CHINA COFFERS

Nation's Top Regulator Calls for Chinese Banking Reforms

jiange li
Banking regulator Jiange Li spoke at 19th annual Handelsblatt Conference.
  • Why it matters

    Why it matters

    Banking reform in China could include acquisitions in Germany and elsewhere.

  • Facts

    Facts

    • Regulator Jiange Li is vice-president of the Chinese government’s bank holding company, Central Huijin Investment.
    • Most Chinese banks are state-owned and are dependent on economic reforms.
    • Mr. Li said investment returns in China are low, so looking abroad is enticing.
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    Audio

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A top official in the Chinese government’s bank holding company said his nation was open to acquisitions outside its borders.

At the 19th annual Handelsblatt Conference, “Banks in Transition,” Jiange Li was asked whether Chinese banks could conceive of buying German banking and financial services giant Commerzbank.

“We are on an expansion course with our eyes open,” said Mr. Li, who as vice chairman of state-owned Central Huijin Investment directly supervises China’s largest financial institutions. If a march into other countries were possible, “we are interested.” China has large foreign exchange reserves, and “that is slowly becoming a problem,” he said. Returns on investments in China are always low, he added, so involvement abroad was an enticing alternative.

If a Chinese bank were to take a stake in a European competitor, Mr. Li would have a major say. Central Huijin has majority stakes in the market leading Industrial and Commercial Bank of China and all of China’s credit institutions, which are among the world’s largest. Mr. Li is open about where the problems lie in his business. “I think we are still facing many challenges,” he said, adding that bank reform was dependent on a restructuring of the entire Chinese economy.

He identified heavy borrowing by municipalities, whose financial foundations are shaky, as among the biggest problems facing China’s banks. The strategies of some some state corporations were also cause for skepticism, he said.

China’s financial institutions emerged virtually unscathed from the global financial crisis that plunged banks into distress all over the world. No surprise, considering the financial system was sealed off from outside by capital controls – money couldn’t exit the country. Also, its banks usually don’t invest in complex products but, in general, act directly as an investor in industry.

Chinese banks owe their long-term high profits to state regulation. Credit and deposit interest rates are set at low levels. Chinese savers don’t earn much interest, but their deposits make easy profits for banks.

“In the next two years, we intend to completely turn over the interest rate to market and economic forces.”

Jiange Li, Vice chairman of Central Huijin Investment

Beijing’s benevolent attitude toward banks is for a reason – almost all of them belong to the state and their top managers are dependable Communist Party members. It’s not surprising that they have been providing their comrades in state-owned businesses with capital.

This business model has now become an impediment. Because state-owned companies enjoy a virtually guaranteed existence, they are oversized colossuses, too inefficient to generate any real growth in today’s economic environment. Many have only recently generated profits through real estate investments. The high amount of outstanding loans, given mostly for concrete for new factories, high-rise buildings and shopping malls, is looking more and more like a liability.

It isn’t only the stability of the state-owned corporations and municipalities that worries Mr. Li. He considers shadow banks that provide loans outside the official financial sector a threat and said this problem is becoming greater. He believes that commercial banks must be allowed to give more loans to decrease the importance of shadow banks.

He advocated giving banks a freer choice in setting interest rates. “In the next two years, we intend to completely turn over the interest rate to market and economic forces,” he said, adding the market could also be liberalized in other ways, including the easing of approvals for private financial institutions.

Parallel to this, China wants to internationalize and liberalize its currency. The country has just recently named London, as well as Frankfurt and Luxemburg, as clearing centers for the yuan. Mr. Li didn’t answer the question regarding whether the British capital, being the largest foreign exchange center, would take the lead, or Frankfurt, since Germany has far greater trading ties with China.

This article was translated by David Andersen. Vinny Kuntz also contributed to the story. Contact the authors: e.atzler@vhb.de and mayer@handelsblatt.com

 

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