Chinese banks must raise their game
Frederic Lau says the challenge for Chinese banks is to keep up with the government's shift of focus from the state to the private sector; bankers must raise their game or be hobbled by their ineptitude
With China's new administration in place, the National People's Congress and Chinese People's Political Consultative Conference will meet again in March to come up with a new framework for the next stage of China's economic growth. Boosting household consumption and private-sector-led growth will be at the top of the agenda.
This will challenge the way many Chinese banks operate and how they lend money during the next phase of economic reform and development - particularly in areas such as interest-rate deregulation, relaxation of currency controls and the extension of loans to the private sector.
Historically, banks have not done a good job in supporting the private sector. Throughout the past 30 years, China's economy has been dominated by large state-owned enterprises, and these companies have commanded a large portion of bank lending.
There will be at least two negative effects if this situation is allowed to continue. First, it will limit the amount of loans that can be obtained by small private firms, in turn reducing the effect of the private sector's contribution to the overall economy. Second, the underwriting skills of bank lending officers will never genuinely improve because loans granted to SOEs are implicitly guaranteed by the government. No particular skill is required to make such loans.
China's banking industry has made a quantum leap in all aspects of its operations over the past 30 years of reform and restructuring. Banks have made record profits in the past few years as a result of the government's stimulus programme. But this does not suggest that their risk management capabilities are up to international standards.
A case in point: a majority of loans made were SOE-related infrastructure projects, or secured by real assets. Making these loans does not require sophisticated credit risk management skills. On the other hand, banks have not made sufficient lending to support research and development, intellectual property, patents, renewable energy or environmentally friendly projects. These are the sectors of the economy that desperately need funding support. This is one reason China has not produced any leading brands, despite being the second-largest economy in the world.