Chinese Bankers Carry Hopes for Future Balances
Liu Mingkang
Chairman, the CBRC
Hong Kong SAR
20 January 2010
Good morning, Ladies and Gentlemen!
Today, I would like to brief on 3 questions. First, there have been reservations about China’s banking industry, sustainable or not? Second, doubts have been expressed regarding the credit growth we had so far. Third, it has been argued how we view today’s banking supervision and regulation?
Allow me to address each of those in turn, beginning with the banking situation.
China is one of the fastest growing economies in the world. Chinese banking sector played a pivotal funding role in the mainland’s spectacular growth story. The scale of the banking sector’s assets has been significant, reaching around 90% of the total financial assets. In line with the growing economy, the banking sector itself has grown much stronger and more resilient. In the renowned list of world top ten banks by market capitalization, there are three Chinese banks on the list which is topped by the ICBC, even against the headwinds of the crisis.
Clearly we used to be plagued by large amount of non-performing loans (NPLs), low profitability, rigid organizational structure and outdated mindsets, substantial and qualitative changes took place over recent years. For example, the banking assets increased from RMB 27.6 trillion the year 2003 to RMB 78.8 trillion the year 2009, while the NPLs decreased from 17.9% to 1.58% respectively. The ROA and ROE of banks grew from 0.1% and 3% the year 2003 to 1% and 17.8% respectively by the end of third quarter of 2009. Besides, banks in compliance with our capital adequacy requirements numbered 224, and took up 99.9% of the total banking assets, up from the previous 8 in numbers with only 0.6% of the total assets in the year 2003.
The satisfactory score sheet is not only rooted in the fundamental reform and opening-up of the banks’ structures and mindsets, but also cannot go without the relentless efforts of the banking supervision and regulation. We have since inception been executing a risk-based and consolidated supervision with strong control and great transparency. The supervisory framework combines both the micro- and macro-front measures, including clear regulatory rules, dynamic supervisory toolkit and prompt regulatory actions.
More importantly, we have been sticking to a set of simple, useful and effective ratios, limits and targets, modeling those used by some developed markets in the past and were later abandoned by themselves during the frenzy innovation and deregulation. For example, apart from the CAR ratio, we emphasized the quality first and required a simple structure of the capital, with common equity and retained earnings occupying no less than 75% of Tier-1 capital, much higher than the 25% in some developed markets. The provisioning coverage ratio surged from 19.7% when I took the Chairman of the CBRC to 155% the end of 2009, a strong buffer against expected losses. The loan-to-deposit ratio is 75%, core funding ratio 60%, and liquidity ratio of 25%. The major deposit-taking institutions are also required to have a 16% reserve ratio with the central bank, which automatically gives them access to liquidity facility in case of need. We also have a dynamic loan-to-value (LTV) ratio and at least 40% down payment requirement for second home mortgage loans today, which proves to be quite effective in curbing excessive speculative risks in the property market.
Sometimes small is beautiful, and sometimes simple and basic is also beautiful. These prudential rules, ratios, limits and targets, together with other prudential requirements, helped to build a robust buffer for the banking sector in the past years. Thanks to them, our banking sector was far away from the crisis and provided enormous underpinning to the real economy.
Second, the credit growth. Looking back, the mainland may well end the year 2009 with over 8% GDP growth, with the third quarter growth accelerating to 9%, up from roughly 6% in the first quarter and 7% in the second. The recovery is broad-based, as exemplified by the following encouraging figures. Industrial production has gained double-digit growth since late June. Purchasing Managers Index (PMI) registered at 55.6% in late December, the highest for the past 20 months. The electricity consumption was up by 25.7% y-o-y and 4.8% m-o-m in December.
That was not easy. Following the bankruptcy of Lehman Brothers, the financial crisis worsened and dragged US and major EU economies into full-blown recessions. The Chinese government timely gauged the world situation before promptly unveiling the stimulus packages worth of RMB 4 trillion and easing monetary policy against impacts of the crisis, which should be highly applauded for turning over the economy.
Among the packages, credit played the primary role in supporting massive infrastructure investment, as evidenced by the new enormous credit supply of RMB 9.5 trillion for the whole year, a dramatic rebound from the tightening of credit in 2008. That said, we actually controlled the credit growth the whole year around. If we take a look at the breakdown by quarters, we would find that the most rapid monthly credit expansion was in the first quarter, which was highly necessary. Every month in that quarter we disbursed RMB 1.52 trillion. But quickly with our prudential management, it was followed by a gradual slowdown to normal levels the next three quarters, which was RMB 920 billion, 430 billion and 310 billion respectively. On average, the credit supply in 2009 grew by 31.7% y-o-y. Such rapid credit buildup stabilized market confidence, eased liquidity stress and picked up the economy. This year, we will continue to control the pace and amount of the credit, i.e., credit supply will go down to roughly RMB7.5 trillion and grow by 18% y-o-y.
In the meantime, we cultivated all the banks to heighten their vigilance against any possible embedded credit risks. Actually, measures were already taken as the first quarter credit hike was witnessed.
First thing first, we closely monitored the associated credit risks of the extended loans. To be specific, we analyzed risks associated with fixed asset loans, especially those placed by local government sponsored projects and the real estate sector. We issued warning signals in a timely manner to alert banks of the prominent risks. We also converged the related information of large exposures of over 190 banking institutions under our radar screen into our database for better examination and scrutiny. Prompt remedial and corrective actions were taken against the excessive concentrated portfolios, irregularities in the credit cards issuance and bill acceptance, disqualified projects with shortfall of equity as well as abuse of the loans for speculation. And that is clear: with more than RMB 1 trillion cushion of provisioning, we are confident that risks envisaged could be well absorbed. Though the first few days of January 2010 witnessed a relatively strong lending momentum, that is because of the lagging effect of last year’s credit buildup and such trend will definitely be eased as the effective demand satisfied.
Third, sound supervision and regulation. Apart from targeted regulation from the micro perspective, we conducted macro-prudential supervision and countercyclical regulatory measures. Based on scientific calibration, we released dynamic provisioning and capital adequacy requirements. Soon we are also going to issue leverage ratio and liquidity ratio requirements to supplement the traditional ratios, limits and targets. And last year, we made two milestone decisions: A is to prohibit banks from guaranteeing corporate bonds; and B is to forbid banks from cross holding the subordinated debts as Tier-2 capital so as to ensure a healthy firewall in between. At the same time, we guided the commercial banks to adjust their business development plans, capital replenish schemes, profit distribution and compensation packages so as to be ready for the wrong kind of borrowers and the wrong kind of weather. By such a doing, we broaden our toolbox and get focused on risk-based supervision with a clear roadmap, and banks will be better to absorb both the expected and unexpected losses. We think we are balancing the two stories, limiting systemic risk by a brand new framework and building a banking system that fulfills its role in the Chinese economy.
Lastly, four of the most important lessons to be learned from the crisis is that we must not underestimate risk, the importance of firewalls, the importance of back to basics, and the importance of balanced supervision and regulation. I just want to mention several facts: we should not ignore the fact that the banking systems that have best withstood the crisis are precisely those where there was closer banking supervision and greater oversight. Another fact is, capital levels and liquidity levels must respond to the situation of the balance sheet, the business model and corporate governance of each bank. Who knows these aspects of the bank better than its own supervisor? Still, who knows better than the regulator and supervisor regarding the systemic risks and the landscape of the national and international challenges? In short, the Chinese banking system of the future must be grounded in effective supervision and appropriate regulation with reasonable requirements that kill the big bubbles and in the meantime, would not be counterproductive.
Looking ahead, our list of challenges is not short. In addition to the credit risk, the market and operational risks are real, too. And the mission to cultivate and guide the banks to support small businesses, rural finance, environment protection are not easy. All these mean that the 2009 issues would not easily make a soft landing in 2010. As 2009 might be the most difficult year for China’s economy, the 2010 could be the most complicated year with uncertainties. As Charles Dickens wrote in his famous ‘A tale of two cities’, it was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness. Notwithstanding the challenges and uncertainties, we need to stick to our own roadmap, because we believe it is better, and dare to make changes to seek a stronger financial architecture.
With that, ladies and gentlemen, I come to the end of my speech. Thank you!
