Net Assessment: The Chinese Financial System

He who is contented is rich.

- Lao-Tzu

To begin: land and labor

• 10 million sq kilometers. Rugged disconnected vast geography

• 15 percent arable land. 1.3 billion people. 142 people per sq km

• 790m workforce. 300m farm workers. Labor intensive economy

• Urban / rural gap. 740 million rural folk; per capita net income is $2 per day. Urban per capita disposable income $2300.

China: Funds and Deposits in Financial InstitutionsOct. 2009 total deposits = 60 trillion RMB ($8.78 trillion)

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Household savings

Enterprise deposits

Total deposits

All sources of funds

High levels of deposits ($9 trillion). Total banking assets are $11 trillion. Enterprise deposits slightly surpassed household savings (about $3.5 trillion each). Central government holds $2.3 trillion in foreign exchange reserves.

Banking dominance

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Corporate bonds

Treasury bonds

Stocks

Bank loans

Bank loans are the dominant means of obtaining finance. The banking system is mostly state-run and includes policy banks, four state-owned commercial banks, over a dozen joint-stock commercial banks, numerous urban and rural commercial banks and credit cooperatives, and foreign banks.

SOEs and part-state companies are dominant in small stocks and corporate bond markets.

Sectors receiving short term loans 2006-2009

Agricultural16%

Private or foreign invested

2%

Commercial17%

Construction3%

Other30%

Industrial32%

Outstanding loans of $6.1 trillion. Most loans (68%) go to capital intensive sectors, mostly managed by state-owned enterprises (SOEs). SOEs receive three-fourths short-term loans and half to two-thirds of medium-long term, often with preferential terms. Private companies self-finance, rely on close networks, access informal finance sector, or seek FDI.

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DP

1998 2000 2002 2004 2006 2008

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Non-performing loans

Non-performing loans

Total lending

State banks lend to state companies that work with politicians and deposit their earnings back in the banks. Inefficient uses of capital develop. NPL near catastrophe in late 1990s. NPL ratios in top two bank categories hit 26% and 12%. Loan growth, GDP growth and fudging stats make NPLs look smaller now. But they are created by nature of the financial system.

The lending surge