Starve Chinese banks of new capital
2014-07-10 23:18阅读：
Stop indulging
China's banks or risk
another crisis
Financial Times, 10 July 2014, By
Joe Zhang,
China's 18 biggest banks are listed on both domestic and
overseas stock markets. Beijing last week approved another 11 banks
lower down the pecking order to go public, too.
In a country threatened by an expanding credit bubble, it is
surprising that no one has raised any concerns about this decision.
This move would add fuel to China's credit fire: enabling more
banks to raise more capital will enlarge the capital base and the
lending capability of an already bloated banking
sector.
The government is pursuing two other equally damaging
policies. One is the relaxation of credit through a targeted cut to
the banks’ reserve requirement ratios. The other is the
encouragement of list
ed banks to sell preference shares now that their stocks are mostly
trading below book value.
The Chinese government does not need to justify its policy
moves to anyone. But there are two reasons often cited by officials
and analysts. First, the government feels the economy has been too
weak and need a jolt through expanding the amount of credit in the
system. Second, the banks need more capital to fund an increase in
lending while maintaining a reasonable capital adequacy
ratio.
However, there is a third, untold reason: the government
thinks many banks are burdened by bad debts, and that their capital
cushion is not as robust as claimed.
These widely held views may sound reasonable but they are a
terrible basis on which to make policy. The Chinese economy, under
the influence of fiscal and monetary stimulus for the past 36
years, is saddled with industrial overcapacity and weak corporate
profitability.
Consider just one crude comparison: the US economy is about
80 per cent bigger than the Chinese economy, as measured by gross
domestic product and based on the current exchange rate. But the
value of the US stock market is at least seven to eight times
bigger, even after stripping out foreign companies listed in the
US.
What is behind the huge valuation gap? US companies are more
profitable than Chinese ones. Despite the deployment of
quantitative easing by the Federal Reserve, money supply has
increased at low single-digits in recent years compared to a rate
of 13-14 per cent in China. Chinese companies are drowning in
credit.
But it is politically difficult for Chinese banks suddenly to
acknowledge a much higher level of bad debt, let alone to write
them off. In any case, the tax men will not allow it.
The banking sector is the country's biggest taxpayer,
accounting for more than 60 per cent of all revenues. If the banks
admit to holding a much higher percentage of bad debts and write
them off, their net profit will collapse and so will their ability
to pay their taxes.
The only realistic way to contain the Chinese credit bubble
is to starve the banks of new capital. Here are three proposals for
how to achieve this.
First, the Chinese government should ban any bank
fundraising. True, the equity investors in thousands of unlisted
banks deserve to have an exit. But one way to provide this would be
to list the banks without allowing them to sell new shares via a
process called listing by introduction. This allows some
shareholders to quit the company, but the business’s capital base
does not increase.
Second, Chinese regulators should stop urging the banks to
sell preference shares. The banks’ management teams need no urging
here, as they know more about empire building than generating
sustainable returns on investments.
Third, China’s banks should be forced to distribute most, if
not all, of their net profits each year as dividends. Their
existing lending capability should be sufficient to support the
economy for many years.
Some might ask whether the Chinese banks should replenish
their capital base if they have been eroded by bad debts. Yes, of
course, but only if it is accompanied by a major writedown of bad
debts.
Another question is whether China should create some “bad
banks” to handle the vast amounts of bad debt in the banking
industry. The answer: absolutely not. The last time China did this
in 2000-2001, the bad banks proved to be the origin of today's
credit bubble. With a blanket deposit insurance regime, China’s
banks are merely an extension of the government apparatus. In this
institutional set-up, capital adequacy ratios are not very
meaningful.
Despite being a much smaller economy, China's money supply is
(on a broad measure) already 61 per cent bigger than that in the
US. At the same time, China's credit balance is compounding at a
high annual rate of 13-14 per cent off a very high
base.
In recent years, there has been a backlash across the world
against austerity measures prescribed by the likes of the
International Monetary Fund. However, China is the notable example
where austerity is sorely needed.
The writer is author of ‘Party Man, Company Man: Is China’s State
Capitalism Doomed?’ and a former manager at the People’s Bank of
China.
