Local Government Finance Vehicles ... Source: IMF ..... 33. Source: China Statistical Yearbook, China Academy of Science ... Impact on Domestic Economic Map.
How China’s Potential Financial Reforms May Shape its Growth and Development Placing Finance in Urban and Regional Development International Geographic Conference Beijing August 22, 2016 Winston Mok 1
“Corporate” debt and Shadow Banking in China “Corporate” Debt
Shadow Banking
% GDP
145-164
> 50
At risk
1.3
2.9
78*
USD trillion (% GDP)
(12)
(25)
Loss Ratio %
60
?
Potential Losses
780
?
7
> 10
USD billion
% GDP Source: IMF, Moody*, FT
2
Is Another Major Recap Due to Address NPL in China’s Banks? % Loan Books
1999 and beyond • PBoC: at least 25% • S&P estimated at much higher • Massive recaps of about RMB 4 trillion (USD 500 billion)
2016 • CBRC: 1.75% (Mar 2016); 2.15% (May 2016) – RMB 2 trillion or USD 300 billion • Including Special Mention Loans: > 6% • International estimates: 7-19%
– RMB 270 billion in 1999 – CLSA: 15-19% – IMF: > 15% – USD 60 billion injection since 2003 – McKinsey: 7% – RMB 1.4 trillion (20% loan book) NPL transferred out in 1999 • Banks trading at 30% discount to NAVs – Additional RMB 780 billion NPL • Recap of at least USD 500 billion transferred out since 2004
needed; perhaps quite higher
Structural reforms needed to address the root causes of NPL Source: Bloomberg, FT, CNBC, ABC, Caixin, CLSA, IMF, McKinsey, Soc Gen, CEPII
3
Key Drivers of Credit Boom “Corporate” Debts and Shadow Banking • Local Government Finance Vehicles • Regional/Local SOEs (Zombie SOEs) • Real estate companies
Source: IMF, FT
Driven by local governments
4
China’s Debt Challenges “Corporate” Debts and Shadow Banking • Local Government Finance Vehicles • Regional/Local SOEs (Zombie SOEs)
• China’s debts mushroomed since 2007 • Debt/GDP estimated at 225 to 280% • Unfunded social security will push the ratio higher
• Real estate companies Will drag down long term growth Source: IMF, Moody, McKinsey, Wharton, CASS, Economist, FT, WSJ
5
Where are the real problems?
Local governments
NPL
Banks
Source: IMF
SOEs
55% of corporate debts 22% of economic output
6
Summary Arguments • China’s banks may need another major round of recapitalization. • It is just the latest manifestation of distorted capital allocation in China's political-economic-financial system which is increasingly incompatible with its next stage of economic development. – Market playing the decisive role in the economy – Innovation driven growth
• To fix the problem, broader structural changes may be needed beyond financial reforms – importantly, transforming the roles of China's local governments. • If a more market oriented financial system may be put in place, it will accelerate the continued rises of Yangtze River Delta and Pearl River Delta as world class mega regions. 7
Risks of Local Government Debts Wednesday, July 31, 2013 A11
Crash alert
Local Government Finance Vehicles Winston Mok says Beijing should do more than audit local government debt – it should set up an agency to restructure debt, inject funding, and even allow some local administrations to go bankrupt
Source: SCMP
8
Why Financial Reforms Important Steel Glut
Zhejiang Private Enterprises
• Over investments
• Cross guarantees among unrelated companies
• Over expansions • Over capacities
• Bad companies given too much credits Source: Winston Mok’s OpEds at SCMP
• Contagion risks • Good companies pulled down by bad ones • Good companies lack access to financing
9
Capital Misallocation Inefficient Sectors
Capital Dynamic Sectors
• • • •
Bad zombie SOEs Local government debts Over-investments Over-expansions
• Good private companies starved of capital • Some even pulled down by contagion risks • Impeding future growth 10
Ramifications • Low capital productivity
• Short term growth wasteful
• Asset bumbles
• Long term growth impeded
• Middle income trap
• Inconsistent with
• Looming debt crisis
– Market playing the decisive role in the economy – Innovation driven growth
Slowing and Unsustainable growth 11
The ends of financial reforms • Reduce wastages
Promote effective growth
• Lower financial risks
• Long term
• Allocate capital efficiently
• Sustainable
The longer view
• Value creating • Innovation driven
Wednesday, July 22, 2015 A11 12
The Market Playing a Decisive Role in Economy Saturday, November 16, 2013 A15
A fairer fight
13
A New Financial Architecture Needed for a New Era of Growth Bastard Keynesian
Schumpetarian
• State directed financings
Market based allocation
• RMB 4 trillion stimulus
• Market based lending practices
• Over investments • Over capacities • Need for rationalization
• Vibrant equity capital markets • VC/PE • New financings 14
China’s State Dominated Banking System • "Unlike other countries, in China the state still maintains pervasive ownership and control of banks and other financial institutions”
• “China's financial system was still unbalanced, repressed, costly to maintain, and potentially unstable“
• "The state has formal ownership of 65 percent of commercial bank assets and de facto control of 95 percent of these assets”
• “risks stemming from wasteful investment, overindebtedness and a weakly regulated shadow-banking system”
• “Authorities were simultaneously owners, regulators and customers of banks”
Source: World Bank, Redacted chapter: Special Topic: Reform Priorities in China’s Financial Sector
15
Banking System in East Asian Development States although China does not follow East Asian model
“Control of finance the birthplace of state capacity” • East Asian firms relied more on bank loans than equity investments to finance growth • East Asian states realized their objectives through the financial system • The true test of state capacity is how the financial system may be mobilized by the state to coordinate the upgrading of industries Linda Weiss 1994, Government-Business Relations in East Asia: the Changing Basis of State Capacity
16
Financial Market Development Singapore
Hong Kong
UK
US
China
Availability of financing
8
3
7
4
61
Equity Markets
8
2
7
5
44
Loans
4
5
82
14
21
VC
3
9
14
5
16
Soundness of Banks
5
7
63
39
78
Overall
2
3
16
5
54
Source: World Economic Forum, Global Competitiveness Report 2015-16
17
China’s Financial System • Five major banks controlled by the state
Types of Financial Institutions
• SOEs received 75% of low cost bank loans
• Policy banks
• Costs of financing much higher for most private enterprises
• City commercial banks
• Undeveloped bond market • Shadow banking emerged to fill the unmet needs in the formal system
• Big Five state-owned banks • Joint stock banks • Rural cooperatives • New private banks • Range of non-bank financial institutions 18
Dominance of “Big Five”
State-Owned Commercial Banks Financial Assets Percent
Others, 18 Rural, 13 City, 12
Big Five, 38
Joint Stock, 19
Source: http://finance.ifeng.com/a/20160126/14189670_0.shtml
19
Declining Market Share of Big Five Share of Financial Assets in Industry 53
49 40
2005
2010
2014
Source: http://finance.ifeng.com/a/20160126/14189670_0.shtml, http://www.askci.com/freereports/2011-01/2011122163154.html, http://www.cbrc.gov.cn/chinese/home/docView/1669.html
38
2015
< 33
2020
20
China’s Leading Joint Stock Banks Rank Bank
2014 Assets
HQ
RMB Trillion
1
China Merchant Bank
4.7
Shenzhen
2
Industrial Bank
4.4
Fuzhou
3
Pudong Development Bank
4.2
4
China CITIC Bank
4.1
Beijing
5
China Minsheng Bank
4.0
Beijing
6
China Everbright Bank
2.7
Beijing
7
Pingan Bank
2.2
8
Hua Xia Bank
1.9
Source: http://bank.hexun.com/2015-04-29/175412282.html
Regional Focus
Shanghai Yangtze River Delta Yangtze River Delta
Shenzhen Shenzhen Beijing 21
City Commercial Banks in Yangtze River Delta Asset Rank
Bank
2014 Growth Percent
2
Bank of Shanghai
21
3
Bank of Jiangsu
36
4
Bank of Nanjing
32
5
Bank of Ningbo
20
9
Bank of Hangzhou
23
Source: http://field.10jqka.com.cn/20150906/c581566042.shtml 22
China’s Initial Private Banks • Tianjin • Shanghai • Zhejiang • Guangdong
23
China Regional Financial Environment 2013-14
Provincial Level
Municipal Level
1. Shanghai
1. Shenzhen
2. Beijing
2. Shanghai
3. Zhejiang
3. Suzhou
4. Guangdong
4. Hangzhou
5. Jiangsu
5. Guangzhou
Yangtze River Delta
Pearl River Delta
12. Beijing Source: 2013～2014年中国地区金融生态环境评价结果报告
24
Broader Structural Changes • China’s banks may need another major round of recapitalization. • It is just the latest manifestation of distorted capital allocation in China's political-economic-financial system which is increasingly incompatible with its next stage of economic development. – Market playing the decisive role in the economy – Innovation driven growth
• To fix the problem, broader structural changes may be needed beyond financial reforms – importantly, transforming the roles of China's local governments. • If a more market oriented financial system may be put in place, it will accelerate the continued rises of Yangtze River Delta and Pearl River Delta as world class mega regions. 25
Embeddedness of China’s Banking System Decentralized Economic Governance Central-local Fiscal Architecture Banking System
SOEs
Reference: Lin, J., Tao, R. and Liu, M. 2006 ‘Decentralization and local governance in China’s economic transition’, in Pranab Bardhan and Dilip Mookherjee (eds.) Decentralization and local governance in developing countries: a comparative perspective, MIT Press, Cambridge, Mass..
26
Banking Reforms Constrained by
Institutional Environment in China’s Political Economy • Cadre measurement
• Local governments key economic actors
• Central-local fiscal imbalance
• Political objectives of SOEs
• Under-developed social security
• “Coupling” of state-owned banks and SOEs
• Performance based legitimacy of ruling party
• Resources mobilized to generate short term economic growth
• Paramount importance of social stability
• Trapped in treadmill away from efficient long term development
The Embeddedness of China’s Banking System 27
China’s banks as part of complex system Cadre measurement
Local SOEs
Local Governments
Fiscal architecture
Banks
28
Integrated Reform Program Needed Revamp cadre measurement
SOE reforms
Transform roles of local governments
Fiscal reforms
Banking Reforms 29
Continued Rise of Dynamic Regions • China’s banks may need another major round of recapitalization. • It is just the latest manifestation of distorted capital allocation in China's political-economic-financial system which is increasingly incompatible with its next stage of economic development. – Market playing the decisive role in the economy – Innovation driven growth
• To fix the problem, broader structural changes may be needed beyond financial reforms – importantly, transforming the roles of China's local governments. • If a more market oriented financial system may be put in place, it will accelerate the continued rises of Yangtze River Delta and Pearl River Delta as world class mega regions. 30
Continued Ascent of Guangdong, Jiangsu and Zhejiang Rapid Growth of Dynamic Regions Less impeded by banking system • Improved Institutions – Property right protection – Rule of law – Efficient government • Level Playing Field • Private enterprises
• State banks • Joint Stock Banks – – – –
China Merchant Bank Pudong Development Bank China Merchant Bank Pingan Bank
• City Commercial Banks • Private banks • Foreign banks 31
Reordering of China’s Economy 1978 1. Shanghai 2. Jiangsu 3. Liaoning 4. Shandong 5. Guangdong 12. Zhejiang 13. Beijing
Source: China Statistical Handbook
2015 1. Guangdong 2. Jiangsu TVEs 3. Shandong 4. Zhejiang 10. Liaoning 12. Shanghai 13. Beijing
Private Enterprises
SOEs
32
Private sector as a Key Growth Engine in China Guangdong
Jiangsu
Zhejiang
1.1 (11%)
1.06 (10%)
.65 (6%)
1st
2nd
4th
10.3
13.3
11.9
Long term GDP growth 1978 -- 2014
365 (1st)
261 (4th)
325 (2nd)
Private sector economy %
52
54
64
Number of Top 500 Private enterprises
10%
17%
33%
Innovation
2nd
1st
5th
GDP USD trillion GDP Rank Per Capita GDP USD 000
Source: China Statistical Yearbook, China Academy of Science
33
China’s Most Innovative Regions Pearl River Delta 1. Shenzhen 9. Guangzhou
Source: Forbes China
Yangtze River Delta 2. Suzhou 4. Hangzhou 5. Shanghai 6. Wuxi 7. Nanjing 8. Ningbo 10. Changzhou
3. Beijing
34
China’s Strongest Small (County Level) Cities Cities
Province
1
Kunshan
Jiangsu
2
Jiangyin
Jiangsu
3
Changshou
Jiangsu
4
Zhangjiagang
Jiangsu
5
Yiwu
Zhejiang
6
Taichang
Jiangsu
7
QiSi
Zhejiang
8
Haining
Zhejiang
9
Yuyao
Zhejiang
10
Jinjiang
Fujian
Yangtze River Delta
Source: Forbes China 35
China’s Strongest Towns Guangdong
Jiangsu
1 – 10
5
4
11 – 20
3
4
1
2
21 – 30
3
1
2
2
31 – 40
2
3
1
3
41 – 50
1
2
4
3
Top 50
14
14
8
11
More than 90% concentrated in two regions
Zhejiang
Shanghai 1
Two Thirds in Yangtze River Delta
Source: China Small and Medium City Economic Development Council
36
China’s Two Most Dynamic Regions Pearl River Delta
Yangtze River Delta
Mega Cities Cities Counties Towns
37
Diversity of Growth across Regions Growth Multiple 1978 -- 2014 Guangdong
365
Zhejiang
325
Shandong
264
Jiangsu
261
Beijing
196
Liaoning Shanghai
125 86
Source: China Statistical Yearbook
38
Highest Growth (Investment Driven) in Inland Regions (and Tianjin) Recently
GDP Growth Percent
2015
2014
2013
2012
2011
Chongqing
11.0
10.9
12.3
13.6
16.4
Tibet
11.0
10.8
12.5
12.0
12.6
Guizhou
10.7
10.8
12.5
13.6
15.0
Tianjin
9.3
10.0
12.5
13.8
16.4
Xinjiang
8.8
10.0
11.1
12.0
12.0
Source: Netease, http://money.163.com/15/0310/10/AKBE29DI00253B0H.html, http://news.51zjxm.com/bangdan/20130129/27534.html, http://tieba.baidu.com/p/2140300630 http://www.phbang.cn/finance/corporation/152025.html
39
Improving Performance of Strong Provinces Percent of National GDP Growth 2015
2014 123
Jiangsu
118 116
Guangdong
105 116
Zhejiang
103 0
20
40
60
80
100
120
140 40
Impact on Domestic Economic Map Greater Beijing
Wuhan Chengdu Chongqing
Yangtze River Delta
Pearl River Delta 41
Implications on World Map Yangtze River Delta Today
• 20% of China’s economy • A third of exports • At USD 2.3 trillion: World’s 7th largest economy
2025
Among top 5 economies Surpass and displace UK Rival Germany in scale Peer of Boston-DC corridor as a – Below France leading mega region – Above India • Per capita GDP above USD 20,000 • Per capita GDP of USD 15,000 (Kunshan at USD 30,000 today) • • • •
Implications of financial reforms
• Channeling resources to most productive regions • Accelerating their rises in the world stage • Supporting their competitiveness beyond scale
42
Yangtze River Delta 2025
A Germany on China’s East Coast
Similar in Scale
• Twice the population • Half per capita GDP
43
Many of My Pieces “Geographical” Today’s Discussion
You May be Interested in:
• Jan 2016: Yangtze's Dynamism Propelling China's Rise
• May 2015: China's New Silk Road plan should focus on strategic links to Southeast Asia (96)
• May 2016: Transforming the role of the state from activist meddling
• Mar 2015: China's rise jeopardised by declining workforce (90) • Mar 2015: Collaborate, don't compete: how regional China can prosper (59) • Sep 2015: What is China's Economic Model? (43)
https://www.researchgate.net/profile/Winston_Mok 44
Which disciplines will unlock the enigma China’s economy?
Political Science Sociology
Economics
China’s Economy
Business
cv
Sociology Geography 45
