Chinese Finance Comes of Age

LONDON – The Chinese financial system’s evolution in recent years has been extraordinary. I have observed its transformation as a member of the International Advisory Council of the China Banking Regulatory Commission (CBRC).

Back in 2002, all of China’s major banks were awash in non-performing loans (NPLs), which in some cases amounted to more than 10% of the total balance sheet. None of the major banks met even the Basel 1 standards for capital adequacy. Few financiers in London or New York could have named any bank other than Bank of China, which was often wrongly thought to be the central bank. And to suggest that the United States Federal Reserve, or the United Kingdom’s Financial Services Authority, might have anything to learn from China’s financial authorities would have been thought absurd.

Less than a decade later, much has changed. The old NPL problem was resolved, primarily by establishing asset-management companies to take over doubtful assets, and injecting new capital into the commercial banks. Now, reported NPLs amount to little more than 1% of assets. Foreign partners have been brought in to transfer skills, and minority shareholdings have been floated. Current valuations put four Chinese banks in the global top ten by market capitalization. They are now expanding overseas, fortified by their strong capital backing.

Of course, challenges remain. Even in China there is no magic potion that can revive a loan to a defunct exporter. And China’s big banks have lent large sums, willingly or otherwise, to local governments for infrastructure projects – many of them of dubious economic value. There is an ever-present risk that the property market might one day collapse, though banks would emerge in better shape than have banks in the US and the UK, because much speculative investment has been funded with cash, or with only modest leverage.