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RR RUEHCN RUEHGH
DE RUEHGH #0494/01 3551252
ZNR UUUUU ZZH
R 211252Z DEC 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8442
INFO RUEHBJ/AMEMBASSY BEIJING 3215
RUEHCN/AMCONSUL CHENGDU 2317
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0774
RUEHHK/AMCONSUL HONG KONG 2486
RUEHLO/AMEMBASSY LONDON 0053
RUEHML/AMEMBASSY MANILA 0141
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHFR/AMEMBASSY PARIS 0032
RUEHUL/AMEMBASSY SEOUL 0629
RUEHSH/AMCONSUL SHENYANG 2308
RUEHGP/AMEMBASSY SINGAPORE 0305
RUEHIN/AIT TAIPEI 2107
RUEHKO/AMEMBASSY TOKYO 0840
RUEHGH/AMCONSUL SHANGHAI 9106

UNCLAS SECTION 01 OF 04 SHANGHAI 000494 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
NSC FOR MEDEIROS, LOI, SHRIER 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
MANILA FOR ADB USED 
PARIS FOR US/OECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: FAST CHINESE LOAN GROWTH BUOYS PROVINCIAL BANK'S AMBITIONS 
 
¶1.  (SBU) Summary:  Bank of Jiangsu (BOJS) -- a model for 
government-led reform of China's municipal-level commercial 
banks -- appears to be prospering from the current lending boom, 
and has set its sights on becoming a trans-regional bank. 
Within Jiangsu Province in East China, BOJS is building a 
high-profile borrower base among pillar industries such as steel 
and plate glass, and sees these borrowers poised to seize 
greater market share as the Central Government attempts to scale 
back production overcapacity.  BOJS is tracking non-performing 
loans (NPLs), but will not be able to fully determine if there 
is a rise in its NPL ratio for several years.  End Summary. 
 
========== 
Background 
========== 
 
¶2.  (SBU) EconOff met on November 25 with Bank of Jiangsu Deputy 
President Liu Changji.  BOJS is a one of new breed of regional 
banks Central Government authorities hope will mitigate the 
risks found in single-city commercial banks -- such as 
overdependence on a few local enterprises -- and bolster 
services to small- and medium-size enterprises (SMEs).  By value 
of assets, BOJS is currently the 20th largest bank in China, 
according to a 2009 KPMG study.  Liu said that assets reached 
RMB330 billion (approximately US$48 billion) at the end of the 
third quarter this year. 
 
¶3.  (SBU) Regulators have facilitated the establishment of at 
least a dozen regional banks over the past few years, generally 
by merging several city commercial banks -- themselves the 
successors to the urban credit cooperatives of an earlier era -- 
into a larger province-wide bank.  These are known as regional 
share-holding commercial banks (difangxing gufenzhi shangye 
yinhang).  BOJS is the largest of these banks not yet listed on 
China's stock market -- Shanghai Pudong Development Bank and 
Bank of Beijing are examples of city commercial banks that have 
already listed.  BOJS opened for business in January 2007, 
formed from the merger of the city commercial banks of the 
municipalities of Wuxi, Suzhou, Nantong, Changzhou, Huai'an, 
Xuzhou, Yangzhou, Zhenjiang, Yancheng, and Lianyungang.  The 
Nanjing city commercial bank was not included, because this 
became the separate Bank of Nanjing, which since has been listed. 
 
================================== 
A Local Bank Growing Quickly . . . 
================================== 
 
¶4.  (SBU) Lending by BOJS surged in the first three quarters of 
2009 by 40-50 percent, said Liu.  This compares with average 
loan growth of approximately 27 percent since the bank's 
founding, based on figures from the bank's public accounts.  The 
rapid growth has compelled the bank to replenish its capital by 
at least RMB5.5 billion (approximately US$806 million) to stay 
above the China Banking Regulatory Commission's (CBRC's) 
prudential capital adequacy ratio (CAR) of 10 percent -- once 
with subordinated debt in August 2008 and twice in 2009, 
including a private offering of additional equity in July and 
another subordinated debt offering in October. 
 
¶4.  (SBU) Liu said that BOJS's ability to raise capital 
repeatedly shows the market has faith in the bank's performance. 
 He also put a positive spin on the fast lending growth, 
pointing out that at its founding the bank planned to double the 
size of its assets within three years.  BOJS passed this 
milestone in July, he said, and the bank will reach its 
three-year anniversary in January 2010.  (Comment:  Nonetheless, 
 
SHANGHAI 00000494  002 OF 004 
 
 
Chinese media reported that the bank fell below the CAR standard 
in July this year before it went back to the markets, which 
appeared to raise concerns among regulators and investors over 
how BOJS is managing its growth.  End comment.) 
 
¶5.  (SBU) BOJS is now focusing on growth beyond Jiangsu's 
borders, as one of the first regional banks to be granted a 
trans-regional banking license by the CBRC.  BOJS has two 
branches outside the province, said Liu, one opened in Shanghai 
in January 2008 and the second in Shenzhen in May 2009.  In 
mid-2007, BOJS announced its intention to seek a foreign 
strategic partner, which Chinese banks have traditionally used 
to signal an improvement in corporate governance, risk control, 
and competitiveness prior to a stock market listing. 
 
=========================================== 
. . . Thanks to Ties to the Government . . . 
=========================================== 
 
¶6.  (SBU) BOJS maintains close ties with officials in the 
municipalities that founded the bank, explained Liu, especially 
with the comparatively wealthy Yangtze River delta cities of 
Suzhou, Wuxi, and Nantong.  The background of the three BOJS 
vice presidents and of the board of directors illustrates these 
connections.  Liu himself was formerly the president and party 
secretary of the Nantong City Commercial Bank, as well as having 
served as a vice president of the Nantong Sub-Branch of the 
People's Bank of China (PBOC); the two other BOJS vice 
presidents have the same credentials from Suzhou and Wuxi, 
respectively.  All three also serve on the board of directors. 
Other directors include an official concurrently serving in both 
the Wuxi Finance Bureau and the Wuxi Construction and 
Development Investment Corporation and officials from the Suzhou 
International Development Group Corporation, the Nantong 
Chemical and Light Industry Corporation, and the Lianyungang 
Cotton and Hemp Corporation. 
 
¶7.  (SBU) Liu said the PBOC guided the merger process that 
established BOJS, and that this was financially and 
administratively supported by the Jiangsu provincial 
authorities.  The province has a continuing direct financial 
connection to BOJS:  according to a statement by the bank's 
auditors, almost half of BOJS's start-up capital was injected by 
the Jiangsu International Trust and Investment Corporation 
(JSITIC), and JSITIC continues to hold a board seat.  Other 
board members include the former head of the Jiangsu Land Tax 
Bureau and the former party secretary of the Jiangsu branch of 
the Agricultural Bank of China.  In addition, said Liu, BOJS 
maintains strong ties with local governments because it serves 
all 52 of Jiangsu's counties. 
 
¶8.  (SBU) However, Liu asserted that the large local government 
presence on BOJ's board and among its shareholders did not 
necessarily translate into undue influence over BOJS's lending 
decisions.  Even in a small bank, said Liu, the board is not 
able to interfere too much, due to banks' regulatory 
responsibilities for prudential lending processes; in a large 
bank like BOJS, he continued, shareholders have even less 
control.  The bank interaction with shareholders is limited to 
providing them with a good annual report, said Liu. 
 
==================== 
. . . And Businesses 
==================== 
 
¶9.  (SBU) BOJS is increasing its strategic links with local 
 
SHANGHAI 00000494  003 OF 004 
 
 
businesses, said Liu, and Chinese media in recent months have 
highlighted several deals clinched by BOJS.  In April 2009, the 
bank provided a two-year, RMB3 billion (approximately US$440 
million) line of credit to Jiangsu's Shagang Group Company, 
reportedly China's largest privately held steelmaker.  Liu 
mentioned that Shagang also is one of BOJS's key equity 
stakeholders, implying that Shagang bought into the bank's July 
2009 equity offering.  Similarly, when BOJS opened its Shanghai 
branch, it announced "strategic cooperation agreements" with the 
major property developer Shanghai Greenland Group and Nanjing's 
Yurun Group, China's largest meat supplier.  Local firms also 
play a leading role in management:  Nanjing-based Huatai 
Securities, for instance, holds a seat on the board of directors 
and, according to a leaked report in Chinese media, controls 
five percent of the bank's equity.  Jiangsu Phoenix Publishing 
House also holds a board seat and, according to the same leaked 
report, controls another five percent of equity. 
 
¶9.  (SBU) Liu was not concerned that a Central Government 
crackdown on industries with overcapacity would negatively 
affect BOJS.  It is true, said Liu, that many of BOJS's 
borrowers are in sectors targeted for consolidation, but in the 
coming shakeout "there will only be loser companies, not loser 
industries."  BOJS's borrowers are strongly competitive, he 
asserted, citing Shagang, which he said has high profits and low 
prices internationally, and Yonggang Steel, which he also said 
is very efficient.  (Note:  Shagang and Yonggang are located 
just north of Suzhou and Wuxi.  According to press reports, 
Shagang recently gained control of a significant percentage of 
Yonggang's production capacity.  End note.)  Huarun Plate Glass, 
with a 10 percent market share, is another borrower that will 
survive the crackdown, said Liu. 
 
¶10.  (SBU) Forty to fifty percent of BOJS's equity is currently 
held by private firms, Liu asserted.  Chinese media reported in 
August 2009 that the equity issued by BOJS to bolster its 
capital adequacy was targeted at private firms, and noted that, 
prior to the share issue, 30 percent of BOJS's equity was held 
by private firms.  (Comment:  Liu did not specify how a firm is 
determined to be private; in China this term frequently covers 
spin-offs of former state-owned enterprises and nominally 
private firms that, nevertheless, have deep ties to local 
governments.  End comment.)  Liu said that 29 percent of BOJ's 
lending goes to small- and medium-size enterprises, which 
typically are privately owned. 
 
=========================== 
NPL Risks May Be Increasing 
=========================== 
 
¶11.  (SBU) Liu reported that BOJS bad loans currently account 
for 1.4 percent of BOJS's lending portfolio, but said he could 
not be sure if this would trend higher following 2009's lending 
surge.  It will be difficult to know which loans are 
non-performing for several years, Liu explained:  if a loan has 
not gone bad in three years, it's a good sign; if it is still 
being repaid on time after five years, it will probably be okay; 
however, only after eight years will it be clear if a loan will 
perform as anticipated.  To some extent, BOJS's larger size 
helps provide greater resources to withstand losses from risky 
lending by the city commercial banks that merged to form BOJS, 
Liu asserted.  Liu said that BOJS treats local government debt 
as high quality, since in ten years he has not seen a local 
government default. 
 
¶12. (SBU) Information from BOJS's auditor statements suggests 
 
SHANGHAI 00000494  004 OF 004 
 
 
that the NPL problem could be partially obscured at present. 
BOJS reports its loan quality according to the CBRC's five-part 
categorization: normal loans, loans under observation, sub-prime 
loans, doubtful loans, and NPLs.  At the time it was founded, 
BOJS could claim a two percent NPL ratio, according to an 
auditor's report.  That said, based on EconOff's calculations, 
BOJS 's losses from NPLs are more likely seven percent and 
perhaps as high as 25 percent.  (Comment:  Since Liu appeared to 
be citing only most restrictive definition of NPLs, current 
probable losses for BOJS are almost certainly also mounting. 
End comment.) 
 
¶13.  (SBU) The accelerating pace of BOJS's lending in the third 
quarter raise further concerns about the bank's NPLs:  BOJS 
reported lending growth of 37.5 percent in the first half, which 
then accelerated to 40-50 percent rate for the first three 
quarters.  Liu admitted that BOJS was currently focused on 
slowing the growth rate of lending through the end of the year. 
In late October, CBRC Chairman Liu Mingkang reportedly called in 
chairpersons of city commercial banks with lending growth above 
40 percent to warn against rapid balance sheet expansion.  CBRC 
Chairman Liu at the same time publicly warned that city 
commercial banks should "not strive for speed, not strive for 
scale, and not strive for ranking." 
 
======= 
Comment 
======= 
 
¶14.  (SBU) In many ways, BOJS shows how a financial institution 
in this intermediate market niche between the five major Chinese 
state-owned commercial banks and the smaller city commercial 
banks can survive and even thrive.  However, the BOJS model for 
Chinese banking reform may be simply enlarging the scale of 
excessive lending to local enterprises that led to the problems 
in China's city commercial banks in the first place.   BOJS 
Deputy President Liu clearly emphasized the connections that 
BOJS is building with Jiangsu's favored pillar industries, 
appearing confident that Jiangsu firms will win market share 
despite central edicts to cut back overcapacity.  He thereby 
sidestepped the bigger question of what China -- and the world 
-- will do as bankers like Liu in each province finance the 
expansion of manufacturing capacity so that their borrowers 
become "too big to fail." 
 
¶15.  (SBU) Some limits on the BOJS model are also apparent.  On 
the one hand, Central Government regulators are more cautious 
about new NPL risks building up.  BOJS's expansion is also 
limited by fallout from the global financial crisis, as foreign 
financial institutions have a decreased appetite for investment 
abroad and BOJS has not yet linked up with a foreign strategic 
partner.  In addition, the slow pace of initial public offerings 
on the Shanghai Stock Exchange means BOJS could miss its target 
of going public within three years.  Not being able to access 
this additional capital and managerial expertise will probably 
set back BOJS's further expansion plans once the current lending 
boom ends. 
BEEDE