be absorbed as high as 10%. The key question is whether the potential spike in NPLs for the banking sector could be even higher than 10%,” he says.

Weathering the storm
There are other strengths in the system, and many argue that the Chinese authorities have the capacity to manage and control the problems. Ms Kuo says: “Moody’s has an AA3 rating on China, which is supported by the country’s high degree of economic resiliency and very high level of financial robustness. Robust growth makes problems in China, including in its banking system, manageable. Ample fiscal headroom can likely accommodate possible contingent liabilities which may arise from the exceptional fiscal and financial stimulus implemented during 2009 and 2010.”

The Chinese authorities have so far been able to manage the problems in the banking sector, and in many cases allowed banks to either roll over the loans – which means they do not make it to the official NPL figures – or restructured them. This has given the banking sector some breathing room, but some time in the future a day of reckoning could come.

Fitch’s research says: “In theory, such practices can continue indefinitely as long as bank shareholders are Robust growth makes problems in China, including in its banking system, manageable. Ample fiscal headroom can likely accommodate possible contingent liabilities Christine Kuo willing and able to provide this forbearance, and as long as other parts of the economy are strong enough to offset the drag on growth. However, the concern in China today is that the banking sector’s forbearance burden is rising at a time when funding and liquidity are dwindling and financing needs remain high.

“For the first time, a large number of Chinese banks are beginning to face cash pressures, and fewer resources are available today than in the past to carry the economy through an extended period of forbearance. It is because of this cash constraint that the forthcoming wave of asset quality issues has the potential to become uglier and more destablising than in previous episodes of loan portfolio deterioration,” says the Fitch research note. Mr Chovanec argues that because bad debt is being rolled over, new credit is not available for the funding of new loans. “It is already starting to bite,” he says, adding that this is the reason for the slowdown that is starting to appear.

Whether there will be a hard landing – which Nomura defines as a slowdown to an average 5% growth in GDP over four consecutive quarters – remains to be seen. In March 2012, China’s prime minister Wen Jiabao revised the country’s growth target downwards to 7.5%. If there is a slowdown in the economy, it could severely impact the banking sector and could trigger even more NPLs.

This would be a case of China’s economy having an impact on the banking sector, but some observers believe that the problem will occur the other way round. They argue that there are enough concerns with the banks – with off- balance-sheet activity, local government debt and the property sector – to cause a crisis in the banking sector first. Whether this will be the case remains to be seen, but what is certain is that the state of China’s banks will continue to be hotly debated.