FiNETIK – Asia and Latin America – Market News Network

Asia and Latin America News Network focusing on Financial Markets, Energy, Environment, Commodity and Risk, Trading and Data Management

Tongling, CRCC to invest $3b in Ecuador copper mine

Tongling Nonferrous Metals Group Holdings Co and China Railway Construction Corp may invest as much as $3 billion in a copper project in Ecuador, as China seeks to control more commodity assets to feed its economy.   

Production at the Corriente Copper Belt may start in 2013, Hu Guobin, vice-president of a venture set up by the two Chinese companies for the project, said in an interview. Annual copper in concentrate output would start at 30,000 tons and double a year later, he said.

Chinese companies spent more than $30 billion last year buying oilfields and mines as two decades of economic growth averaging 10.1 percent made China the world’s biggest metal and energy consumer. Copper prices have doubled in the past five years, driven by demand in the third-largest economy. “The investment will significantly lift Tongling’s copper ore self-sufficiency and investors expect the assets to be injected into the listed unit later,” Heng Kun, an analyst at Essence Securities, said by phone.Tongling Nonferrous Metals Group Co rose 2.4 percent to close at 16.20 yuan at the 3 pm close in Shenzhen. China Railway rose 0.4 percent to HK$10.08 ($1.3) at the 4 pm close in Hong Kong. Tongling, China’s second-biggest copper producer, and China Railway Construction, the nation’s biggest railroad builder, in December agreed to buy Canada’s Corriente Resources Inc for C$679 million ($652 million) for the copper resources. The deal was completed and Corriente was delisted this month, according to a statement on Corriente’s website.

Chinese Demand

“All the ore will be shipped back to China” to meet demand, said Hu, who was nominated to the venture from Anhui- based Tongling. The copper producer will take delivery of half the ore, he said. Production in the long-term may reach 250,000 tons to 300,000 tons a year, Hu said. Tongling produced 44,000 tons of copper concentrate last year.

The rapid expansion of smelting capacity in China, the world’s biggest producer and consumer of copper metal, has increased ore demand and spurred companies to invest overseas. Larger rival Jiangxi Copper Co invested in copper mines in Peru and Afghanistan, and Zijin Mining Group Co is seeking copper and cobalt assets in the Republic of Congo.

The Corriente Copper Belt covers 17 deposits in the four main mining regions of Mirador, Mirador Norte, Panantza and San Carlos, China Railway said in December. Copper resources are about 11.54 million tons, based on initial studies, it said. Corriente was also involved in the exploration and development of gold, silver and molybdenum mines, according to the December statement.

Source: CITIC New Edge, 12.08.2010 Mr. Liang Haisan


Filed under: China, Energy & Environment, Latin America, News, , , , , , , ,

China Index Futures get Regulatory approval

The government on Friday gave the green light for stock index futures, margin trading and short selling in a milestone move that ends the one-way trade in the capital market.

An official with the China Securities Regulatory Commission (CSRC) said on Friday that the State Council has approved stock index futures, short selling and margin trading “in principle”. The regulator said it would take three months to complete preparations for index futures.

The new tools would protect investors against losses and also help them to profit from any declines. Until now, Chinese investors could only profit from gains in equities.  Analysts said the announcements are unlikely to cause any sharp volatility in the A-share market next week as the rumors have already been factored in.  “The market is unlikely to see huge fluctuations next week as the introduction of new financial tools has been discussed for years,” said Zhang Qi, an analyst with Haitong Securities.
Index futures are essentially agreements to buy or sell an index at a preset value on an agreed date. Investors can also borrow money to buy securities or borrow securities to sell under the business of margin trading and short selling.

Zhang said the move would be positive for blue-chips and heavyweight stocks as the contract would be initially based on China’s CSI 300 Index that tracks the 300 biggest shares traded in Shanghai and Shenzhen.

“Index futures are expected to bolster the market value of blue-chips,” he said.  Large listed securities firms such as CITIC Securities and Haitong Securities will also
directly benefit from the new business and could see a surge in their revenues, Zhang said.  Analysts expect the new tools to improve liquidity by attracting more capital into the equity market as the government plans to cut back bank lending to 7.5 trillion yuan ($1.1 trillion) in 2010 from last year’s 9.21 trillion yuan.

China’s securities regulator has been considering the introduction of index futures since 2006 when Shanghai set up the China Financial Futures Exchange to prepare for the running of the new mechanism. The plan had been held up till now along with the proposals for margin trading and short selling.

In 2007, CSRC chairman Shang Fulin said that the infrastructure and regulations needed for index futures and margin trading are in place.  Institutional investors are expected to be the mainstay of the new business as the threshold is high for retail investors who are more vulnerable to potential risks, said analysts.

It is estimated that the trading of stock index futures will take about three months to set up. Investors will need to deposit a minimum of 500,000 yuan in order to open an account to trade in stock index futures.

China will select high-quality brokerages to launch the short selling and margin trading of stocks on a trial basis.

Source: NewEdge, 08.01.2010 by Liang Haisan

Filed under: Asia, China, Exchanges, News, Risk Management, , , , , , , , , , , ,

QDII:Chinese index products face obstacles

Meanwhile, Chinese investors should buy foreign assets, and ETF/index products are the most efficient way to do so, say panellists at a recent conference.

The development of index products has made some progress in China, but still faces key issues, according to panellists at an event this month in Shanghai. They also argued that Chinese investor education must be addressed before the qualified domestic institutional investment (QDII) market will really take off.

The SG China Markets Forum, organised by French bank Société Générale, focused primarily on the QDII, with one panel discussing index product development in China.

That panel comprised: Song Hong Yu, head of research at China Securities Index; Zheng Xu, director in the international cooperation and product development department at Yinhua Fund Management; Zeng Fan Qing, head of product development at Fortune SGAM; Joseph Ho, head of ETF sales and marketing at Société Générale; and Frank Benzimra, director of equity derivatives structuring at SGI Index, part of Société Générale.

The index market has continued to grow, they said, thanks to the high liquidity of indexed products, economies of scale, deepening of product knowledge, and increasing demand for both risk management and an improved legal framework.

However, there remain problems affecting the market’s development, including asset managers’ strategies of seeking higher commissions by selling actively managed funds, said the panellists. The situation is exacerbated — as in Japan and South Korea — by regulations allowing the same securities house to sell active funds and exchange-traded funds (ETFs), the former with a significantly higher profit margin.

Nor do system limitations help matters. The separation of the Shanghai and Shenzhen stock exchanges are slowing the pace of ETF development in China, argued the panelists. And ultimately there is a lack of dedicated market educators — again, as in Japan and South Korea — since industry players are unwilling to take up this role due to the aforementioned conflicts of interest over active/passive fund selling.

As for investing in overseas assets, ETFs/indices are the most efficient and cost-effective way to manage a global portfolio, argued panellists. And despite the strong performance of the Chinese market this year, there are still good reasons for investors to buy foreign assets, including: sharing of growth in global economic developments, diversification, limited local investment tools apart from equity investments, and expensive pricing of shares on Chinese stock exchanges.

So how much Chinese money is likely to flow overseas — and where — under the revised QDII scheme? That was the subject of another panel at the event. The participants were: David Chang, assistant president at GuoTai Asset Management; Dong Bin, head of QDII at Citic Securities; Sandru Lu, a lawyer at Llinks; and Du Jun, head of institutional investment at Fortune SGAM.

The consensus was that there will be a huge increase in product applications under the QDII scheme, which now stands at $90 billion. However, the main issues hindering the market’s growth are insufficient investor education and expertise.

Local investors should not only take a close look at the legal framework of all the investable products when considering overseas assets and should not only focus on returns. More, panellists felt that the Lehman Brothers bankruptcy and aftermath has affected local investors’ understanding of overseas markets, meaning there will be a discrepancy between local and foreign investors’ understanding and execution, even for very simple products.

For overseas markets, it was pointed out, there are more stringent rules and strategy, whereas for the local market there is more flexibility in execution. The panellists felt that a better way to approach this situation is to combine the two approaches.

As for where domestic investors should put their money, participants felt commodities is a promising asset class, due to dollar weakness and the lack of precious metals/resources. They also suggested making some allocation to overseas structured products/derivatives to help achieve a stable return, and for those with a higher risk tolerance making use of statistical/quantitative strategies.

With reference to managing a full global/China portfolio, Citic said it will put 30% in the local market, 30% in overseas markets, 20% in hedge funds and 20% in strategic products. GuoTai will put a large portion in China and India.

Source:, 30.11.2009

Filed under: Asia, China, Exchanges, News, Risk Management, , , , , , , , , , , , ,

Shanghai Stock Exchang International listing Board on track

Positive signals for an international board on the Shanghai Stock Exchange point to a nearing launch. But major obstacles remain.

A growing din within financial circles suggests China’s proposed international board for foreign company stock trading is on the runway and approaching takeoff.

On September 8, Commerce Minister Chen Deming said at an investment conference in Xiamen that China would indeed allow listings by qualified foreign invested companies on mainland exchanges.

The same day, CITIC Securities International Chairman Ted Tokuchi said at a Caijing conference that if the Chinese stock market remains stable, a first draft for board listing rules could be released after China’s national holidays in early October. The news drove the A-share Shanghai Composite Index up 1.7 percent to close the day at 2930 points.

One or two foreign companies are expected to list through the board on the Shanghai exchange early next year, announced Fang Xinghai, director of the municipal Shanghai Financial Office, while describing Shanghai’s effort to build a new trading platform during a London visit in mid-September.

In another positive signal, Caijing learned that the China Securities Regulatory Commission (CSRC) has set up a working group under CSRC Vice Chairman Yao Gang that’s specifically dedicated to the task of building an international board.

At the Shanghai exchange, General Manager Zhang Yujun is in charge of a separate working group preparing for the board’s launch. And it’s been confirmed that the yuan will be the currency for all trades.

Nevertheless, several key issues remain unsettled. Yet to be decided are questions about accounting standards, listing requirements, share sale limits, and rules governing how raised funds can be used.

Indeed, there are plenty of controversies that could affect the launch of the international board, for which an official target startup date has not been announced. At worst, unsettled issues could park the project on the runway.

Longing to List

Tokuchi said up to six foreign companies have shown interest in listing on the Shanghai exchange. These include the banks HSBC and Standard Chartered, and the stock exchange NYSE. “It is very likely that they will list in the next two to three years,” he said.

Responding to a recent rumor that a red chip company would list on the Shanghai market this year, Tokuchi said that listing may be delayed until 2010. But he said the first company to list on the international board probably will be a red chip company.

A source tied to regulators told Caijing that a stable stock market could lead to a speed-up in preparations for red chip stocks now trading in Hong Kong to join the A-share market. Reportedly, these would include China Mobile and CNOOC.

Tokuchi predicted two to three companies, including red chips and foreign invested companies, would list on the Chinese stock market next year. Over the next five to six years, 20 to 30 companies will list. And within 15 years, he said, more than 100 mature companies will have listed on the Shanghai exchange.

According to Tokuchi’s analysis, foreign companies willing to list in Shanghai are mainly multinationals with fairly big stakes in China. Companies such as NYSE and HSBC aim to further integrate China into their global strategy maps.

However, some foreign companies are quite reserved about listing in Shanghai. Key reasons include listing requirements, fund-raising target rules, share price differences and delisting requirements.

Step By Step

The public first heard an official proposal for opening an international board in April 2007, when the Shanghai Stock Exchange released a Market Quality Report suggesting a new way for overseas companies to issue A shares.

CSRC released a draft regulation for a pilot program a month later, allowing overseas red chip companies to list on the A-share exchange. But for various reasons, the red chip A-share return plan was postponed two years.

Two years passed before the State Council confirmed that Shanghai would be promoted as an international center for finance and shipping – a move that brought the idea of an international board back to the table. After that, for the first time, CSRC and Shanghai exchange officials added the international board concept to the government’s working agenda. Last May, exchange chief Zhang publicly called for steadily advancing preparations for the international board.

Tu Guangshao, deputy mayor of Shanghai and former CSRC deputy chairman, later said overseas companies should be given access to the A-share exchange as part of the city’s long-term goal to build an international financial center.

Technical Bumps
Some technical issues, such as what kind of accounting standard should be used, market pricing and whether companies on the international board should be required to invest in China, are still being discussed.

Industry professionals say it’s unrealistic to require companies to comply with certain Chinese bookkeeping rules. “It is too costly for an international company with assets all over the world to comply with Chinese auditing standard,” said Zhu Junwei, general manager of capital markets with UBS Securities.

Changing to Chinese from international accounting could cost a company from US$ 5 million to more than US$ 10 million. “This is not even a one-time charge,” Zhu said. “Every year, a listed company would have to pay auditing fees.”

A senior executive at a securities firm, who asked not to be named, said international board listings should not follow in the footsteps of so-called panda bonds — yuan-denominated bonds issued by foreign companies in China.

Friction was apparent in October 2005 when International Finance Corp. (IFC) issued 1.13 billion yuan in pandas, and the Asia Development Bank used the bonds to raise 1 billion yuan. Both offered the bonds on interbank markets.

Neither issuer would accept a Chinese regulation requiring panda bonds to comply with Chinese accounting standards. After lengthy negotiations, IFC and the bank were exempted from the accounting rule and allowed to follow international credit rating and accounting standards. But they paid a price: Their bond offers were postponed several times by regulators.

Zhang recently told Caijing, “Listed companies on the international board should comply with Chinese regulations.” But he also noted that, as the nation’s corporate and securities laws currently only apply to domestic companies, the legal framework should be restructured for foreign companies that want to list A shares.

Other technical challenges surround IPOs. Lou Gang, a China strategist with Morgan Stanley, said launching an international board would test the current system for launching IPOs.

“With too much intervention by the government, listing access has become an asset,” Lou said, adding that the current review and approval procedure has become an obvious obstacle.

China could learn from its neighbor Japan, which set up an international board in the 1980s. By 1991, up to 131 foreign companies had listed on the Tokyo Stock Exchange.

Later, with the collapse of an asset bubble, many foreign companies delisted. And in April 2004, the Tokyo exchange canceled its foreign division. It then gave foreign and domestic companies equal rights and status.

Chen Changjie, an attorney with local law firm Guangda, said Japan’s international board failed due to a complex, tedious review and approval process.

Another issue for architects of a Chinese international board is that the proposal has intensified competition between Shanghai and Hong Kong.

“This affects the status of Hong Kong and Shanghai, and which one is more important,” said a Beijing-based securities executive. “In the environment, in which the yuan currency is not exchangeable, Shanghai can hardly be called an international financial center.

“All these issues are not easily resolved in the short term,” said Lou. “So the international board does not present a rosy picture.”

Source: Caijing Magazine, 15.10.2009 by staff reporters Fan Junli and Shen Hu

Filed under: China, Exchanges, News, , , , , , , , , , , , , ,

More Tweaking and Consolidations for China’s Brokerage Firms

A fourth round of securities industry reform is forcing some of the nation’s 107 brokers to merge while locking out foreign investors.

A red banner draped above a Nanjing building doorway at 90 Shandong Road enthusiastically declared, “Battle for Entry into Industry First Tier.”

The banner was celebrating regulatory approval in August for a joint venture – 18 months in the making — between Huatai Alliance Securities and the former Shenzhen Alliance Securities.

The message also mirrored an upbeat mood for selected players in the nation’s brokerage business. They plan to benefit from a new wave of consolidation that’s sweeping the industry following recent government enactment of two policies: the Intra-Industry Competition Ban, and the One Participant, One Controller rule.

Soon, industry analysts predict, dozens of the 107 securities firms now operating in China could disappear in one fell swoop, altering the industry landscape in the fourth consolidation wave since securities trading began in China.

Local governments that control minor brokers may be negatively affected by the changes, which are aimed at strengthening the industry overall. But domestic players that survive the shakeup are likely to remain shielded from foreign competition for some time.

Individual firms are mapping out survival strategies.

Second-tier firms such as Huatai, Guoxin Securities and GF Securities are now being encouraged by regulators to seize the opportunity, strengthen integration efforts and expand their territories.

The China Securities Regulatory Commission (CSRC) gave a green light to Huatai’s proposal to reach beyond its traditional, local business in Jiangsu and Zhejiang provinces and battle for a position as a top-tier brokerage.

Some firms may lose out over the policy changes. Large brokerages controlled by CITIC Securities and the so-called Huijin Family, for example, are being limited in this latest round of restructuring by the One Participant, One Controller rule.

But the ultimate goal, as the office building banner in Nanjing suggested, is a rapid ascent for every firm that emerges from the consolidation push.

Step by Step

The integration wave reflects the kinds of industry pressure and regulatory urging that were seen before. Brokerage firm crises gave birth to the first round of consolidation, spurred by the government, in the 1990s. That led to mergers between firms, such as Shenyin and Wanguo combining to become Shenyin Wanguo. Similarly, Guotai and Junan merged.

After 2000, as capital poured in and share trading expanded, nationwide powerhouses such as CITIC Securities appeared on the scene. That development was followed by a three-year, comprehensive overhaul of the brokerage industry starting in 2004, which triggered consolidation battles affecting 48 firms that had been on the brink.

A wave of mergers and acquisitions among small- and medium-sized brokerage houses altered the industry last year, setting the stage for the latest round of reform. Annual reports for 2008 show the top 30 firms currently control 91 percent of the domestic market, while the 10 largest firms have a 64 percent share.

By the time the dust settles from the latest consolidation, market insiders say, only around 70 or 80 firms will remain.

Regulatory Persuasion

Experts say regulators promoted the latest integration by enacting the new rules despite resistance from the opponents of consolidation, including local governments.

“This integration tide is both a requirement from regulators and a result of the need to expand to survive,” a Shanghai brokerage executive explained. “One could say that the involvement of regulators has sped up the pace of integration.

“For securities firms that have been around for nearly 20 years and have experienced several restructurings, mergers and acquisitions, internal governance practices have reached a critical point where integration is necessary.”

Central government regulators hope to chip away at a system that has protected brokers with tight links to local government fund-raising.

The brokerage executive said local governments hold controlling stakes in most small and medium-sized domestic brokerages, and none want to lose these financial platforms. Governments want to use these brokerages to push forward reforms of state-owned enterprises and encourage companies to go public.

No wonder local governments have resisted broker restructuring, adding obstacles to possible mergers and acquisitions that would cross geopolitical boundaries.

The two new regulations “mean that the pace of integration in the brokerage industry is likely to accelerate, despite problems such as distribution of benefits (and) regional protectionism,” said Wang Dali, an analyst at Southwest Securities.

“A brokerage with annual profits of 200 to 300 million yuan is a very good business in the eyes of local governments,” the brokerage executive said. “But in the brokerage industry, it makes for an awful company and an obvious target for M&A.”

Integration Moves

The latest consolidation wave may not be the last for China’s brokerage industry. Experts say reform’s climax would require a break-up of the Huijin Family and allowing foreign brokers into the market – developments that may be far in the future.

Nevertheless, the One Participant, One Controller rule presents a substantial barrier to the Huijin Family. The policy says two or more securities firms controlled by a single company or individual, or firms with controlling interests in each other, cannot conduct overlapping brokerage business.

During the 2004 overhaul, Central Huijin Co. — then controlled by the central bank — and its wholly owned subsidiary China Construction Bank Investments Co. (CCB Investments) were entrusted with disposing risk in the brokerage industry. That led to Huijin and CCB Investments taking partial or controlling interests in nine brokerage firms, giving them the nation’s largest market share and enormous power in the industry, building what insiders called the Huijin Family.

Huijin has been gradually taking over some CCB Investments brokers since last year, allowing CCB Investments to reach the One Participant, One Controller standard. But Huijin itself owns stakes in seven brokerage firms — far exceeding the limit.

Huijin is trying to accelerate the transfer of its broker shares to UBS Securities, Guotai Junan and Qilu Securities, yet it is still majority shareholder in Galaxy Securities, Central Investment Securities, Shenyin Wanguo and CITIC Construction Investment Securities.

If One Participant, One Controller were strictly enforced, these large brokers would not only be restricted from going public, but internal integration could be impeded as well.

“In the current market environment, in what form, at what price and how to exit are sensitive and difficult-to-answer questions for Huijin, regulators and Huijin’s brokerages,” a Huijin executive said.

There were once rumors that CSRC was inclined to let Anxin Securities take over Huijin’s brokerage stake. But price was apparently a sticking point. Anxin is owned by the China Securities Investor Protection Fund, which is managed by CSRC.

“What needs to be clear is that Huijin at the time (of the last consolidation) saved the securities industry by taking over those (troubled) brokerages,” a source close to Huijin said. “Now, those assets have seen huge increases in value. Should Huijin not keep those profits? “Price is the key issue,” the source said.

One brokerage on track for growth through a merger is Guoxin, which ranked third in equity funds transactions and first in investment banking share issuances last year. Last year, Guoxin posted net profits of 2 billion yuan and 45.2 billion yuan in assets, ranking it seventh in the industry.

Although the company has only 49 offices, it boasts registered capital of 7 billion yuan and was one of only two firms to win AA ratings for two consecutive years.

In August, a Guoxin official said the company would acquire Hualin Securities. Previous market rumors pointed to a possible tie-up between Guoxin and Dongguan Securities.

Cool to Foreigners

Meanwhile, the current climate of consolidation parallels chilly attitudes toward foreign investment. Regulators are clearly cautious about issuing brokerage and advisory licenses to foreign enterprises.

China allows foreign financial companies to offer only investment banking. The only exception is China Euro Securities, a joint broker with foreign backing, which has a brokerage business permit to operate in the Yangtze River Delta region and an investment advisory business permit from CSRC.

“CSRC’s goal is to allow domestic brokerages to grow and develop sufficiently before allowing foreign investment,” one brokerage executive explained. “One Participant, One Controller directly encourages securities companies to develop as a community, supporting the superior and eliminating the inferior, and pushing medium-sized brokerages to grow bigger and stronger.”

In early August, sources close to the U.S. financial giant Goldman Sachs said the company expected to receive a license for securities industry asset management. But CSRC information has continued pointing toward difficulties for foreign securities firms in receiving anything but investment banking licenses in the near-term.

Under a State Council directive to speed up Shanghai’s development as a financial center, the city’s joint venture securities and fund companies have been told to take the lead in opening the door wider. It was suggested this could expand the scale of brokerage licenses issued to foreign institutions. Asset management and self-service businesses were expected to gradually open to foreign investment as well.

But the domestic industry may not be ready for foreign players. A CSRC spokesperson said, “If we throw open the door, two-thirds of China’s 107 brokerages would be out of business. The current financial crisis further proves that a policy of steadily opening up is correct.”

Source:, 04.09.2009 by Fan Junli

Filed under: Asia, China, News, Services, , , , , , , , , , , , , , , ,

Rapid loan growth puts Chinese banks at Risk

Aggressive loan growth could significantly stretch the banks’ newly developed risk management systems, and the quality of new loans is expected to be inferior to the quality of those written a year ago, S&P analysts say.

Loan growth among Chinese banks hit more than Rmb7.76 trillion ($1.13 trillion) in the first half of 2009, a record high. As a result, asset quality is likely to slip further in 2009, but should remain highly manageable. It could deteriorate sharply in the next two to three years, however, if the economic slowdown is protracted in China.

Chinese banks seem to be lending so aggressively despite the economic slowdown for three key reasons.

First, the strong growth suggests that the banks’ corporate governance is still relatively weak and that the government continues to exert strong influence over banking practices as a dominant shareholder.

Second, the banks appear willing to extend additional funding to borrowers facing cash-flow difficulties on the premise that such difficulties are short-term in nature and should correct themselves when China’s growth recovers.

And third, they may be looking to compensate for the negative effects on earnings from the squeeze in net interest margins.

We expect the quality of new loans to be on average inferior to the banks’ loan book a year ago. That’s because the banks are either expanding into an enlarged but inferior client base or making incremental loans to existing clients with deteriorated financial metrics. Some new borrowers had no or limited access to bank credit in the past because they didn’t meet previous underwriting standards. But banks are likely to have eased their underwriting standards for projects related to the government’s stimulus package, as the government relaxed the capital leverage requirement for many types of projects. Loan quality should, however, be adequate for infrastructure projects that the central government or affluent provincial governments have backed; but these loans perhaps represent only a fraction of total new lending.

While further slippage in bad loans in 2009 and 2010 is likely in our view, it should be at a manageable pace. This is due to the very supportive liquidity environment for corporations as a result of strong loan growth, the limited exposure of major banks to severely hit small businesses in the export sector, and signs of economic recovery, particularly at home. A jump in the non-performing loan ratio is still very likely, as the dilutive effect gradually wanes and banks eventually stop renewing loans.

Barring a protracted slowdown in the Chinese economy, we anticipate the system will on average be able absorb incremental credit costs, given still healthy official interest spreads and banks’ improving capacity to generate fee-based income. For banks that are aggressively increasing their exposure in concentrated segments or regions, we expect potential credit losses to significantly weigh down their already below-average earnings profile. This is likely to lead to further divergence in credit profiles across the sector.

The aggressive loan growth in the first six months of this year could significantly stretch Chinese banks’ newly developed risk management systems and undermine their underdeveloped risk culture. Inflationary pressure may be the single-largest macroeconomic risk that the banks face. Historically in China, inflation often followed when loan growth ran above 20% (it was about 30% year-over-year at the end of June 2009). We’ll have to wait to see if this time will be an exception as the global economic slowdown continues to weigh on overall pricing levels. If the inflation pressure becomes so acute that the government resorts to a policy u-turn and increases lending restrictions, the heightened policy risks could exacerbate the difficulties for borrowers and banks.

The government’s role and commitment to reforms

The government remains highly influential with regard to lending policy at the banks, in our view. It has encouraged banks to make loans to prevent the economy from making a hard landing. But some government agencies, particularly the China Banking Regulatory Commission, have continually warned against excessive lending. Recently, the government seems to be fine-tuning its policy to favour a greater check on bank loan growth. The central government appears to have a delicate balancing act. It’s trying to use bank credit as a lever to maintain economic growth while preserving the banking system’s fundamental strengths. This reflects an inherent conflict between the government’s different roles as the country’s policymaker, banking regulator and major shareholder.

There are still strong incentives for the government to press ahead with banking reforms. The aggressive response to the government’s call for greater lending indicates that the banks do not yet have a sound risk culture and effective corporate governance in place. Given the experience in some markets, Chinese policymakers are likely to take a cautious approach to deregulating relatively risky activities and products. They’re also likely to slow down some reforms, such as those regarding compensation schemes. Some recent initiatives, such as those related to the development of the debt market and renminbi convertibility, indicate the government’s intention to proceed with market-oriented banking reforms.

Ratings impact on Chinese banks

We believe the major rated banks have sufficient financial strength to weather the economic slowdown. Although we see growing pressure from credit risks, policy risks and other risks for the banking sector, these are still within our expectation. We have long factored the significant volatility in Chinese banks’ financial metrics into the ratings on banks. If we are convinced that any bank has been performing better than we originally expected due to its own structural strengths, we would acknowledge these strengths against the context of a less-supportive operating environment.

Ratings On Chinese Banks
Banks Issuer Credit Rating
Industrial and Commercial Bank of China Ltd. A-/Positive/A-2
China Construction Bank Corp. A-/Stable/A-2
Bank of China Ltd. A-/Stable/A-2
Bank of Communications Co. Ltd. BBB+/Stable/
China Merchants Bank Co. Ltd. BBB-/Stable/A-3
CITIC Group BBB-/Watch Pos/A-3
Agricultural Development Bank of China A+/Stable/A-1+
China Development Bank A+/Stable/A-1+
Export-Import Bank of China A+/Stable/A-1+
Note: Ratings as of July 20, 2009.

The authors of this article, Qiang Liao and Ryan Tsang, are senior analysts in the financial institutions ratings team at Standard & Poor’s Ratings Services., 23.07.2009

Filed under: Asia, Banking, China, News, Risk Management, Services, , , , , , , , , , , ,