It’s hard to think of anything more badly run than a Chinese bank. Somalia perhaps, or the BBC’s remuneration committee. Certainly, Beijing’s embattled lenders make ours look like paragons of financial rectitude. We may dislike RBS et al for bringing our economy to its knees, but at least we’re not saddled with a cabal of banks inextricably linked to whoever resides in Downing Street.
Let’s start with good old-fashioned service. We may complain about our banks, how they all look the same and bombard us with adverts that would patronise a two-year-old. But at least they pretend to care. China’s banks don’t. Service is dire wherever you go. Internet or mobile banking ranges from poor to non-existent. A few make an effort, notably China Merchants Bank, a mid-range lender from the south of the country. But for most big Chinese high-street names, ‘service’ means an unsmiling clerk with breath that would scrape enamel off a sink.
Next, choice. In theory, the People’s Republic has lots of it. China’s billion workers can place their money with a big player like Industrial & Commercial Bank of China (ICBC), the world’s largest bank by stockmarket valuation, or a city-based institution like Bank of Beijing. Those keen to play fast-and-loose could even park their savings with one of the country’s rural credit co-operatives.
But choice is relative. All banks are essentially the same, given that they have, in the Communist Party of China, the same owner. Wherever you go, the same omnipresent, bland banking brands stare back at you. ICBC has more than 18,000 branches peppering the country. China Construction Bank has 14,000. And as was once claimed about the KGB, it sometimes seems impossible to leave the bank. Chinese workers often have little say over who has charge of their money: that decision is made by their employer.
At a corporate level, things are barely any better. Given that all power in China relates to its proximity to the ruling party, executives covet bank jobs that communicate directly with Beijing. Vital internal positions — head of cash management, say, or head of wholesale banking — have little prestige, and are usually filled by the halt and the lame.
China’s leaders aren’t daft. They want to inject competition into an industry that has evolved little over the past decade. But how? Banks offer the same low rates of interest on deposits, essentially amounting to a tax on savers, because it’s the only cast-iron way to guarantee a steady flow of profits. Without this weird form of financial repression, the rest of China’s lopsided economy, dominated by bloated state-owned enterprises that benefit from cheap loans that are rarely called in, would collapse.
Perhaps the problem is that anyone thinks of these institutions as ‘banks’ at all. After all, they don’t offer savings accounts, wealth management services, or mortgages in the true sense of the word. Few provide crossover products such as insurance. Private banking is nonexistent. A customer is just a customer, however fat his wallet. Chairman Mao would be proud.
One Hong Kong-based analyst describes them as ‘a bit like dogs trying constantly to read their master’s moods’. Anne Stevenson-Yang, founder of independent Beijing consultancy J Capital Research views them as mere ‘money utilities’, spigots that the authorities turn on and off at will. ‘Political leaders basically instruct banks where to send the cash,’ she notes. One can only imagine the sense of envy felt by George Osborne at such a compliant state of affairs.
Nor can private or foreign institutions take up the slack. China only has one purportedly private lender of size, Minsheng Bank, founded in 1996 by a now-deceased pig farmer, and even that is really run by Beijing. HSBC and Standard Chartered are well known here, but foreign lenders control less than 2 per cent of the market, thanks to longstanding efforts to restrict their pace of expansion.
‘It’s difficult for the government to let foreign banks in properly,’ notes Andrew Polk, China economist at the think tank The Conference Board. The mere thought of mainland customers pouring into foreign banks in search of better service fills the authorities with dread. Moreover, these foreign financial devils may start acting outrageously, adds Polk, ‘pricing capital correctly, and lending to companies that use the money wisely’. That would most likely mean extending credit to the private sector rather than Beijing’s pet state-owned enterprises.
China’s banks now faces two great challenges: a slowing economy, and a more profound battle to remain relevant. The first factor is largely out of their hands. Economic growth has slipped alarmingly in recent times. Beijing insists its economy will still grow by around 7.5 per cent this year, but most independent observers put the real figure far lower. Andrew Polk places it closer to 5.5 per cent. That may seem exuberantly healthy to the western world, but Party leaders have long set a base target of 8 per cent, the minimum deemed necessary to stave off social unrest. Yet more startling, China’s economy may actually be smaller than believed. In August Christopher Balding, an associate professor at Peking University, issued a report suggesting output had been ‘significantly overstated’ for years. China’s economy, he concluded, was up to 12 per cent smaller than stated, cutting its real size to around £4.4 trillion.
A slowdown will hit the banking sector hard. China’s lenders are exposed to colossal amounts of debt held by state-owned enterprises and local governments, most of which is regularly rolled over rather than repaid. Too many state firms stay afloat thanks to generous injections of state capital: last year, more than 98 per cent of the companies listed on China’s A-share stock market received state subsidies totalling Rmb55 billion (£5.6 billion), a 17 per cent rise on the previous year.
Even worse lurks within local government financing vehicles, set up in 2009 to channel state capital directly into costly infrastructure and real estate projects. Much of this is now going sour, leaving lenders on the hook. The likely outcome, one that fills party leaders with fear, is a new wave of non-performing bank loans. This already appears to be happening: the national stock of non-performing loans (according to official data) rose to £55 billion at the end of June, the seventh straight quarterly increase.
Then there’s the battle to stay relevant. ICBC may be a vast institution, hoovering up assets around the world — most recently, the London commodities-trading division of South Africa’s Standard Bank, for around £450 million. But size often matters far less than the health of the underlying assets — RBS was after all briefly the world’s largest bank in 2008.
Besides, it’s sometimes hard to work out what ICBC and its ilk actually are. For decades they have existed merely to fulfil a function: generating cash and recycling it back into the maw of the state. Like Peter Pan, they never had to grow up or plan for the future. Thus any challenge to their brittle status quo scares them witless. Take the June decision by China’s central bank to stop them lending quite so much money to shady grey-market investment vehicles. The result, before the People’s Bank of China backed off and restored market calm, was chaos: a cash crunch and a spike in interbank rates as banks stopped lending to each another. China’s own Lehman moment was ‘very clearly a bank run, and proof that China’s banks do not trust each other’, notes Andrew Polk.
Grey or ‘shadow’ finance constitutes another direct threat to their wellbeing, though here, banks are inadvertent accomplices in their own demise. This may well be the fastest growing segment of the Chinese economy. JPMorgan estimates the largely unregulated industry to be worth £3.7 trillion, or 70 per cent of GDP, and growing at 35 per cent a year.
Banks have come to rely on it heavily, and in very unhealthy ways. Some generate profit from wealth management products created by specialist money managers offering unfeasible rates of return. Others turn to credit-guarantee companies, who help locate private-sector firms, unable to borrow through formal channels and willing to pay higher rates. Contrast that with the level of financial creativity within China’s formal banking sector, which remains an innovation-free zone. Banks are even helping corporations lend directly to each other, guaranteeing capital as it passes fleetingly through their virtual hallways.
The Hong Kong analyst describes China’s lenders as arbiters of their own demise. ‘Why China thinks it’s a good idea to let their corporates lend to each other is beyond me,’ he says, noting that mainland lenders are, quietly but very concertedly, being ‘bypassed and absorbed by the grey market. They need to shape up, and quickly.’
Investors pursuing the greater China story need to understand the weakness of the financial underpinnings. It makes our own embattled lenders look a lot better by comparison. At least they pretend to care. And at least they’re real banks.