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FIMA Research Center, University of Hawai'i


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FIMA Research Center, University of Hawai'i

  1. 1. China’s WTO Entry and Its Financial Sector Reforms <ul><li>S. Ghon Rhee </li></ul><ul><li>College of Business Administration </li></ul><ul><li>University of Hawai’i </li></ul>
  2. 2. Size of China’s Economy <ul><li>2000 GDP ($billion) Per Capita GDP ($) </li></ul>USA 9,873 $35,000 Japan 4,750 37,000 China 1,080 850 Korea 457 10,940 Taiwan 309 13,275 Hong Kong 163 23,960 Indonesia 135 640 Thailand 116 2,010* Singapore 92 22,860 Malaysia 90 3,850 Philippines 66 845 * As of 1999
  3. 3. Asian Stock Market Performance <ul><li> 1995 – 1999 2000 2001 1 st Quarter, 2002 </li></ul><ul><li>China 16.10% 60.43% -21.89% -2.23% </li></ul><ul><li>Hong Kong 11.84 -14.39 -20.01 -1.10 </li></ul><ul><li>Indonesia 7.56 -38.50 -5.80 22.89 </li></ul><ul><li>Japan -0.81 -27.19 -23.52 4.57 </li></ul><ul><li>Korea 0.01 -50.92 37.47 29.10 </li></ul><ul><li>Malaysia -3.51 -16.33 2.42 8.62 </li></ul><ul><li>Philippines -5.11 -30.26 -21.84 20.16 </li></ul><ul><li>Singapore 2.06 -22.29 -15.74 11.06 </li></ul><ul><li>Taiwan 3.47 -43.85 17.02 11.10 </li></ul><ul><li>Thailand -18.74 -44.14 12.88 23.07 </li></ul><ul><li>USA 24.56 -6.18 -7.10 3.82 </li></ul>
  4. 4. Expected Changes after WTO Entry <ul><ul><ul><li>1. Banking Sector </li></ul></ul></ul><ul><ul><ul><li>a. Corporate Banking by foreign banks: 2 years </li></ul></ul></ul><ul><ul><ul><li>b. Individual Banking by foreign banks: 5 years </li></ul></ul></ul><ul><ul><ul><li>2. Insurance Sector </li></ul></ul></ul><ul><ul><ul><li>a. Life Insurance: 50% foreign ownership </li></ul></ul></ul><ul><ul><ul><li>b. Property & Casualty Insurance: Majority foreign ownership </li></ul></ul></ul><ul><ul><ul><li>3. Fund-Management Industry </li></ul></ul></ul><ul><ul><ul><li>a. Initially 33% foreign ownership </li></ul></ul></ul><ul><ul><ul><li>b. 49% foreign ownership in 3 years </li></ul></ul></ul><ul><ul><ul><li>4. Subsidies and tax breaks for State-Owned Enterprises (SOEs) must be phased out </li></ul></ul></ul>
  5. 5. Unexpected Surprises after December 11 WTO Entry (1) <ul><ul><ul><li>1. Banking Sector </li></ul></ul></ul><ul><ul><ul><li>a. Foreign banks are allowed to open one branch per year . </li></ul></ul></ul><ul><ul><ul><li>Agricultural Bank of China: 50,000 branches </li></ul></ul></ul><ul><ul><ul><li>Industrial and Commerce Bank of China: 44,000 branches </li></ul></ul></ul><ul><ul><ul><li>Construction Bank: 23,000 branches </li></ul></ul></ul><ul><ul><ul><li>Bank of China: 13,000 branches </li></ul></ul></ul><ul><ul><ul><li>b. Foreign bank branches’ loan guarantee income is shrinking fast because of local competition from Chinese banks </li></ul></ul></ul><ul><ul><ul><li>c. Return on Assets earned by foreign bank branches is only 0.03%. </li></ul></ul></ul><ul><ul><ul><li>d. Still undefined, but equity capital requirement for foreign banks may be prohibitively high. </li></ul></ul></ul>
  6. 6. Unexpected Surprises after December 11 WTO Entry (2) <ul><ul><ul><li>2. Insurance Sector </li></ul></ul></ul><ul><ul><ul><li>a. New insurance licenses granted before December 11, 2001: </li></ul></ul></ul><ul><ul><ul><li>9 European insurers </li></ul></ul></ul><ul><ul><ul><li>2 US insurers </li></ul></ul></ul><ul><ul><ul><li>b. Government approval on each licensee’s insurance business plan…. may take more than a year. </li></ul></ul></ul><ul><ul><ul><li>c. The above insurance business plan needs local insurance company as a partner….. Negotiations with potential local partners may be lengthy and prolonged process. </li></ul></ul></ul><ul><ul><ul><li>d. Purchase of a local partner’s equity share…. will be prohibitively expensive. </li></ul></ul></ul><ul><ul><ul><li>e. Unresolved Issue : American International Group (AIG) has a wholly owned subsidiary in China. New licensees want an “equal treatment”… WTO arbitration may take years. </li></ul></ul></ul>
  7. 7. Unexpected Surprises after December 11 WTO Entry (3) <ul><ul><ul><li>3. Fund-Management Industry </li></ul></ul></ul><ul><ul><ul><li>Foreign fund management companies have two ways of establishing a joint venture: </li></ul></ul></ul><ul><ul><ul><li>(i) Buy a 33% stake in an existing domestic fund management company or </li></ul></ul></ul><ul><ul><ul><li>(ii) create a joint venture with an existing domestic securities company company. </li></ul></ul></ul><ul><ul><ul><li>BUT, 15 domestic companies already have foreign partners. </li></ul></ul></ul><ul><ul><ul><li>Government approval on the creation of a joint venture with a local securities company may take years. </li></ul></ul></ul><ul><ul><ul><li>This means that a 33% stake in a domestic fund management company will carry a huge premium….. too expensive to buy! </li></ul></ul></ul><ul><ul><ul><li>I </li></ul></ul></ul>
  8. 8. Weak Links in Chinese Economy <ul><ul><ul><li>Chinese government has all the incentives to create entry barriers for foreign firms </li></ul></ul></ul><ul><ul><ul><li>Why? </li></ul></ul></ul><ul><ul><ul><li>Government officials are keenly aware of weak links in its economy </li></ul></ul></ul><ul><ul><ul><li>1. Ailing State-Banking Sector </li></ul></ul></ul><ul><ul><ul><li>2. Struggling State-Owned Enterprises </li></ul></ul></ul><ul><ul><ul><li>3. Weaknesses in Capital Markets </li></ul></ul></ul>
  9. 9. Ailing State-Banking Sector (1) <ul><ul><ul><li>Current Status </li></ul></ul></ul><ul><ul><ul><li>a. Big 4 state banks hold 75% of banking assets and 60% of bank deposits </li></ul></ul></ul><ul><ul><ul><li> Agricultural Bank of China </li></ul></ul></ul><ul><ul><ul><li> Bank of China </li></ul></ul></ul><ul><ul><ul><li> Construction Bank of China </li></ul></ul></ul><ul><ul><ul><li> Industrial and Commerce Bank of China </li></ul></ul></ul><ul><ul><ul><li>b. Non-Performing Loan Ratio </li></ul></ul></ul><ul><ul><ul><li>Official Statistics: 25.37% </li></ul></ul></ul><ul><ul><ul><li>Unofficial Estimates: 50% of total loans </li></ul></ul></ul><ul><ul><ul><li>Unofficial Estimate of NPLs: $350 billion </li></ul></ul></ul><ul><ul><ul><li>($169 billion of NPLs transferred to four Asset Management Companies in 1998) </li></ul></ul></ul>
  10. 10. Ailing State-Banking Sector (2) <ul><ul><ul><li>Current Status </li></ul></ul></ul><ul><ul><ul><li>c. Poor Profitability: ROA=0.19% </li></ul></ul></ul><ul><ul><ul><li>i. Interest receivable treated as income until loans are declared default </li></ul></ul></ul><ul><ul><ul><li>ii. Loan-loss provision is subject to 1% of outstanding loan regardless of loan quality </li></ul></ul></ul><ul><ul><ul><li>d. AMCs are a viable solution in China? i. Virtually illiquid markets for real assets </li></ul></ul></ul><ul><ul><ul><li>i. How can you sell SOEs? </li></ul></ul></ul><ul><ul><ul><li>ii. Approximately 60% of new loans (extended after NPLs were transferred to AMCs) still go to cash- strapped SOEs in the form of working capital </li></ul></ul></ul><ul><ul><ul><li>iii. No legal framework is in place to facilitate sale of AMC assets to foreign investors </li></ul></ul></ul>
  11. 11. SOE Sector Problems (1) <ul><ul><ul><li>Snap Shot of SOE Sector </li></ul></ul></ul><ul><ul><ul><li>a. 60% of industrial fixed assets </li></ul></ul></ul><ul><ul><ul><li>29% of industrial output </li></ul></ul></ul><ul><ul><ul><li>b. Employs 55% of urban workers </li></ul></ul></ul><ul><ul><ul><li>b. Average capacity utilization: </li></ul></ul></ul><ul><ul><ul><li>Below 60% </li></ul></ul></ul><ul><ul><ul><li>TV: 46.0% Telephone: 51.4% </li></ul></ul></ul><ul><ul><ul><li>VCR: 40.3% Air Con: 33.5% </li></ul></ul></ul>
  12. 12. SOE Sector Problems (2) <ul><ul><ul><li>c. Redundant Workers: 15 million or 10-15% of SOE work force </li></ul></ul></ul><ul><ul><ul><li>d. Average debt ratio = 65 - 70% </li></ul></ul></ul><ul><ul><ul><li>e. 1 out of 4 SOEs is money-losing </li></ul></ul></ul><ul><ul><ul><li>f. Plan to create 30-50 giant SOEs to compete with foreign multinational companies: </li></ul></ul></ul><ul><ul><ul><li>Feasibility? </li></ul></ul></ul><ul><ul><ul><li>Another series of handouts to failing SOEs? </li></ul></ul></ul>
  13. 13. Weaknesses in Capital Markets (1) <ul><ul><ul><li>a. Stock Market is Too Small </li></ul></ul></ul><ul><ul><ul><li>Total Market Capitalization: $550 billion </li></ul></ul></ul><ul><ul><ul><li>Tradable Shares: $192 billion </li></ul></ul></ul><ul><ul><ul><li>Savings Deposits: $773 billion </li></ul></ul></ul><ul><ul><ul><li>b. Investment Vehicles Are Limited </li></ul></ul></ul><ul><ul><ul><li>Number of Financial Products Owned by </li></ul></ul></ul><ul><ul><ul><li> Individual Investors </li></ul></ul></ul><ul><ul><ul><li>Hong Kong: 6.9 </li></ul></ul></ul><ul><ul><ul><li>Korea: 5.2 </li></ul></ul></ul><ul><ul><ul><li>Taiwan: 4.4 </li></ul></ul></ul><ul><ul><ul><li>China: 3.7 </li></ul></ul></ul><ul><ul><ul><li>Source: McKinsey & Co. </li></ul></ul></ul>
  14. 14. Weaknesses in Capital Markets (2) <ul><ul><ul><li>c. Corporate Bond and Financial Derivatives Markets are Undeveloped </li></ul></ul></ul><ul><ul><ul><li>1. No corporate bond market </li></ul></ul></ul><ul><ul><ul><li>2. Financial derivatives market for bond futures were banned due to excessive speculation since 1995 </li></ul></ul></ul><ul><ul><ul><li>3. Equity index futures and options are needed for risk hedging </li></ul></ul></ul><ul><ul><ul><li>d. Improvement in Corporate Governance and Financial Disclosure is desperately needed. </li></ul></ul></ul>
  15. 15. To Sum Up <ul><li>1. China will open the markets gradually at its own pace. </li></ul><ul><li>2. When the markets open, entry barriers will be high. </li></ul><ul><li>3. Financial sector will see the highest barriers. </li></ul>
  16. 16. Mahalo for You Attention!