People’s Bank of China Central bank of China--similar to US’s Federal Reserve System
Specialized banks: (1) Bank of China, (2) Industrial and Commercial Bank of China, (3) Agricultural bank, (4) China’s Construction bank
People’s Bank of China (PBOC)
Implement/administer laws relating to banks
Formulate interest rate policy
Control credit -loans
Manage FX reserves
Monitoring of banking sectors (M&A etc)
Bank of China (specialized bank)
All foreign trade and remittance transaction
International inter-bank transactions
FX and gold
International loan syndication
Government bond and securities issues
Consultancy services to investment on-shore and off-shore
Industrial and Commercial Bank of China (ICBC)
Created in 1983
Accept deposits and loans to individuals and companies
provide payroll management services for state enterprises
Operate securities, trust and real estate business
Issue credit cards
Deal with FX matters in SEZs
Agricultural Bank of China
Created in 1979
2 largest specialized bank
Serve rural area for functions similar to ICBC’s functions in urban area
China’ s Construction Bank (CCB)
Created in 1954
supervise and settle large scale finance of project
regulate investment funds of state enterprises
One of the 4 state-owned commercial bank that that control about 80 per cent of the banking business in China
First state-owned bank to remunerate plan for performance-related bonuses (9/28/99)
CCB president earns about $361 (monthly) under the current system
allow the most senior bank executives to have salary six times that of the junior banker
China’ s Construction Bank (CCB)
China Construction Bank (teamed up with Xiangcai Securities) has become the first mainland financial institution to offer securities-backed loans to stock brokerages (March 2, 2000)
The bank offers the firms short-term loans secured by shares and securities investment funds.
Traditionally, most brokerages illegally dipped into clients' funds to finance daily operations but a crackdown on the practice last year has left many firms strapped for cash.
The Communications Bank of China
established in 1987
support modernization of China
Deal with both RMB and foreign currency deposits and loans
Operate the securities market
Foreign owned and joint venture banks are allowed to operate in China since 1970s
Book loans denominated in foreign currencies
collect bills and remittances from overseas
discount foreign exchange bills
handle documentary credit arrangement
conduct credit checks
accept consulting engagement
offer safe deposit services
The Bank of China agrees to provide renminbi loans to HSBC and Standard Chartered to bolster the business of the two British banks in the Chinese market (10/22/99 FT) -- as a good will by the Ziang Zemin’s UK trip
The deals are expected to total Rmb 3bn ($362m) apiece, making them the largest such loans granted to foreign banks in China since the rules on funding lending business there were relaxed last summer.
The deals should give the two banks an edge in the Chinese market because they will have more money to lend to corporate customers operating in China than their competitors, all of whom have faced difficulties raising renminbi in the local market.
Foreign banks see lucrative opportunities in renminbi lending in China but are not allowed to take deposits from the public and may only lend Chinese currency to corporate ventures financed with foreign investment.
The Chinese government agreed in August to allow foreign banks to raise large loans on fixed maturity terms direct from Chinese banks -- a very short term borrowing in the interbank market.
But loans granted under the new rules have been much smaller than those now being made available to the British banks. For example, Bank of Tokyo-Mitsubishi raised only Rmb50m in one of the first such deals in August, 1999.
Privatization of Chinese Banks
Shenzhen Development Bank, a state-owned development, first bank to list shares (IPO) on Shenzhen Stock Exchange after winning approval from the SEZ’s government in early 1990s
Shanghai Pudong Development Bank,
established in 1993, focusing on project financing
second state-owned bank to list shares (Shanghai’s stock Exchange) as 400 million ( 16.6% of its shareholding ) A shares ($484 m ) on Sept 23, 1999.
First bank was approved with central government mandate to list shares
for strengthening capital base and expansion
China Minsheng Bank, another new regional bank, listed on Shanghai Exchange on December 2000. It is China's first and only private bank and the third bank listed on exchanges. The eight-branch Minsheng is a relatively small bank, with assets of Rmb43bn and 1,800 employees.
Other banks such as, China Merchants Bank and Citic Industrial Bank have shown in interest to raise public funds
A handful of Chinese banks (Bank of Shanghai and Xiamen International bank) has foreign financial institutions as minority stakeholders. Now, Bank of communication (5th largest bank) is inviting two foreign financial institutions to be its 15 % holding to bolster its capital and management skills to meet WTO challenges
Shenzhen-based CMB has received approval from the China Securities Regulatory Commission (CSRC) to go public on the Shanghai stock exchange. CMB, the 4 th bank to go public, is preparing for a road show to educate domestic investors about its A-share IPO (SCMP, 1/16/02)
The country’s 4 major state-owned bank plan to swap the debt for equity in the underlying enterprises (to off-load the bad loans). The equity stake will then be sold to the market
China Construction bank has begun the process
Asset Management Companies (AMCs)
Such set up is a bold attempt to clean up the mess in its banking industry-- bad loans official estimate to be about 1.8 trillion Yuan or $220 billion -- some estimate to be US$1.08 trillion
Cinda Asset Management Corporation, a registered capital of RMB 10 billion provided by the ministry of finance, was set up in April, 1999 to take over the compromised assets (non-performing loans) of CCB (RMB 220 billion)
Cinda is funding via bond issues
Cinda uses debt-for-equity swaps strategy to alleviate the interest payment for state-owned enterprises
Cinda did a debt-for-equity deal (RMB 60 million) for Beijing Cement Plant.
Beijing has launched an asset management company to take over bad loans held by the Bank of China. China Orient Asset Management (COAM) is the second such company to be set up as part of a drive to reduce banks bad debts. COAM, a registered capital of Rmb10bn ($1.2bn), would be allowed to sell stock and creditor rights as part of its efforts to raise funds to buy Bank of China's non-performing loans.
Dongfeng-Citroen Automobile Co (Wuhan-based joint venture between Chinese and French care makers) convert part of its 12 billion Rmb ($1.45 b) debt into equity.
City of Shanghai has also launched its first state-owned asset management company as part of state enterprise reform.
Management Affiliated Bad Loan Companies
company bank ($ billion) affected (e.g.)
Great Wall Agricultural $42.86 Hualu Electronic
Bank of China
Dongfang Bank of China $32.30 Jiangxi Phoenix
Cinda China Constr. $45.06 Beijing Cement
Bank and 5 other Plant
Huarong Industrial & $49.17 Ernest & Young
Commercial Bank helps to sell bad
of China loans to foreigners
Source: 11/8/99 and 2/21/01 WSJ
Huarong Asset Management has cleared up 15.06 billion yuan of non-performance as of July 2001. There were to debts sold to foreigners (road show in Europe and US) (5/10/01 FT). Debts are convertible into equity. The asset recovery rate was 31.7% while the Finance Ministry’s standard is 30%.
A total of 16.6 billion yuan in loans were up for auction by Huarong. The consortium agreed to buy four of the five pools of assets (45% being loans collateralised by property and the remainder unsecured (11/30/01 SCMP). The Morgan Stanley-led consortium-- Lehman Brothers, Salomon Smith Barney and Chinese investors Zhongjin Fengde and KTH Capital Management, agreed to buy a 10.8 billion yuan (about HK$10.11 billion) portfolio of bad loans from Huarong.
It is aiming to resolve 407.7 billion yuan.
$170 million loans were transferred into 4 AMCs
30cents per dollar debt sale will be considered a success.
Bank of China reports a higher-than- previously-estimated figure. The bad debt ratio is 28% of its assets ($414 billion)- FT 5/14/01
Resistance to foreign Banks after WTO
Foreign banks must have US$72.3 m in operating capital to conduct full services (higher than expectation)
Only open a new branch a year
Pricing out the foreign banks
Offering loans with low interest rate (even below LIBOR), e.g. BP syndicated loans
Direct lending by Chinese banks to foreign firms without using standby letter of credit from a foreign bank if the firm fails (a practice required by foreign banks)
Central Bank requires financial institutions to maintain 60% of registered capital in local currency and demonstrate “a need” for an office. The rule force banks to disperse capital to individual branches rather than concentrating it at headquarters, boosting operating costs
• China’s 80 financial local institutions have announced plans to complete a national bank card network (costing $200 m) by 2005 to combat increased foreign bank competition. It aims to reach 40 cities. HSBC, Citbank and Bank of East Asia have given approval to offer foreign currency services to Chinese citizens in Beijing and Shanghai. Note: Ericsson incident– The Nanjing-based Ericsson joint venture (Swedish electronics company) reported to dump its Chinese banks in favor of Citbank because they cannot offer services similar to the US competitor. (3/28/02 FT)
Counter Strategies by foreign Banks
HSBC bought 8% stake in the Bank of Shanghai in 2001; International finance corporation (private arm of World bank) bought stakes in Pudong Development Bank and the Nanjing city Commercial Bank.
Investment in small Chinese banks allows up to 25% (which helps smaller Chinese banks for foreign capital).
Four big banks are expected to lose 1/3 of their most qualified staff to foreign rivals, which offer better pay, bonuses and training opportunities.
Foreign banks now has 5% foreign deposits, 20% foreign loans, and 40% export settlements. They target the big customers for the big 4 banks which derive their 60% profits form these 10% clients. The services include personal finance, credit cards, internet and telephone banking and consumer credit.
Big four banks plan to issue up to $48 billion bond sale to retail investors to boost the banks’ capital adequacy requirement of 8% by the end of 2002.
Current corporate bond market is about rmb 12 billion.
In 1998, ministry o finance issued Rmb 270 billion to re-capitalize the banks.
Other Financial Institutions (non-bank financial institutions)
International Trust and Investment Corporations
Rural Credit Cooperatives
Urban Credit Cooperatives
Financial institutions (continued)
All these financial institutions under the oversight of the People’s Bank of China
comprise 10% of the financial intermediation
finance the non-state sector
Centrally controlled credit plan does not extend to these institutions, thus moral hazard problem exists because controlling organizations use them to evade regulation and supervision
( International ) Trust and Investment Corporations (ITICS )
More than 200
Designed to promote investment in and from China
Power broader than banks
Make foreign exchange guarantees
raising funds via
deposits (maturity > 1 year)
make S/T and L/T loans (infrastructure projects)
borrow from foreign banks
China International Trust and Investment Corporation (CITIC) -- oldest
Guangdong ITTIC (GITIC) failed in 1998
second largest trust corporation
more than $4.7 billion debts, a large portion held by overseas creditors
June 1998, closure of Venturetech Investment Corporation
Leading state-owned conglomerate
plans to group its expanding financial services under one holding company, creating a financial services “supermarket”, which may be listed in Hong Kong
New structure (similar to U.S. Citigroup)
securities broking and leasing
Citic Pacific (focus on infrastructure finance)
Citi Industrial Bank - commercial banking
Citi Securities - brokerage firm
Wholesale Shutdown of Trust Firms
Government plans to close down more than half of trust and investment companies in 2000
invest in risky projects (real estate) while paying sky-high interest rates
Mergers and closures
No. of trust is near 400 (in 1994)
no. of trust is about 230 (in 1999)
At least 50 years in history
support local economic development
enhance daily lives of communities
collectively owned and have independent accounting and operating performance
business- receive deposits/give credit, execute settlement and remittance transactions for private industry
provide funds to small or medium size enterprises
Two problems with cooperatives
free riding and collusion
non-borrowers and borrow may collude for not paying (or settle) the loans
Rural Credit Cooperatives
Exists in every rural township in China
By September 1998, more than 50,000 rural credit cooperatives
a quarter of million village credit stations
Urban Credit Cooperatives (UCC)
Gain popularity in 1990
End 1998, 3200 UCC
80% of credit given to private enterprise of SMEs
Central bank has developed strategies to merge UCC with urban cooperative banks
1997, The Unified Pension System Reform Law was set up to enforce a mandatory pension programs for part of the population
Not yet allowed pension funds to invest in securities market
The only country in Far East not have a private fund cover.
Shenzhen Investment Fund Management - first domestic fund manager in China, set up in 1992
for the purpose of fund launching, management and investment
Investment choices are bonds and publicly issued stocks
Over 150 investment companies
focus on infrastructure and high-tech industries
China National Investment Association (CNIA), a quasi-governmental investment organization, has 63 of these investment companies
State Investment Co. (continued)
Six new investment companies in 1988
allocate budgetary funds to companies
China National Energy Investment Corporation
China National Transportation and Communications
China National Raw Materials
China National Machinery, Electronics, Light Industry and Textile Investment Corporation
China National Agricultural Investment Corporation
China National Forestry Investment Corporation
Others financial institutions
Finance companies tend to be established by commercial conglomerates
Leasing companies , first introduced in early 1980s
leases provided a means to obtain foreign capitals
1979, The People’s Insurance Company of China (PICC), state-owned, monopolistic, offer insurance products
Two subsidiaries (over 70% of market share):
China Insurance Company
Tai Ping Insurance Company
Other: China Life Insurance
52 insurers in 2001 ( vs. one in 1980).
Insurance assets: 400 billion yuan in 2001.
Hard sell for life insurance in China; however, An insurance market premium income was US$15bn in 1998
China Insurance Regulatory Commission (CIRC), an industry watchdog, launched a clean-up campaign in 1998, had ended most violations of its rules by insurance agents and brokers.
Sedgwick, the UK insurance brokerage, was forced to suspend operations for three months for "serious violations of China's insurance laws and regulations", while Jardine Insurance Brokers was ordered to close its Beijing representative office
China will open more cities to foreign insurance companies and issue more licenses to overseas ventures.
Currently, foreign companies are permitted to do business only in Shanghai and Guangzhou.
Insurance related to Bank:
Bank of China sets up an insurance company in Shenzhen-- a strong indication that Beijing’s regulatory demarcation between banks, insurance companies, and brokerages may be crumble.
Zhongyin Group Insurance Company is the first to be set up by a bank. It is a registered as an insurance company in HK (7/19/01 FT)
ICBC (Asia) acquired equity stake in Tai Ping insurer that recently won a licence to do business across China
Earlier, premiums are invested in bank deposits and T-bonds (whose yields are below what the insurance companies agreed to most customers)
Starting November 1999, CIRC permits stock market investments by insurance companies;
About 4 % of insurance company’s assets are in now the stock markets.
1992, US-based American International Group (AIG) opened a branch in Shanghai. AIG is the only foreign insurance company in Chain allowed 100 % ownership of its life insurance operations.
CIRC may ask the AIG to sell 50 % of its current life-insurance operation and form a joint venture with a local partner to expand in the future. Those two moves would bring he U.S. insurer into compliance China’s insurance regulations and WTO.
Huatai Insurance will become the first insurance company to list on exchange. Huatai would sell less than 25 per cent of its shares (about HK$1.2 billion) to foreign firms (9/26/01).
It could take one year for the property life insurer to complete pre-listing preparations before getting approval from the CSRC. Beijing has been pushing mainland insurance companies to list and raise funds to speed up restructuring for its WTO entry.
Other steps would include selling a stake to foreign firms and setting up a joint-venture life insurance firm.
China Everbright International Trust and Investment Corporation (CEITIC)
take deposits and loans in Chinese and foreign currency
Chinese Stock market
Stock market starts at 1990
Shanghai and Shenzhen Stock Exchanges
capitalization: 50 % of GDP
Most listed companies are SOEs; some are private firms
Shanghai Zhonglu Industrial (take over 54% of state-owned Forever Bicycle) under “particular transfer” (PT), which requires a long time before enabling rights offers.
Sanlian Group of Shandong took control of Zhengzhou Baiwen
China intends to slash brokers’ commission on stock-trading to 0.2 per cent of the transaction from 0.35 per cent to cut costs and lift turnover
A shares pay brokers a 0.35 per cent and 0.4 per cent to the government as stamp duty. B shares -- 0.81 per cent
South Korea - 0.09 per cent to 0.23 pr cent
First Open-End Fund
Huaan Fund Management Co sets up the first open-end fund with the assistance of JP Morgan.
Set up with $600 million in initial capital
Sold to Chinese individuals
to launch in September, 2001
sold through Bank of Communication outlets
called Innovation Fund
minimum/max purchases: $1,207/$36,231
An open end fund fluctuates in price daily based on capital flows and the underlying value of shared held in fund. Easier-to-mange closed end funds issue a fixed number of shares and then trade like a stock
Once China enters the WTO, foreign investment banks and asset managers will be allowed to take 33 % stakes in domestic brokerage firms and fund companies.
That figure will rise to 49% three years later
China's first Western-style mutual fund launch was an instant hit September 11, 2001 with domestic investors, who snapped up nearly all its three billion yuan (about HK$2.81 billion) retail subscription allocation, half in the first two hours.
Ignoring rainstorms, risk warnings and 15-month lows in the markets, investors flocked to 139 Bank of Communications outlets in 13 mainland cities to apply for units in the open-ended Huaan Innovation Fund.
The remaining two billion yuan of the five billion yuan fund is to be sold to institutional investors.
China Southern Fund Management is another mainland open-ended funds. China Asset Management signed a technical co-operation agreement last year with British fund-management firm Schroders for assistance in launching the third open-ended fund.
Mainland investors' choices were limited to closed-end funds offered by 14 fund management companies and managing assets worth 70 billion yuan as of late July, 2001.
Foreign-funded Companies listed on Exchanges
The foreign-funded firms may allow to issue stocks but must retain a minimum stake of 10%. It might lose their preferential treatments such as tax benefits if foreign holdings were diluted below 25%
Unilever, The Bank of East Asia, HSBC Holdings, insurer American International Group, French Alcatel (French telecommunications equipment maker) and Eastman Kodak also have an interest such plans
Trade Finance in China
Cash in advance
L/C -- procedure and documentation Bank of China requires its bills officers to comply directly to international code
Since 1980s, private sector financing of infrastructure investments revive
projects -toll road, bridge, dams and hydroelectricity, etc
In recent years, private funding takes the form of project finance
Project finance (continued)
Project -separate company
Major portion of project equity provided by project manager or sponsor
Project company - comprehensive contractual arrangements
High ratio of debt to equity
Project Company government contractors suppliers Investors Project sponsor Lenders customers Parties to Project Financing
Two Categories :
exploit the existing stock of goods
proceeds to service debt and provide a return to investors
examples --mines, oil and gas field
generate flows of business
bridges, tool highways, tunnels, etc
When Project finance Is Right?
Large, complex, and standalone project
parent is sensitive to debt capacity
parent concerns total risk of the project
Parent wants to maintain operating risk over the project
Risks in Project Finance
Resource risk -- equity-holder
Input Risk-- suppliers
Technical Risk--project manager
Timing risk--project manager and owner
Completion risk--lenders, project manager
Operating Risk--lenders, sponsors
Political Risk--government, all parties
Functions of Project Finance
Resolving Principal-agent problems
Non-recourse financing arrangement
A method provides large pool of credit
Mandate initiated by borrower
Lead bank with other banks via placement memorandum
Parties of the Syndication
4 functions: sourcing, structure, sell and service
Other banks participate in the loan process
responsible for collecting payments due and disbursing these payments to the banks
Project Finance in China
Legal framework of project finance
Draft BOT Circular
No government debt guarantee
allow 100% foreign ownership of PRC power projects
Security Law of 1995
Foreign-Related Security Rules
Foreign Exchange Control Regulations of 1996
New BOT Structure
Local government can invite international developers to bid
special purpose project company can be a wholly owned enterprise, equity joint venture or cooperative joint venture
State guarantees the conversion of foreign exchange required for the project in terms of principle, interest and divided
No government guarantees
Zhuhai Highway Co.
In August 1996, Zhuhai Highway Co (Cayman registered subsidiary of Zhuhai municipal government) successfully launched a 2-tranche US 200-million revenue bond
US$85 m, 10-year senior bonds (9.12%)
US$115m, 12-year subordinated bonds (11.5%)
First revenue bond in Asia
First high-yield bond by Chinese entity
Proceeds to finance infrastructure project
Three Gorges Dam Project
The $24 billion project --spanning Yangtze River is on the 2nd phase of construction
financial Package includes state and domestic sponsored funds (80%) and foreign funds (20%)
China three Gorges Project Corporation is considering an International bond issue and listing its IPO on HK stock exchange and NYSE exchange to raise capital