By Wang Yanhang Source: Global Times Published: 2015-12-1
Systemic risk not an issue as domestic economic fundamentals still strong
An article published recently on the website of the Financial Times suggested that the likelihood of a local banking crisis in China has increased due to a concentration of risks in some regions.
The article, written by Andrew Collier, managing director of Hong Kong-based research institute Orient Capital Research, offers some reasons for this argument.
The market share of large banks shrinks when local banks gain ground. But since these local banks have few branches nationwide, it is difficult for them to spread risk geographically and thus they are at greater risk of closure.
For instance, in Northeast China`s Liaoning Province, the market share of State-owned banks has fallen to 33 percent from 41 percent, while the share of city commercial banks rises to 26 percent from 11 percent.
In Jinzhou, a city in the province, Bank of Jinzhou, a local city commercial lender, has a market share of 62.6 percent, with State-owned banks having a market share of 19.4 percent. The article said that residents in Jinzhou are putting all their eggs in one basket by relying so heavily on Bank of Jinzhou.
But I think the argument is misleading. The author includes the assets of Bank of Jinzhou outside Jinzhou in calculating the market share of the bank in the local area. According to the bank`s annual report, at the end of 2014 it had 11 branches all over the country. The bank`s loans and advances to customers outside Jinzhou accounted for 40.7 percent of the bank`s total loans and advances to customers, while deposits outside Jinzhou took up 55.8 percent.
Therefore, the assets of the bank in Jinzhou should not be as high as 62.6 percent after excluding the assets held by the bank beyond the city.
And if the 62.6 percent figure is false, the argument about residents in Jinzhou putting their eggs in one basket is also unfounded.
Bank of Jinzhou is planning an IPO in Hong Kong, and is set to raise $794 million from its upcoming offering. So far, not many city commercial banks in the mainland are qualified for overseas listings, but those that are qualified are excellent in many respects.
However, whenever Chinese banks seek to get listed overseas, there are always comments questioning their status, and some doomsayers even take the opportunity to spread gloom about China.
Of course there are some struggling city commercial banks in China. We are willing to accept any objective assessment of Chinese banks, but at the same time, unfair comments should be rejected. Regarding the argument against Bank of Jinzhou and the possibility of systemic risk in the Chinese banking sector, I don`t think these points are well-founded.
For those who pay attention to the Chinese banking industry, what they need to know is that China`s economic fundamentals, which have a profound influence on the development of the country`s banking sector, have not changed.
First, China has maintained rapid and stable development and its economy is still operating within a reasonable range.
Second, China`s development is still in an important period of strategic opportunities. The economy has great potential to grow and has adequate resilience to deal with possible economic problems.
Third, new engines of economic growth are starting up and China`s economy has a good foundation for sustainable growth.
Fourth, China is continually promoting the adjustment and optimization of the country`s economic structure and the quality and efficiency of its economic growth have generally improved.
So concerns about systemic risks in the Chinese banking sector are utterly necessary.
The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China.