China’s Banking Risk Is Under Control
Yang Kaisheng: Former President of Industrial and Commercial Bank of China (ICBC); Special Advisor to China Banking Regulatory Commission
Written for: Andover International Review
Many people – our global peers, analysts, friends from the media, research fellows and scholars – have now shown grave concern over the risk to China’s banking system. Their angst, spawned by the world’s second largest economy confronting “new normal” of slower growth, is fueled by its mounting downward pressure and a possibility of sliding into financial meltdown. On this, I would like to voice my views.
While adapting to the “new normal” state, China is furthering its transformation of development mode and economic restructuring, paired by fast pace of growth dipping to the medium level. In this transition, some firms will inevitably face business troubles – capacity cuts or even collapse, resulting in impaired solvency or all-out insolvency. This adds to their creditors’ worry over full, scheduled loan repayment. In other words, banks expect growing non-performing loans (NPLs). In this sense, the concern is fairly justified. To my knowledge, for example, the NPLs of China banks rose by RMB250 billion in 2014. But it is worth noting that behind the figure is a banking sector with a huge loan book of RMB86 trillion. In fact, the industry-wide ratio by 2014-end was merely about 1.25%, not alarming at all, slightly higher than 1.03% of one year earlier though. Then how should it be properly approached? Another quotation will simply help. Last year, The Banker, a renowned UK magazine, analyzed the asset quality of the world’s Top 30 banks. Throughout the rankings, they, excluding a handful of China-based ones, had an NPL ratio averaging 3.96%. The number suggests a relatively low NPL level or solid asset quality for Chinese banks against their overseas peers.
To be honest, China will continue to struggle with its economic stress this year and may encounter even more challenges than last year. Under such circumstances, how will be the risk profile for its banks? It all depends on their ability to fend off and absorb distressed loans. Two primary figures are indicative. The first one is the provision coverage ratio, which is typically expressed as an “allowance-to-NPL” percentage. It refers to how much an NPL is covered by loan loss reserve. As of the end of 2014, the ratio stood at 230%, which means for 1 yuan of NPL, 2.3 yuan of reserve had been set aside for possible loss. Undoubtedly, it offers a solid buffer to account for risks to be exposed. The second is the capital adequacy (CAR) ratio. By the end of last year, China’s banking industry had met the Basel Committee’s CAR requirement and its latest reading is 13.18%. More importantly, its core capital adequacy ratio, out of the CAR indicator series, has exceeded 10%, suggesting sound capital quality and a leading position worldwide. Given that, despite slight pickup from prior years, Chinese banks’ NPL ratio remains relatively low against their enormous assets and gigantic loss-absorbing capacity. Considering that, it is needless to go bearish on China’s banking community. Nor is it justifiable to short sell the sector going forward.