By Joseph Neu
The difference between banks in China and banks in the US is that when the government asks banks to lend to stimulate growth, the Chinese banks ask how much and to whom. In the US, banks simply refuse and hold their cash in reserve. This oft-cited anecdote gets to the heart of concerns that treasurers have—along with China observers, generally—regarding Chinese banks: they are too intertwined with the Chinese government and its policy priorities, which may not be aligned with MNC interests or their standing as reliable counterparties.
It’s possible this situation is so bad that it will eventually drag down the Chinese economy. This also would not be good news for treasurers. Neither would an ongoing trend of unreformed Chinese banks continuing to rise atop global bank tables, thanks to ongoing Chinese expansion. Thus, it is in every treasurer’s interest to interact with Chinese banks in ways that help make the case for reform.
Chinese bank growth risk
Already, China boasts the world’s two largest banks by market capitalization—ICBC and China Construction Bank—and its banking dominance may not end there. According to Oliver Wyman’s most recent annual “State of the Financial Services Industry” report, China’s banking sector is expected to grow some 10 percent per annum between 2009 and 2014, besting almost every other G20 country.
Unfortunately, as noted in a Knowledge@Wharton post sparked by the recent IPO of Agricultural Bank of China (the last of the four largest Chinese banks to list), the growth prospects for the sector have been marred by the decision to use Chinese bank lending as the official conduit for economic stimulus. This decision has reversed progress on reform efforts begun in 2000 to transform the sector away from the “policy bank” template established in the 1980s to fund state-owned enterprises solely at government discretion.
The result has been highly suspect bank balance sheets across China. Plus, questionable securitization practices, highlighted in a July report by Fitch, serve to keep banks’ most aggressive lending off-balance sheet. Many of these toxic securities end up with state-owned asset management companies, as the banks’ special purpose vehicle of choice. These AMCs essentially buy up bad bank assets in exchange for bonds. The banks classify these AMC bonds as quality assets, because the Chinese government backs them (sound familiar?).
As the Wharton article makes clear, this sort of government-supported shell game is nothing new. However, now that Chinese banks are listing, their minority shareholders, including multinational banks, are also in on the financing. Since such shell games are at odds with global financial reform, at some point, Chinese banks must stop them if they want to continue to grow and win the international presence their size should dictate.
What can treasurers do?
Aside from avoiding exposure to toxic Chinese bank assets, what can treasurers active in China do to encourage Chinese banking reform and banks that lead the way?
One area of focus is working to change the culture within banks. This will not be easy. The Knowledge@Wharton article cited Marshall Meyer, a Wharton management professor, who recalled a recent visit to China where a bank manager lamented that he had to choose between “being a responsible banker and keeping my job.” This suggests that, thanks to joint ventures, education and training efforts to enhance technical knowledge, Chinese bankers do know what best practice is. The problem is that some members of bank boards don’t care as much.
Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing, also has noted on his blog the problems with Chinese bank culture. For example, what look like best practice approaches to employee performance reviews actually function as simple rotational sharing of best performer and merit awards to everyone on the team. Treasurers can counter this by making their own assessments of Chinese bank employees and make these assessments known to local bank partners. Insisting on working only with high performers can help to foster change. Better this than to eventually face Chinese banks, and their current practices, not just in China but on the global stage.