The top-down structural reform of China’s commercial banks is beginning to show results, but the real economy is still overleveraged, requiring further action, writes Zhang Yanling, Former Executive Vice President, Bank of China
While China has been adjusting its model of economic growth, on the international stage three issues regarding its commercial banks have received broad attention. The first is the cash shortage of June 2013, when both short-term interbank interest rates and the Shanghai interbank offered rate (Shibor) suddenly spiked to record levels. Second, in 2013, 42 state-owned enterprises recorded losses totalling ¥72.6 billion ($11.8 billion), while the 17 biggest banking enterprises in China earned ¥1.23 trillion ($200.7 billion) in profits. The third issue is the large volume of non-performing loans in the commercial banking system; by June 2014, non-performing loans reached ¥694.4 billion ($113.2 billion), having increased for 11 straight quarters.
‘Cash shortage’ warning
China is undertaking economic reforms and deleveraging. Its goal is for assets to circulate in the banking system to flow towards the real economy. This is a top-down structural reform that has only just begun to take effect. During the cash shortage of 2013, the People’s Bank of China refused to inject capital into commercial banks that were short on funds, which caused the overnight interest rate to shoot from 2.1 per cent in early May to above 13.4 per cent on 20 June. The banks were unprepared. Since then, the commercial banks have improved their management of liquidity and risk.
High leverage, local-government debt issues and policy reform
In reality, it is hard to say that the commercial banks have made no mistakes, but these problems are probably inevitable. Responding to government easing policies after the 2008 global financial crisis, commercial banks provided massive lending support for various infrastructure projects through local-government financing vehicles.
Targeted macroeconomic management and deleveraging
Even though these measures are starting to bear fruit, because such a large amount of credit previously flowed into long-term infrastructure investment projects, the problem of overcapacity in numerous industries such as steel, cement, glass, chemicals and coal remains. The real economy is still overleveraged. Commercial banks must coordinate with the People’s Bank of China to solve these existing problems, such as deleveraging overcapacity industries while continuing to proactively contribute to employment, improved quality of life and sustainable economic growth.
The yield on one-year AA-rated urban-construction investment bonds has fallen to 5.3 per cent from a rate of 7.4 per cent in early 2014. The seven-year urban-investment bond yield has fallen to 6.7 per cent from 7.9 per cent. The two-week Shibor has fallen from 5.2 per cent early in 2014 to about 3.5 per cent, indicating that deleveraging measures have started to take effect.
China’s economy under the ‘new normal’
These targeted changes reflect the ‘new normal’ of China’s macroeconomic management efforts. In the medium term, as China takes the initiative to deleverage, it will guide the economy away from a path that once emphasised quantity towards one that emphasises quality.
China is moving from being a manufacturing power to an innovation power. The commercial banks will do their part to provide support and be an active and crucial participant in the reform process, fostering the growth of the real economy.