

Currently released so far... 64621 / 251,287
Articles
Brazil
Sri Lanka
United Kingdom
Sweden
00. Editorial
United States
Latin America
Egypt
Jordan
Yemen
Thailand
Browse latest releases
Browse by creation date
Browse by origin
Browse by tag
Browse by classification
Community resources
courage is contagious
Viewing cable 09BEIJING71, Federal Reserve Visit to Beijing: Impact of Financial
If you are new to these pages, please read an introduction on the structure of a cable as well as how to discuss them with others. See also the FAQs
Reference ID | Created | Released | Classification | Origin |
---|---|---|---|---|
09BEIJING71 | 2009-01-11 23:05 | 2011-08-23 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Beijing |
VZCZCXRO4191
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0071/01 0112305
ZNR UUUUU ZZH
P 112305Z JAN 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 1780
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC
UNCLAS SECTION 01 OF 03 BEIJING 000071
SIPDIS
SENSITIVE
STATE FOR EAP/CM AND E/YON
TREASURY FOR OASIA/DOHNER/WINSHIP
TREASURY ALSO FOR IMFP/SOBEL/MOGHTADER
NSC FOR LOI
E.O. 12958: N/A
TAGS: ECON EFIN CH
SUBJECT: Federal Reserve Visit to Beijing: Impact of Financial
Crisis on Chinese Banks
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION.
¶1. (SBU) Summary: In December 11-12 meetings in Beijing, Chinese and
foreign financial sector representatives told San Francisco Federal
Reserve Bank Senior Vice President Steven Hoffman that they expect
ChinaQs cyclical downturn to increase non-performing loan volumes
and reduce bank earnings, but not to the point of a Qseizing upQ of
the financial sector. Debate continues among bankers and officials
on how best to keep prudent banking and banking supervision from
being excessively pro-cyclical, particularly with regard to loans to
the private, small- and medium-sized enterprises responsible for
most of ChinaQs jobs; such companies typically experience more
difficulty
securing financing, particularly when perceived credit risks rise.
Chinese banks appear set to test whether the U.S. Federal Reserve
will allow them to take larger equity stakes in U.S. banks, which
will likely impact perceptions among ChinaQs political leadership
and the public regarding U.S. openness to foreign investment. End
Summary.
¶2. (SBU) During his visit to Beijing, San Francisco FRB Senior Vice
President Steven Hoffman met with PeopleQs Bank of China (PBOC)
Director General for Financial Stability Zhang Xin, Bank of China
General Manager for Overseas Business Management Department Wang
Leejun, Industrial and Commercial Bank of China (ICBC) General
Manager of Corporate Strategy Department Gu Shu, Dragonomics
Managing Editor Tom Miller, Fitch Ratings Senior Director for
Financial Institutions Charlene Chu, Price
Waterhouse Coopers (PWC) Advisory Services Partner Tim Pagett, and
Deloitte-China Consulting Managing Partner Norman Sze. HoffmanQs
conversations focused on the severity of the impact of the global
economic crisis on the Chinese banks and likely policy responses.
In addition, this report also incorporates some points raised in
recent meetings by EmbassyQs Economic and Financial
Minister-Counselors with officials of the Bank of China and ICBC.
Varying Views on Intensity of Economic Downturn . . .
--------------------------------------------- --------
¶3. (SBU) Miller of Dragonomics noted some similarities of the
current crisis to ChinaQs previous Qhard landingsQ in 1989 and 1997.
First, all involved exogenous shocks: Tiananmen (a political
shock), the Asian Financial Crisis, and todayQs global credit
crisis. Second, all involved sharp investment-led cyclical
downturns. And third, all occurred when economic structural
adjustments were adversely impacting certain sectors: the late
1980Qs price liberalization, the mid-1990Qs state-owned enterprise
(SOE) rationalization, and the current attempted shift to more
balanced and harmonious growth (less coastal and resource-intensive
growth).
¶4. (SBU) One difference, however, is that this time the Chinese
Government has been more proactive with fiscal policies. Miller
estimates that 25-50 percent of the RMB four trillion stimulus
package already was budgeted prior to its announcement in November,
with the rest as new spending. About half of the total will go to
general infrastructure and a fourth for post-earthquake
re-construction, both of which should boost the steel and cement
industries that are depressed due to the downturn in real estate
construction. This, Miller believes, will help China maintain a 7-8
percent real GDP growth in 2009. He also predicts steadier and more
balanced growth when the economy recovers, and
speculated that the Chinese GovernmentQs goal is to allow 4 percent
RMB appreciation per year against the U.S. dollar. On unemployment,
Miller noted the widely held belief that unemployment above five
percent would trigger noticeable social unrest, but he conceded that
the quality of Chinese unemployment and under-employment data
remains poor.
¶5. (SBU) FitchQs Chu is less optimistic. She believes economic
growth will deteriorate further before improving, especially in the
southern coastal provinces. SMEs will be severely affected. The
current, but not yet published, Fitch forecast for Chinese real GDP
growth in 2009 is 6.5 percent, which Chu expects this to be revised
down, as the impact of the fiscal stimulus on growth would be
limited. In addition, by targeting
capital-intensive rather than labor-intensive activities, the
stimulus will have only limited impact on unemployment and would
exacerbate macroeconomic imbalances.
. . . and the Impact on Chinese Banks
-------------------------------------
¶6. (SBU) According to BOC representatives, their bank is involved in
two key government initiatives for the banking sector. First,
commercial banks will be allowed to provide bridge loans for mergers
BEIJING 00000071 002 OF 003
and acquisitions, although this change appears mainly geared towards
domestic rather than overseas activity. Second, the China Banking
Regulatory Commission (CBRC) is encouraging banks to increase
lending to SMEs,
which tend to be hit hard during cyclical downturns (in part due to
inability to access credit) but which also offer higher lending
margins. While the BOC has not set specific targets for SME
lending, it will establish special SME credit officers in its
branches and also has adopted a SME loan evaluation model from
Temasek, one of its foreign strategic partners.
¶7. (SBU) Despite the cyclical downturn, BOC officials remain
confident that deterioration of BOCQs major asset classes will be
limited. Mortgage lending is mostly to first-time home buyers, for
whom NPL ratios traditionally have been low. BOC has strict
guidelines on lending for second homes and has limited exposure to
commercial real estate. Education loans are extended only to
students at accredited universities and are backed by Chinese
government guarantees.
¶8. (SBU) With real estate prices and sales declining, Dragonomics
Miller believes the greatest risk facing Chinese banks is their
lending to property developers, but he does not foresee a large rise
in defaults on home mortgages. Overall performance of banks to date
has been good, although problems have grown for coastal branches
with large exposure to
the export sector. However, FitchQs Chu thinks Chinese banks
published accounts overestimate asset quality; she estimates that
revenues for some listed banks could fall by almost half next year
due to a rise in non-performing loans. Given the deteriorating
economic outlook, Chu expects the Chinese banks to remain reluctant
to lend despite the governmentQs moral suasion, although they
ultimately will relent as both the downturn
and government pressure intensify. She also believes the government
will cover all losses for the policy banks (including China
Development Bank, which recently became a commercial bank), but to
mitigate moral hazard the government will ensure that some large
state commercial bank losses are not covered, such as losses on
their riskier businesses (e.g. subordinated loans).
¶9. (SBU) DeloitteQs Sze stressed that two systemic weaknesses for
Chinese banks remain: management information systems and internal
auditing. PWCQs Pagett believes ChinaQs large banks can move
relatively quickly towards meeting Basel II standards, though the
quality of their compliance is unlikely to be as high as banks in
other countries.
International Ambitions
-----------------------
¶10. (SBU) BOC will seek overseas growth through both expansion of
its branch network and mergers-and-acquisitions, according to the
BOC representatives. It wants more branches in the United States,
particularly San Francisco, but remains subject to enforcement
actions by the U.S. Comptroller of the Currency for regulatory
violations at its New York branch.
¶11. (SBU) For ICBC, the decline in U.S. asset prices is not driving
its expansion strategy, as the bank already had decided to expand in
the United States long before the financial crisis, in order to
follow its corporate clients (e.g., in trade finance and settlement
clearing) and service the Chinese immigrant communities (remittances
and financial
services). ICBC believes, however, that organic growth is too slow
so it is considering merger-acquisition opportunities. It currently
is engaged in discussions with East-West Bank of California, in
which ICBC seeks a larger and possibly controlling stake and thus
exemption from the 5 percent ownership cap; in ICBCQs view, a five
percent purchase of
that bank is Qnot worth it.Q In October 2008 ICBC opened its New
York branch, which it wants to expand; while in the United States
for the branch opening, the ICBC Chairman met with Treasury
Secretary Paulson and noted his bankQs intentions to buy a majority
stake in a U.S. bank. ICBC has also informed CBRC of its U.S.
plans.
¶12. (SBU) Hoffman explained that the United States was open to
foreign participation and that 25 percent of bank assets in the U.S.
are held by foreign organizations. Foreign applicants need to meet
the same standards as U.S. banks, including financial and managerial
soundness and Comprehensive Consolidated Supervision (CCS). The CCS
standard for purchasing a controlling stake in a U.S. bank is more
rigorous than for just opening a branch. The ICBC officers said
BEIJING 00000071 003 OF 003
they understand their bank, as a bank holding company that already
has a branch, can only purchase five percent of another bank; banks
that are not deemed by U.S. regulators to be bank holding companies,
such as China Minsheng, can purchase up to 10 percent.
¶13. (U) VP Hoffman did not have an opportunity to review this
report.
RANDT