outbound foreign direct investment in china’s finance sector: implications for domestic banking...
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OUTBOUND FOREIGN DIRECT INVESTMENT IN CHINA’S FINANCE SECTOR:
IMPLICATIONS FOR DOMESTIC BANKING REFORM
by
Brandy Au
______________________________________________________________
A Thesis Presented to the FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the
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(POLITICS AND INTERNATIONAL RELATIONS)
August 2011
Copyright 2011 Brandy Au
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ii
Table of Contents
List of Tables iv
List of Figures v
Abbreviations vi
Abstract viii
Chapter 1: The Banking System in China, Reforms, and Outbound Foreign Direct Investment 1
Chapter 2: Theories of OFDI and Application to China’s Finance Sector 6 2.1 An Overview of the Eclectic (OLI) Paradigm 6 2.2 Finance Sector-Specific Explanations of OFDI 7
Chapter 3: China’s Banks: Structure, Evolution, and Role 11
3.1 China’s Banking System in Comparison to Other Countries 11 3.2 Development of the People’s Bank of China and the State-Owned Commercial Banks 13 3.3 The Role of Household Deposits in the Banking System 16 3.4 Reforms in the Banking System 17
Chapter 4: An Assessment of China’s Banks 22
4.1 Fragility 22 4.2 Iron-Fisted State Control 25 4.3 China’s “Too Big to Fail” Banks 26 4.4 Economic Growth and Overdependence on the Banking System 27
Chapter 5: The Role of the Banking System in Outbound Foreign Direct
Investment 29 5.1 Lending Guidelines for State-owned Commercial Banks and Corporate Clients 29 5.2 Significant Developments in OFDI by China’s Banks 31 5.3 ICBC’s Lower-Profile Foreign Bank Investments 36
Chapter 6: The Link between Finance and Non-Finance Sector OFDI and
Implications for Banking Reforms 41 6.1 Finance Sector OFDI Strategies and National Economic Development Goals 41
6.1.1 The Internalization Factor in Practice 41 6.1.2 Beyond Wholly Owned Subsidiaries 42
iii
Chapter 7: Has OFDI Made China’s State-Owned Commercial Banks More Competitive? 46
Chapter 8: Implications and Going Forward 49
8.1 The Potential for Foreign Direct Investment in the Finance Sector 49 Bibliography 53 Appendices 60
Appendix A: Household Deposits, Total and as a Percentage of Total Bank Funds 60
Appendix B: Foreign Exchange Reserves, China 62 Appendix C: China’s OFDI By Region, 2008 63 Appendix D: China’s OFDI By Sector, 2008 64 Appendix E: Top 12 Chinese Multinational Corporations with
Overseas Investments, 2008 65
iv
List of Tables
Table 1: OFDI in China’s Finance Sector and Applicability of the Eclectic Paradigm 7
Table 2: Factors Influencing Finance Sector FDI 10
Table 3: Profile of China’s State-Owned Commercial Banks, 2010 16
Table 4: Chinese Financial Institutions and OFDI in the Finance Sector,
Major Deals 38
v
List of Figures
Figure 1: Household Deposits as a Percentage of Total Bank Funds 17
Figure 2: Corporate Loans Made by ICBC, CCB, and ABC 28
Figure 3: Overseas Loans made by ICBC, CCB, and ABC 31
Figure 4: ICBC and BEA-USA Profiles 36
Figure 5: China’s Outbound Foreign Direct Investment, 1976-2006 40
Figure 6: China’s OFDI By Region, Percentage of Total Amount, 2005-2010 40
vi
Abbreviations
ABC Agricultural Bank of China
AMC Asset Management Company
ASEAN Association of Southeast Asian Nations
BBL Bangkok Bank Public Company Limited
BCBS Basel Committee on Banking Supervision
BEA-USA Bank of East Asia, USA
BOC Bank of China
CAR Capital Adequacy Ratio
CBRC China Banking Regulatory Commission
CCB China Construction Bank
CDB China Development Bank
CFIUS Committee on Foreign Investment in the US
CIC China Investment Corporation
FTA Free Trade Agreement
ICBC Industrial and Commercial Bank of China
IPO Initial Public Offering
MOF Ministry of Finance
NPL Non-Performing Loan
OFDI Outbound Foreign Direct Investment
PBOC People’s Bank of China
vii
ROA Return on Assets
SAFE State Administration of Foreign Exchange
SASAC State-owned Assets Supervision and Administration Commission
SOCB State-Owned Commercial Bank
SOE State-Owned Enterprise
SPC State Planning Commission
UCBH United Commercial Bank Holdings
viii
Abstract
Economic liberalization has occurred at a rapid pace in China since the start of
economic reforms in 1978. One sector that has lagged behind when it comes to
liberalization, however, is that of the banking and finance sector. The lack of
liberalization, and more generally, structural reform in China’s banking system is due to
its irreplaceable role as financier of the national economy. With no alternative forms of
financing, state-led economic development in China has consistently been dependent on
bank lending. In particular, large state-owned enterprises (SOEs) are the entities that have
benefited most from government-mandated preferential lending policies.
This critical role of financial support has extended beyond the domestic realm in
recent years to include assisting enterprises in their outbound foreign direct investment
(OFDI). As China’s general OFDI increases, so has finance sector-specific OFDI.
Finance sector-specific OFDI theoretically can assist in the reform process for China’s
state-owned banks, but this does not seem to be a primary motivation for banks to invest
abroad. Rather, finance sector OFDI indicates an extension of banks supporting state-
owned and large enterprises abroad. This project makes the argument that this added
imperative role will provide even less of an incentive for policymakers to mandate
desperately needed reforms, to the detriment of the banking system.
1
Chapter 1: The Banking System in China, Reforms, and Outbound Foreign Direct Investment
China’s economy has experienced phenomenal change in the short time span of
thirty-three years, marked by the official start of reforms in 1978. Moving from an
isolated command economy with poor performance to a market-based, export-oriented,
and globally integrated one that has achieved remarkable levels of growth is no small feat
on the part of policymakers and enterprising firms. Many sectors of China’s economy
have liberalized, allowing for impressive sums of inward foreign direct investment and
the ability of Chinese firms to undertake profit-seeking activities and investments with
comparatively fewer restraints.
There is one sector that has lagged in the liberalization process, and that is the
financial and banking system. For the most part, the government has relinquished very
little control over China’s banking institutions, keeping them shielded from foreign
investment and competition. Unlike other sectors where China has allowed, even invited,
foreign direct investment, in the financial system banks are still majority state-owned and
operate based on government-mandated criteria. The casualty resulting from this setup is
that China’s banks have become stagnant performers, plagued by operational
inefficiencies, non-performing loans and bad assets; exposed to precarious risk situations;
and subject to political interests without the independence to operate in a profit-seeking
manner. This has severely eroded the competitive abilities of banks and compromised the
2
health of the domestic financial system. Without state support, China’s banks would be
wholly incapable of competing with their foreign counterparts.
The puzzle under discussion is why, despite desperately being in need of reforms,
China’s banking system has yet to take the necessary steps to address the issues
highlighted above. Central and local government officials have been reluctant and
resisted enacting policies that would assist in the reform process. The reason for this is
that banks in China play an indispensable role—that of financing economic activity of the
equally important state-owned enterprises (SOEs). “In China, the banks are the financial
system,” serving as the only source of credit to borrowers. (Walter and Howie, 2011, p.
25) In other words, the banks are responsible for ensuring a steady stream of capital and
monetary loans to the engines fueling China’s economic growth. The logic is
straightforward. Without the banks, there is no capital. Without capital, SOEs cannot
operate. If SOEs become non-operational, economic growth would decline and political
and social stability would be disrupted. In a literal sense China’s banks are the foundation
of the economy, but in a more philosophical sense they are the foundation of the Chinese
leadership’s legitimacy vis-à-vis economic development. The irreplaceable role of the
banking system is no exception when it comes to supporting the activities of SOEs and
other enterprises’ investment activities overseas, which is the focus of this thesis.
Because of this added function, reforms in the banking system will, even more so, be
further delayed.
This thesis will examine the role of the banks in supporting outbound foreign
direct investment (OFDI) activities in non-finance sectors, and argue that such a function
3
is one of many that make China’s banks indispensable in the national economy. In recent
years, increasing total OFDI has become an explicitly stated goal as part of a
comprehensive national economic development strategy.1The government is encouraging
firms to invest abroad and taking its own steps to fulfill this mandate, such as directing
investment abroad via the state-owned sovereign wealth fund China Investment
Corporation (CIC). Like many other sectors of the economy, the banking sector has also
gone global by engaging in OFDI, but it is not for reasons of supporting the reform
process or building competitiveness. Although bank reforms are an important part of the
government agenda, improving the performance of banks is a secondary consideration
when discussing finance sector OFDI. Ultimately, OFDI is undertaken by banks to
support and facilitate the overseas activity of non-finance firms. Because of this
particular role that only became crucial with China’s goal of increasing overall outbound
foreign direct investment, it provides even less of an incentive for policymakers to
implement the necessary reforms in order to improve the status of the banking system.
Needless to say, no reforms would take place that would jeopardize the banks’ role of
financing SOEs.
This argument has several implications. On a theoretical level, China’s OFDI
activity in the banking and financial services sector does not adhere neatly to traditional
theories of foreign direct investment, including the eclectic paradigm postulating that
firms invest abroad in order to exploit various ownership, location, and internalization
factors. (Dunning, 2002, p. 103-104) Banks, thought of as firms, do not possess
1 Specifically, this is articulated in the National People’s Congress 10th and 12th Five Year Plans, which will be discussed later.
4
competitive advantages that they can exploit abroad, especially when it comes to those
that are ownership-specific. China’s banks theoretically could go abroad with the
intention to seek factors of production that would make them more competitive, such as
managerial capital with the ability to train staff and strengthen business practices in
services that are offered. Foreign management can also assist in developing a system to
determine and address financial risk, meeting international banking standards and
regulations, and assessing creditworthiness of borrowers to make functional loans with a
probability of return. Interestingly enough, these are not primary reasons for investing
abroad. The unique role of state-owned banks requires a case-specific approach to
explain their behavior.
In terms of policy implications, the very specific role that banks—especially state-
owned commercial banks (SOCBs)—play in the national economy means that reforms
have been and will continue to be delayed. Policymakers have been selective about what
aspects to reform, and political leaders will implement reforms insofar as they do not
compromise the relationship between banks and SOEs. Selective and incomplete reform
has occurred, and patterns of OFDI in the finance sector will continue to be driven by
national economic development goals.
This thesis primarily analyzes China’s SOCBs, although China’s financial system
is more pluralistic, including non-SOCB firms such as joint stock commercial banks,
regional- and city-level banks, and credit cooperatives. The SOCBs are the primary focus
because they hold the bulk of national deposits—over 70 percent—and moreover,
provide the majority of lending to China’s SOEs. (Walter & Howie, 2011, p. 27) These
5
banks have been designated as the primary vehicles by which SOEs are financed and
hence, they are a critical apparatus that deserves further analysis.
The thesis will first provide a theoretical overview of finance sector FDI as it
relates to China’s case. The next section covers important trends in China’s general OFDI
profile as they relate to national economic development goals, and how this policy
priority impacts reforms in the banking system. Following this is a discussion about the
banking system’s development, problems, reform efforts, and how such efforts have fared
to date. The next section proposes some motivations for finance sector OFDI and
implications for the domestic reform process, tying the two distinct phenomena together.
Although it is generally too early to assess what the impact has been, meaningful
observations can still be made about the intentions of these transactions. A final section
concludes and discusses prospects for China’s banks and finance sector OFDI.
6
Chapter 2: Theories of OFDI and Application to China’s Finance Sector
The purpose of this section is to provide theoretical motivations for why banks
invest abroad, and assess the applicability of such explanations to China’s case.1
(Buckley, Clegg, Cross, Liu, Voss, & Zheng, 2007; Child & Rodrigues, 2005; Deng,
2007; Wang, 2002) Firms in the finance sector—not just in China, but across countries—
tend to have a unique set of motivations when it comes to OFDI that are not captured by
more general theories. Hence, a myriad of theoretical explanations must be considered
when examining the behavior of Chinese banks abroad. After the discussion, it will be
clear that Chinese finance sector OFDI requires a combination of different approaches in
order to accurately capture its motivations for going abroad.
2.1 An Overview of the Eclectic (OLI) Paradigm
Perhaps the most well-known theory of foreign direct investment and
international production is the eclectic paradigm, developed by the late economist John
Dunning and used to explain patterns of firm investment in foreign localities. The theory
contains three classes of factors in which firms possess an advantage and, in turn, exploit
abroad—ownership, location, and internalization. (Buckley et al, 2008, p. 718; Child &
Rodrigues, 2005, p. 383) These factors have provided useful theoretical explanations for
the investment by foreign firms abroad, especially for developed economies, but this
mainstream approach only partially describes the behavior of Chinese banks. Like many
1 The literature on “late industrializer” economies emerged after approaches such as John Dunning’s eclectic paradigm, developed out of advanced economies’ industrialization experiences, failed to account for countries such as South Korea and more recently, China.
7
of its non-finance counterparts, China’s banks do not possess intangible assets they can
exploit abroad, hence ruling out ownership-specific factors. Location- and
internalization-specific factors do have a role to play in explaining the behavior of
Chinese banks. In the first case, a location-specific factor would be the presence of
Chinese non-finance sector OFDI. This variable is elaborated on later in the discussion on
theories of finance sector OFDI. In the second case, the internalization factor is
demonstrated through the establishment of wholly owned banking branches in foreign
countries.
Table 1: OFDI in China’s Finance Sector and Applicability of the Eclectic Paradigm
OLI Factor Describes China’s Case? How Demonstrated?
Ownership No Location Yes Investing in host
countries with Chinese non-finance sector
OFDI Internalization Yes Establishing
wholly owned banking branches
2.2 Finance Sector-Specific Explanations of OFDI
As noted previously, multinational banks have an idiosyncratic set of motivations
in conducting investment abroad. There have been a number of statistical studies
conducted on this topic. Most of these factors can be categorized as ownership-, location-
, or internalization-specific under the eclectic paradigm because they pertain to intangible
assets such as efficient business practices; site-specific features of the host economy such
as a large and growing market; and the establishment of wholly owned banking branches
8
in a host economy. The last two of these three factors are demonstrated in the behavior of
Chinese banks.
In a paper researching the determinants of foreign direct investment activity by
banks, Moshirian proposes and tests a number of factors believed to be significant in the
decision of financial institutions based in Germany, Britain, and the US to invest abroad.
(Moshirian, 2001) Another paper by Buch looks at motivations for German banks to
invest abroad. (Buch, 2000) As in Moshirian’s findings, German FDI from non-finance
sectors is a significant determinant of FDI from the finance sector. Preceding studies by
Goldberg and Johnson and Sagari look at how different macroeconomic variables affect
foreign direct investment decisions by US banks. (Goldberg & Johnson, 1990; Sagari,
1992) Lastly, Yamori assesses the impact of factors already delimited in the studies
mentioned as motivations for Japanese banks to invest in subsidiaries abroad. (Yamori,
1998)
Many factors defined in these studies are not directly applicable to China’s case
because they are relevant factors for more developed banking systems that can be
exploited. China’s banks are still very much developing standardized commercial and
personal banking services and cannot be considered mature financial institutions in this
sense. Sagari considers the relationship enjoyed between a bank and its foreign clientele
as an “intangible asset” in accordance with the ownership-specific factor of the eclectic
paradigm, a characteristic that Chinese banks do not possess. (Sagari, 1992, p. 7)
Expansion of banking institutions into a foreign market requires sufficient demand by the
host country, supported by recognition of the bank’s name and the ability to offer
9
competitive services. In fact, it is many of the ownership-specific factors held by
developed financial institutions that China would gain by going abroad—the ability to
undertake complex financial transactions and being staffed by experienced management
and bankers, as examples. (Sagari, 1992, p. 8)
Non-finance sector OFDI and possibly bilateral trade can serve as explanatory
factors for China’s case. Moshirian finds a positive and statistically significant correlation
between FDI activity in the banking sector and FDI activity in non-finance sectors going
to the same country for all three cases under study. (Moshirian, 2001, p. 322) The results
can be interpreted to mean that banks will go abroad to the same host economy in order
to service non-finance sector firms from the home country. A qualitative assessment of
China’s OFDI activity in the banking sector demonstrates this tendency, as the discussion
about ICBC’s investments in Standard Bank in South Africa and small banks in
Southeast Asia later will corroborate. In terms of investing in host economies with which
China has significant bilateral trade, this factor cannot be ruled out, though a more
rigorous methodology for testing it would have to be conducted in order to make
definitive statements about the nature of the link. As China’s trade and OFDI activity are
simultaneously increasing, it is important not to automatically correlate these two
economic patterns simply because they are both increasing in a given host economy.
10
Table 2: Factors Influencing Finance Sector FDI
Variable Applicable to China’s Case?
Existing client base in host country (Moshirian, 2001)
No
Non-finance FDI from home country (Moshirian, 2001; Buch, 2000; Goldberg and Johnson, 1990; Sagari, 1992; Yamori, 1998)
Yes
Bilateral trade (Moshirian, 2001; Goldberg and Johnson, 1990)
Maybe
Foreign market opportunities/ Expected returns (Moshirian, 2001; Buch, 2000; Yamori, 1998)
No
Size of foreign market (Moshirian, 2001; Buch, 2000; Sagari, 1992)
No
Exchange rate volatility (Moshirian, 2001; Buch, 2000; Goldberg and Johnson, 1990; Yamori, 1998)
No
Economic growth in host country (Moshirian, 2001)
No
Geographical proximity of host country (Buch, 2000)
No
Regulatory restrictions by host country (Sagari, 1992)
No
Competitiveness of host country banking system (Goldberg and Johnson, 1990; Sagari, 1992)
No
11
Chapter 3: China’s Banks: Structure, Evolution, and Role 3.1 China’s Banking System in Comparison to Other Countries
In a state-controlled finance sector like China’s, banks constitute the majority of
financing in the economy and do not operate under market forces. For example, interest
rates are set by the government as opposed to being determined by independent bank
policies. Instruments such as ceilings are utilized to artificially achieve a specific rate in
order to meet state preferences and goals. (Lukauskas, 2002) As a result, state control
results in distortion. China’s financial repression policies are not a novel phenomenon
when examining the experiences of other East Asian countries. One view is the “late
industrializer” perspective. As Lukauskas argues, in these types of economies
“governments have…little choice but to opt for a bank-based financial system under tight
state control. Restriction is necessary because existing markets cannot adequately support
a process of industrialization…without government intervention.” (Lukauskas, 2002, p.
384) During their respective periods of industrialization, Japan and Korea practiced
financial repression as well, shielding their banking sectors from competition. Many of
the same policies enacted are observed in China’s current banking system. Some of the
parallel features include low deposit yields for savers, the suppression of bond markets,
and the prevalence of “policy loans” for priority borrowers. (Lukauskas, 2002, p. 390-
391, 394) Similarly, the Chinese banks’ feature of holding an overwhelming share of
deposits was seen in Korea during the 1970s and 1980s, with “government-owned or
controlled financial institutions [holding] 90 percent of total banking system deposits.”
(Lukauskas, 2002, p. 391) Credit was allocated to certain sectors of the economy—
12
namely export-oriented and ones dominated by large industrial conglomerates—per state
mandate. Small and private borrowers experienced limited availability in credit access.
The functions of the commercial banking system in Korea are similar to China’s
as well. During strict control, the “commercial banks were little more than government
agencies delegated the task of mobilizing savings and allocating them according to
directives and guidelines issued by the government.” (Park & Kim, 1994, p. 215) In
China’s current financial system, banks are also saddled with the task of taking household
deposits and allocating credit to sectors the government considers a priority for economic
development. Outside of this, banks have little policy discretion and functional
autonomy. Similarities aside, Lukauskas discusses a different set of reasons from China’s
that motivated Japan to repress its finance sector. From a “public interest perspective,”
banks were shielded from competition in order to build up their competitiveness. Policies
such as restricted entry into the banking sector, fixed ceiling rates, and the suppressed
development of bond markets were supposed to create a “small number of efficient,
highly profitable banks.” (Lukauskas, 2002, p. 391) In turn, banks gained expertise, better
operational capabilities, and developed systems to monitor performance. (Lukauskas,
2002, p. 391-392) Seen from this perspective, the goal of restrictive policies was for the
benefit of the banks themselves. Comparatively speaking, Japan also practiced a level of
financial repression less severe than Korea, the latter of whose objectives more closely
resemble China’s.
Some comparisons between China and Korea can be made regarding the
implications of financial repression. State involvement in the banking sector in Korea
13
eventually resulted in a moral hazard problem. As the government became more
entrenched in the banking system, it bore an increasing amount of the risk associated with
non-performing loans, inefficiency, and instability. (Lukauskas, 2002, p. 406) Extrication
became difficult and the government had no choice but to bail out banks that got into
trouble. As will later be discussed, China faces a similar problem in having to save its
banks during periods of irreparable insolvency. China’s central bank (the PBOC) acts as a
lender of last resort and an injector of capital, roles which all too often are utilized by the
banks.
3.2 Development of the People’s Bank of China and the State-Owned Commercial Banks
The development of China’s modern banking system unfolded as quickly as the
rest of the economy during the reform period. In order for economic development to
progress, China needed an efficient and functional financial system that could facilitate
transactions and provide capital. On the state-led economic reform agenda, it was decided
that the banking system would undertake restructuring of its own and be responsible for
providing credit to China’s state-owned enterprises, entities that in turn the state upheld
as integral to economic development. Because the government no longer directly
financed SOEs, banks became the primary vehicle by which it was able to exercise
decisionmaking authority over the allocation of financing. As a result, in China’s modern
banking sector four large banks dominate lending to SOEs, other enterprises, and
individuals. From 1983 to 1994, bank lending as a source of capital for SOEs grew from
14.3 percent to 25.7 percent, an increase of approximately eleven percentage points.
During the same time period, direct government financing fell from 40.6 percent to 5.0
14
percent. (Cull & Xu, 2002, p. 535) In fact, the decreasing share of government financing
is what Shih attributes to the banking system’s current non-performing loan problem.1
(Shih, 2008, p. 107, 120) After the first bailout of banks over-saddled by NPLs, the
government pledged that this rescue effort would be the first and last of its kind. (Shih,
2008, p. 120) As will be noted below, this was not the case. As Walter and Howie
describe, “…the Party treats its banks as basic utilities that provide unlimited capital to
the cherished state-owned enterprises. With all aspects of banking under Party control,
risk is thought to be manageable.” (Walter & Howie, 2011, p. 25; Jefferson & Rawski,
1994, p. 51)
China’s central bank, the People’s Bank of China, became a separate entity from
the Ministry of Finance in 1978. Prior to this critical year that marked the pre- and post-
economic reform periods, China only had one bank—the People’s Bank of China—kept
as a nominal institution without any semblance of policymaking power. (Okazaki, 2007,
p. 6) In 1984, the PBOC officially ended its commercial banking functions and became
China’s central bank. It became responsible for overseeing and setting national monetary
policy, as central banks in most other countries do. However, it had another key
responsibility unique to a state-planned economy, and this was managing the funding of
1 During the early 1980s household deposits in banks began to increase exponentially, which “did not escape the notice of central leaders, who began to see banks as a source of funding.” They became “second treasuries” for SOEs and development projects. During the early 1980s household deposits in banks began to increase exponentially, which “did not escape the notice of central leaders, who began to see banks as a source of funding.” They became “second treasuries” for SOEs and development projects. Lax repayment guidelines as a tradeoff for growth-inducing investment meant that many loans went un-repaid. Defaulting was also exacerbated by the requirement that “a company was first and foremost obligated to hand in the mandated amount of taxes to the central government and to pay workers’ wages before repaying banks.” (Shih, 2008, p. 109)
15
SOEs and their economic projects. (Okazaki, 2007, p. 9) To assist in this endeavor, four
large banks were restructured or reestablished to serve different sectors of the economy—
the Agricultural Bank of China (ABC), Industrial and Commercial Bank (ICBC), China
Construction Bank (CCB), and the Bank of China (BOC).2 (Cull & Xu, 2002, p. 537;
Wu, 2005, p. 220; Naughton, 2006, p. 455) Since this initial restructuring, the roles of the
PBOC and SOCBs have become increasingly defined. In the case of the SOCBs, their
roles have become more general and functions have overlapped. As the PBOC
transitioned into its roles of serving as China’s central bank and monetary policy
authority, the SOCBs gradually took over the commercial functions of lending and
accepting deposits, as well as offering an array of other financial services, functions for
which the PBOC used to be responsible. Combined, they have consistently constituted
the majority of commercial banking activity. Even with the proliferation of other types of
financial institutions, SOCBs were still responsible for four-fifths of all outstanding loans
and 61 percent of total financial assets between 1995 and 1996. (Lardy, 1998, p. 80)
2 The division of labor for the banks was as follows: the ABC would lend credit to rural areas and agricultural economic activity, the ICBC would be responsible for overseeing national savings and loans, the CCB would specialize in financing investment in fixed assets, and the BOC, a spin-off of the PBOC, would be responsible for foreign exchange activity.
16
Table 3: Profile of China’s State-Owned Commercial Banks, 2010
ICBC ABC BOC (2009) CCB SOCB-owned Assets as % of Total Assets
31.5 24.2 20.5 23.8
Return on Assets
1.32 0.99 1.29 1.32
Non-performing Loan Ratio
1.08 2.03 1.52 1.14
Capital Adequacy Ratio
12.27 11.59 11.14 12.68
Liquidity Ratio 38.36 51.96 % of Foreign Ownership (2009)
3.9 N/A 14.1 (2006) 10.95
Source: Various Bank Reports; Okazaki, 2007 3.3 The Role of Household Deposits in the Banking System
One important detail about China’s banking system is that households are the
majority of depositors. The high national savings rate and lack of financial markets for
more profitable investments are directly responsible for the high volume of deposits in
banks.3 In 2005, households were 55.7 percent of total bank deposits, followed by
enterprises at 29.5 percent and the government at 9.9 percent. (Walter & Howie, 2011, p.
53) In turn, the government relies heavily on China’s savers to fund the lending made by
the SOCBs to SOEs.
3 The reasons will not be described in detail here, but a number of scholars such as Nicholas Lardy and Barry Naughton have written about the social, political, and economic issues thought to be driving these two phenomena.
17
Figure 1: Household Deposits as a Percentage of Total Bank Funds
0
10
20
30
40
50
60
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Year
Percen
tag
e o
f T
otal
Fu
nd
s
Source: China Statistical Yearbook 3.4 Reforms in the Banking System
China’s banking system has since undergone a series of reforms—with the
SOCBs being at the center of the agenda. Conceptually speaking, reforms can be seen as
occurring in two broad distinguishable periods, though it is important to note that they are
not officially distinct parts of the reform agenda. Rather, reform has been a continuous
process, with initiatives spurred by a combination of goals outlined in the national
economic development agenda, international regulatory standards, and financial crises.
Additionally, the broader goals of recapitalization, restructuring, and mandating the
fulfillment of key performance criteria as components of the reform agenda is for banks
to be able to continue serving as the financing engine of China’s economic growth, and
not necessarily to make them globally, or even nationally, competitive entities.
After approximately 20 years since the beginning of economic reforms, state-owned
banks were not operating efficiently or profitably enough on their own. Non-performing
18
loans were pervasive on bank balance sheets after a few decades of sub-par lending
practices. SOEs that borrowed from the banks were operating at a loss or not making
enough profit to cover their debt. (Lardy, 2003, p. 70) Declining bank profitability in the
mid-1990s meant that the state-owned banks required more capital than was already on
their balance sheets in order to keep operating and stay solvent. The government’s
strategy was to inject fresh capital into the banks’ portfolios. They were termed
differently—“value preservation subsidies”; “deposit index subsidies”—but ultimately
the injection of capital caused a boost in reported bank profits. (Lardy, 1998, p. 105)
China Construction Bank reported almost a doubling of pre-tax profits, while the
Agricultural Bank of China reported a tripling of profits in 1995. (Lardy, 1998, p. 105)
Lardy estimates that the value of capital injections totaled 16.2 billion RMB in 1995.
(Lardy, 1998, p. 263)
The Asian Financial Crisis in 1997 was also a dramatic wake-up call for
policymakers to restructure the increasingly unsustainable lending system. They viewed
China’s banks as a serious liability with the potential to devastate the economy if left
unreformed. As a result, China undertook a deeper series of reforms beyond capitalizing
the banks. The first important step was to bring banks in line with international standards.
It committed to regulatory and supervisory standards set forth by the Basel Committee on
Banking Supervision (BCBS) at the time. Notable among the list of “core principles”
were items that:
• Established stringent criteria on ownership and acquisition activity by banks;
• Set minimum capital-adequacy ratios;
19
• Supervised policies and practices surrounding the evaluation of credit risk in
loans;
• Required transparent accounting policies and practices captured on accessible
records. (Basle Committee on Banking Supervision, 1997)
Committing to adhere to a set of international standards signaled China’s seriousness
about reforming its banking system. In addition, the “aggregate lending quotas” set under
the official credit plan was abolished, replaced by increased, albeit restricted,
independence of the banks to make decisions on financing allocation. (Okazaki, 2007, p.
19) All SOCBs were required to attach a risk assessment to each loan given out, in order
to increase the transparency of credit risks that banks faced. With every outstanding loan,
banks also had to set aside a certain percentage of capital reserves depending on the
borrower’s repayment risk, which was in addition to a specified amount of reserves
already set aside for the total number of general loans. (Okazaki, 2007, p. 22-23)
Undoubtedly these were measures undertaken with the general principles set forth by the
BCBS as guidance.
As part of the recapitalization effort and the desire to attract foreign capital, in an
unofficial second wave of reform during the early 2000s SOCBs were effectively
converted into jointly owned banks by changing their ownership structure. This strategy
entailed recapitalizing the SOCBs so that they would be prepared for an initial public
offering on stock exchanges and be more attractive to foreign investors—both moves
serving to secure important sources of much-needed capital. With the SOCBs going
public, the state no longer maintained 100 percent ownership. High-ranking bank
20
officials hoped that with foreign—or at least diversified—ownership, political interests
plaguing banks would be alleviated.4 (Voss, 2009, p. 140; Naughton, 2006, p. 463;
Okazaki, 2007, p. 21, 27, 30)
With the global financial crisis of 2008, China further realized the deep structural
problems that, if not rectified, would threaten to destabilize its banks and the largest
stakeholder in the financial system—the government itself. A number of measures were
enacted to counter the slowdown in economic growth, including closer monitoring of
overseas bank assets and system-wide credit risk, tightening supervision of the largest
banks, i.e. the SOCBs, and adjusting capital-adequacy ratios to account for global
financial developments. (China Banking Regulatory Commission, 2009) In addition, to
insulate the effects of badly hit foreign financial institutions operating in China, the China
Banking Regulatory Commission (CBRC) mandated several measures to minimize risk
contagion and maintain performance quality, including keeping the CAR at high levels,
maintaining a low NPL ratio, and stabilizing the liquidity ratio.5 The CBRC has
4 To prepare for this, an “investment” company called the Central Huijin Investment Company was established in 2003, backed by the government agency State Administration of Foreign Exchange (SAFE). SAFE was established in 1979 under the Bank of China and is responsible for administering the usage and flow of foreign exchange and recommending foreign exchange policies to the PBOC. Huijin effectively provided capital for the state-owned commercial banks, largely using massive amounts of foreign exchange reserves from the central government. In addition, the central government established asset management companies (AMCs) to temporarily wipe out NPLs from the SOCBs’ liability sheets. For each of the SOCBs there was an AMC created to manage NPLs on their balance sheets: Huarong, Great Wall, Orient, and Cinda. All four AMCs were created in 1999. The specific functions of the AMCs were to “purchase nonperforming loans at face value from the banks in exchange for equity positions in the borrowing firms.” (Lardy, 2003, p. 72) 5 Foreign financial institutions have had consistently higher CARs than Chinese counterparts; the figure stood at 21.22 percent. The NPL ratio was 0.85 percent, compared to 1.58 percent for Chinese financial institutions. The liquidity ratio for foreign financial institutions was 58.83 percent, while for Chinese financial institutions the figure was 46.4 percent. These figures are from 2009. (China Banking Regulatory Commission, 2009)
21
encouraged banks to follow the standards laid out in updated Basel III guidelines, and
annual reports released by SOCBs include discussions on how they are attempting to
achieve these standards.
22
Chapter 4: An Assessment of China’s Banks
Despite reform efforts, China’s banking system still suffers from persistent
performance-related problems. Key issues that need to be addressed include the fragile
and precarious risk situation of the banks, inefficient operations due to monopolized state
control that has severely hindered competitiveness, the continued existence of non-
performing loans and “bad” assets, and the incredibly troubling moral hazard present
between the government and state-owned banks. The longstanding need to support SOEs
domestically, and now internationally as well, increases the gravity of the banking
system’s role in the national economy, and suggests that fundamental reform becomes an
even more remote possibility.
4.1 Fragility
Bank reforms have produced mixed results. In some issue areas, SOCBs have
experienced improved governance and adherence to international standards. The
establishment of a government agency wholly dedicated to bank regulatory supervision
and oversight, the CBRC, is one attempt to follow the international framework.1 The
government anticipates CBRC to become a fully functioning regulatory and supervisory
agency for the banking sector, akin to its counterparts in developed countries that perform
the same duties.
1 This observation is made due to the idea that an autonomous monitoring agency to keep banks in line with national regulatory performance standards is one impermissible feature of developed banking systems.
23
Under CBRC mandate, capital-adequacy ratios have generally met the Basel
standard of eight percent by most financial institutions.2 (Okazaki, 2007, p. 46-47)
However, risk-alleviating provisions are still inadequate.3 (China Banking Regulatory
Commission, 2009; “China’s Banking Industry,” 2005) The most pertinent problems are
structural in nature and will not be alleviated simply by adhering to international
standards. For one, many of the SOEs receiving loans from banks are unprofitable.
Returns on investment projects and industrial output have been disappointingly low.
From the early 1980s to the mid-1990s, SOE profitability decreased from 25 percent to
12-13 percent.4 (Cull & Xu, 2002, p. 536-537) During the 1980s and 1990s, it is
estimated that returns from loans made to SOEs fell from 1.4 percent to 0.3 percent.
(Lardy, 1998, p. 100)
The low profitability of SOEs directly impacts the profitability of its lenders.
Accumulating triangular debt, in which SOEs owe each other, must first be repaid before
debt to the bank is paid back.5 (Shih, 2008, p. 145) This is an important reason why low
2 CARs for the SOCBs were reported as the following at the end of 2006: ICBC’s was 14.05 percent, BOC’s was 13.59 percent, CCB’s was 12.11 percent, and BoComm’s was 10.83 percent. The figure for ABC was not available. 3 Although China has met the minimum eight percent CAR set by the Basel standard, the ratio is merely a guideline. In 2009 China’s banking system-wide CAR stood at 11.4 percent. Developing banking systems typically have higher CARs. Indonesia, for example, has a CAR of 19.9 percent, and Thailand’s is at 12.7 percent. Developed banking systems in East Asia also have CARs beyond the minimum requirement—Singapore’s is at 14.8 percent, Hong Kong is at 15.4 percent, and Taiwan is at 10.7 percent. Banking systems in emerging markets need higher CARs to address macroeconomic shocks that tend to have a more volatile effect on the economy. 4 The authors measure profit as the ratio of pre-tax profits to the total value of output. 5 Having to pay back debt to other SOEs before paying the bank back was mandated at the central level in the 1990s by former Premier Zhu Rongji.
24
profitability of SOEs directly and adversely impacts the ability to pay back bank loans. In
China’s case, the profitability rate is not nearly sufficient to cushion volatility and the
risks associated with an emerging economy.6 (Lardy, 2003, p 70; “China’s Banking
Industry,” 2005) Research by The Economist estimates that for every one dollar of
output, five dollars of new capital must be injected into the system. (“China’s Banking
Industry,” 2005) For China’s banks to sustain their current level of lending and not
receive any external capital, i.e. from the central government, the return on assets would
have to be at least 2.1 percent, approximately five times higher than current levels.
(“China’s Banking Industry,” 2005) That is aside from any macroeconomic shocks that
may occur.
However, making unprofitable loans seems to be a structural trend that will
continue due to central government priorities. As Lardy mentions, state-mandated lending
to SOEs, profitable or otherwise, is classified as a “closed-end loan.” “In principle, these
loans are to be limited to financing potential profitable activities of heavily indebted
money-losing firms. For example, unprofitable firms with signed contracts to produce
goods for the export market are eligible for closed-end loans if the exports are expected
to be profitable.” (Lardy, 2003, p. 89) It is clear from this definition where NPLs first
arise and why they have become such a headache for the SOCBs—lax standards of
evaluation on who may receive a loan, and the fact that SOEs receive preferential
treatment for access to capital regardless of their profitability and performance, if they are 6 In 1985, the profitability of state-owned banks was 1.4 percent. In 1997, the figure had fallen to 0.2 percent. In the mid-1990s, the largest SOCB, ICBC, had a profitability rate of 0.42 percent, measured by return on assets (ROA). At the end of 2004, overall bank profitability was at 0.4 percent, a small improvement.
25
deemed to be important to the central or local government’s economic development
agenda.
4.2 Iron-Fisted State Control
Although the “big four” banks have successfully listed on public stock exchanges,
a closer look reveals that a majority of bank shares are not traded. The figures tell the
story—29.3 percent of ICBC’s shares are tradable, 34.0 percent of CCB’s, 24.5 percent
of BOC’s, and 41.8 percent of BoComm’s. (Walter & Howie, 2011, p. 39) The listing of
SOCBs on stock exchanges is considered more of a signal to foreign investors that such
banks are healthy, sufficient to become a publicly listed company, rather than to actually
diversify ownership, as any profile of the SOCBs reflecting dominant state ownership
would indicate. Walter and Howie argue, “The Big 4 banks [SOCBs] form the very core
of the Party’s political power…[though] China’s banks have taken on an international
guise by public listings, advertising campaigns and consumer lending…such change is
superficial…in China there is…the drive to create a fortress, but it is one that seeks to
insulate the banks from all external and internal sources of change in the belief that risk
should remain under the Party’s control.” (Walter & Howie, 2011, p. 79-80) The
overwhelmingly high-priced IPOs in three of the SOCBs on the Hong Kong and
Shanghai Stock Exchanges are a case in point. The reason for this was due to the role of
bids by government-backed or affiliated organizations. (Naughton, 2006, p. 469) They
included AMCs, “national champion” SOEs, and financial or insurance subsidiaries, all
tied in one form or another to central government agencies. (Walter & Howie, 2011, p.
178-181) The presence of their offerings made IPO shares extremely competitive, hence
26
bidding up the price and edging out small, and largely private, investors. By keeping
ownership in the hands of investors with strong ties to the government, state control
would not be obviated. This would allow the government to hold onto the ability to
mandate banks to carry out its preferred lending policies.
4.3 China’s “Too Big to Fail” Banks
On balance sheets China’s banks look impressive. In terms of asset size, the big
four SOCBs rank in the top 30 globally.7 (Okazaki, 2007, p. 44) A closer look indicates
that the quality of assets is suboptimal. All four banks have consistently been plagued
with a high level of non-performing loans (NPLs), especially when compared to global
counterparts. NPLs are part of every bank’s balance sheet, but in China the problem is
especially pronounced. (Naughton, 2006, p. 461) Bad debt such as NPLs is classified on
balance sheets as assets, which paints a deceiving picture of the banks’ assets to liabilities
ratio and the overall health condition of the bank. The total amount of NPLs is so
significant that it dwarfs the reserves usually used to cover a write-off of debt. Lardy
states, “The nonperforming loans that several of China’s four largest banks ultimately
will have to write off almost certainly exceed the combined value of their reserves and
their own capital. On a realistic accounting, these banks’ capital adequacy is negative,
and they are insolvent.” (Lardy, 1998, p. 95; Italics my emphasis) In the past 10 years,
NPLs have decreased, which may indicate better repayment levels by SOEs.
7 At the end of 2006, ICBC ranked 21st globally with total assets of 961.6 (US$ billion), 26th with 684.4, BOC 27th with 682.0, and CCB 28th with 697.7.
27
The problem of moral hazard is demonstrated in the broad waves of capital
injection and recapitalization that occur every few years since the 1990s. In the mid-
1990s the reported boost in profits was due to capital provided to the large banks by the
MOF. (Lardy, 1998, p. 105) During the 2000s, recapitalization occurred with the
introduction of the government investment agencies. These examples demonstrate that
government-backed recapitalization schemes will serve to undermine banks’ incentive to
adopt fundamental reforms, if it is known that they are guaranteed. (Lardy, 1998, p. 144)
If the SOCBs require another capital injection or restructuring, there is little doubt that
the central government will once again come to their rescue. The banks are simply too
important to allow them to fail. At the same time, the issue of moral hazard points to,
more than anything, the need for reforms to take place that would alleviate this problem.
4.4 Economic Growth and Overdependence on the Banking System
Given all these problems, why have reforms not been more stringently
undertaken? Simply put, there is no alternative form of financing for China’s SOEs. Bank
support takes the form of credit provision for and underwriting losses of the SOEs within
these sectors. (Lardy, 1998, p. 83) Returns from loans are not a priority concern. Before
its abolishment, banks were guided by annual “aggregate lending quotas” set by the State
Planning Commission (SPC) in granting loans to SOEs, with little regard to profitability
and risk. (Okazaki, 2007, p. 11) Furthermore, a large part of total lending is made up of
what is officially called “policy loans,” essentially credit extended to government-
designated “priority sectors” of the economy. Such sectors include manufacturing,
wholesale and retail operations, transportation, real estate, and energy firms, which
28
dominate the majority of corporate loans made by SOCBs. Enterprises within these
sectors are also ranked highest when it comes to “transnationality,” measured by the
extent of a firm’s overseas operations (see appendix). In turn, transnationality is an
important indicator of OFDI, so banks that lend to these enterprises are directly assisting
their borrowers’ overseas investments. The first and foremost concern was, and still is,
ensuring that SOEs are well capitalized.
Figure 2: Corporate Loans Made by ICBC, CCB, and ABC (RMB million)8
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year
Va
lue
(R
MB
Mil
lio
n)
0
10
20
30
40
50
60
70
80
90
100 Co
rpo
rate L
oan
s a
s %
of T
ota
l
Lo
ans
ICBC
CCB
ABC
ICBC (%)
CCB (%)
ABC (%)
Sources: Various bank reports
8 As indicated in SOCB reports. ICBC, CCB, and ABC bank reports classify loans as either corporate or personal. Personal loans are on the rise but still constitute less than a quarter of all loans.
29
Chapter 5: The Role of the Banking System in Outbound Foreign Direct Investment
The discussion so far has focused on the banking system’s domestic role in
lending to SOEs. One aspect given less attention in the general scholarship is how banks
are supporting national enterprises abroad. Commercial banks have been issued a number
of lending guidelines to support the overseas investment activities of enterprises, which
will be briefly discussed in the following section. Just as importantly, banks have lent
direct support abroad. OFDI by the non-finance sector really took off beginning in 2004,
and finance-sector OFDI followed soon thereafter, experiencing a substantial increase
beginning in 2007. Just as SOEs have needed capital to conduct domestic economic and
production activities, they also require financing for investment endeavors abroad. This
section reviews notable investments made abroad by Chinese banks, which serves as an
important context in which to situate the discussion on how banks are supporting the
OFDI endeavors of their non-finance counterparts.
5.1 Lending Guidelines for State-owned Commercial Banks and Corporate Clients
As noted previously, state-owned banks are expected to prioritize enterprise
borrowing according to government-mandated criteria. Though the restrictions and
lending quotas have eased, for the most part corporate loans still dominate the majority of
lending that occurs in SOCBs. In line with reform efforts, the guidelines for these priority
loans have evolved over time to include risk provisioning and include attempts at
following international banking standards. For example, beginning in 1994 banks were
limited to lending 15 percent of their total capital to any one single borrower to minimize
30
loan concentration. (Lardy, 1998, p. 96) During the late 1990s the central government
eased the mandating of lending based on non-commercial criteria, at least officially. A
PBOC official noted in an interview that factors such as asset-liability ratios, reserve
funds, deposit-loan ratios, and the time frame of the loan now had to be taken into
consideration by commercial banks in order for a loan to be approved. (“People’s Bank
Official Explains Decision to Abolish Loan Quotas,” 1998) At the same time they were
expected to give
priority to supporting state-owned large- and medium-sized enterprises [as well as] give proper consideration to medium-sized and small enterprises and money-losing enterprises that can guarantee the capital repayment and interest payment, have a ready market for their products, and have competitive ability and development potential; should vigorously support the re-employment of laid-off workers; and should…cultivate and develop new economic growth areas. (“People’s Bank Official Explains Decision to Abolish Loan Quotas,” 1998)
Although this has been the official mandate, a number of factors prevent
its realization. First, there has been lax oversight over local governments. Bank
branches operate under the jurisdiction of the local government, made up of
policymakers who have an incentive to lend to favored enterprises and/or projects
in which they have a personal or business-related interest. Although the decree
may come from the central bank, local bank branches and government officials
have shown little interest in implementing it.1 Second, banks are still weak when
it comes to having a system of risk assessment and evaluating creditworthiness
based on commercial criteria. Internally, banks do not have the expertise required
1 For a detailed account of local politics surrounding the financial system in China see Victor Shih, Factions and Finance in China: Elite Conflict and Inflation, 2008, Cambridge University Press.
31
to develop a system in line with international standards, and the CBRC is still a
fledgling institution when it comes to providing guidance on issues of operations
and corporate governance. Third, and perhaps most relevant, is that with the
expansion of SOEs and large enterprises abroad, accessible financing is now more
important than ever.2 (Ma, 2009)
Figure 3: Overseas Loans made by ICBC, CCB, and ABC (RMB million)
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year
Valu
e (
RM
B M
illi
on
)
ICBC
CCB
ABC
Source: Various bank reports 5.2 Significant Developments in OFDI by China’s Banks
To date, SOCBs are one of several types of actors conducting finance OFDI.
Joint-stock commercial banks, policy banks, and even government-owned wealth funds
2 In a set of guidelines governing merger and acquisition investments abroad, the CBRC defined lending criteria for commercial banks in financially assisting SOE and other enterprise borrowers. ICBC and CCB have made available more than 30 billion RMB in credit for enterprises in high technology, real estate, construction, steel, and shipbuilding industries making acquisitions abroad. In addition, borrowers applying for these loans must be acquiring an important asset in the investment—“R&D abilities, key technologies and processes, trademarks, franchises and supply or distribution network from the target enterprise to improve its core competitiveness.” Making credit more readily available for M&A activities abroad serve the dual purpose of strengthening the competitiveness of national enterprises in strategic sectors and fulfilling the government’s priority goal of increasing outbound investment.
32
have participated in overseas investments.3 To provide a chronological narrative of how
finance sector OFDI has evolved, the discussion below is not limited to activity by
SOCBs. Many of these financial actors invest abroad with intentions similar to those of
SOCBs. It is still important to keep in mind, ultimately, that SOCBs are expected to
increase their OFDI due to the integral role they already play domestically in providing
SOEs with financial support.
One example of a finance sector firm making an investment overseas for the
purpose of supporting Chinese enterprises is that of China Minsheng Bank. In September
2007 China Minsheng Bank, a privately owned medium-sized commercial bank, bought
4.9 percent of San Francisco-based United Commercial Bank (UCBH) valued at $96.1
million dollars. As part of a two-part investment strategy, Minsheng would increase its
total holdings to 9.9 percent in a year, with the ultimate option of increasing the figure to
twenty percent two years after the initial purchase. (Oliver, 2007) The ultimate value of
the deal was estimated to be $129 million dollars. (Braithwaite & Anderlini , 2009) This
was China’s first investment deal in an American bank, and it happened to be one that
served primarily a Chinese-American population. Unfortunately for Minsheng, UCBH
failed in 2009 due to a number of stress factors adversely impacting its profitability—a
significant one being the number of construction and mortgage loans it had on its books
when the Global Financial Crisis hit—and Minsheng, at the time its largest shareholder,
had to write off the investment. (“All the World’s a Stage, 2010) The extent of UCBH’s
3 As of 2009 SOCBs have a combined 86 branches overseas, covering commercial and investment banking and insurance services.
33
financial deterioration became apparent when in 2009 top executives at UCBH resigned
because they had been deemed responsible for unlawfully modifying loan terms and
withholding information from external auditors in order to cover up the amount of
troubled loans. (Calvey, 2009) Minsheng applied to acquire UCBH, but was subsequently
denied by US federal regulators. (Braithwaite & Anderlini, 2009) With the failed UCBH
deal, China’s eighth-largest commercial bank had paid a high cost for an opportunity to
expand into the US and support rapidly increasing OFDI in this particular market.
In October 2007 ICBC bought a 20 percent share of Standard Bank in South
Africa for $5.6 billion dollars. (“Trojan Dragons,” 2007) The deal was noteworthy in the
sense that it was one the biggest foreign direct investment transactions not only in
Africa’s banking sector, but in the continent’s entire economy.4 It was called a
“watershed,” with Standard Bank chief executive Jacko Maree stating, “It is the biggest
foreign investment by any Chinese company ever and it is the largest foreign direct
investment into South Africa since the end of apartheid. Its significance goes way beyond
the actual deal between the banks.” (Timewell, 2007) In recent years Africa has become
an economically important place for China, so there was no doubt that this consideration
was central in the decision to invest in Standard Bank. Standard Bank is a comparatively
smaller bank with ICBC in terms of market capitalization and net profit, but it has
extensive reach continentally and even globally, with branch operations in 18 African
countries and 20 countries outside of Africa. (Timewell, 2007; Kandell, 2010) With
4 This particular deal is considered exceptional because of the unique strategic nature of the purchase, and hence I spend more time discussing it in this section and elaborating on it in the subsequent section.
34
approval of the deal by regulators, it stood as one of the biggest banking partnerships in
Africa, comparable to the one between Britain-based Standard Chartered and Absa Group
(the Johannesburg-based arm of Barclays) in terms of extent of operations. (Timewell,
2007; Kandell, 2010) In the partnership, Standard Bank received financing from ICBC
for loans it made to borrowers working on infrastructure development projects. ICBC,
along with the Bank of China, China CITIC Bank Corporation, China Development
Bank, and ICBC (Macau), funded a one billion dollar loan for Standard Bank to maintain
liquidity and boost its balance sheet. (Timewell, 2007; Kandell, 2010) Standard Bank
also received capital from ICBC to refinance a copper mine in Zambia to the amount of
$400 million dollars and finance trade of the cocoa crop in Ghana, both projects that
likely would not have been possible without the financial backing of ICBC. (Timewell,
2007; Kandell, 2010) Both banks have partnered to provide loans for Chinese companies
in Africa working on petroleum-related and electric equipment manufacturing projects.
(Enrich, Dean, & Stevens, 2011) ICBC, since it now had a partnership with a well-
connected local entity, became more competitive in assisting Chinese enterprises win
bids for government-backed infrastructure and development projects. One example
involved a coal energy plant-building project in Botswana. It received several foreign
bids, including those from France, India, and Malaysia, but the $970 million dollar
contract was eventually granted to one of ICBC’s clients, China’s state-owned China
National Electric Equipment Corporation. (Enrich et al, 2011) Standard Bank has
operations in Botswana and had known about the project plans, due to consistent energy
35
shortages, for years. There are more plans to cooperate on financing infrastructure
projects, and there is little doubt that they will involve Chinese enterprises.
The most recent proposed purchase is that of ICBC and the Bank of East Asia,
USA (BEA-USA) in January 2011. BEA was founded in Hong Kong and is currently its
third largest commercial bank, with operations overseas in Canada, the United States, and
Britain. Under the proposed purchase, ICBC would buy eighty percent of BEA-USA’s
common stock shares for 140 million US dollars. (Reiss, Patrikis, Zou, Wall, &
Cuccinello, 2011; “Chinese Bank Acquisitions in the United States,” 2011) This is the
first purchase that, if approved by the Board of Governors of the Fed, the Committee on
Foreign Investment in the US (CFIUS), the China Regulatory Banking Commission
(CRBC), and the Hong Kong Monetary Authority, would make a Chinese SOCB a
controlling shareholder in a foreign bank, and quite non-coincidentally, an American-
based one. (Reiss et al, 2011; “Chinese Bank Acquisitions in the United States,” 2011)
The ICBC—BEA-USA deal is the latest in a flurry of overseas investments Chinese
financial institutions have been making in recent years in an effort to internationalize the
banking system, and the process does not show signs of slowing down.
36
Figure 4: ICBC and BEA-USA Profiles
Source: Wei, “China Bank Moves to Buy U.S. Branches”, Wall Street Journal 5.3 ICBC’s Lower-Profile Foreign Bank Investments
The examples raised above were larger-scale transactions, several of which were
conducted with global-scale financial institutions located in countries with developed
banking practices and systems. They were high profile, garnering attention from the
media, financial regulators, and the general banking sector. In addition to these deals
banks, primarily the largest SOCB ICBC, have made a series of investments in smaller
banks, none of which should be discounted. A strong argument can be made for the
strategic nature of these investments as part of banking system’s efforts in assisting the
OFDI goals discussed in the government’s economic development agenda.
37
ICBC has taken the lead on OFDI in the banking sector. In December 2006, it
bought 90 percent of Bank Halim Indonesia for $8.9 million dollars, a bank far smaller in
asset size than ICBC. (Timewell, 2007) It was the first overseas investment by one of
China’s state-owned commercial banks. An official ICBC press release noted, “It is the
first time that ICBC has taken over a foreign bank…and [the investment] should give the
bank experience to expand into international financial markets.” (“ICBC Says it Will Buy
Indonesian Bank,” 2007) In August 2007 ICBC bought 80 percent of Seng Heng Bank,
based in Macau, for $584 million dollars, and in June 2009 ICBC bought 70 percent of
Bank of East Asia Canada for $72 million dollars. (Luo, 2009; Timewell, 2007) ICBC
had the option of raising the stake to 80 percent a year after the transaction. (Alexander,
2009) Finally, in September 2009 ICBC came to an agreement with Thailand’s Bangkok
Bank Public Company Limited (BBL) to buy the entire 19.26 percent share of ACL Bank
Public Company Limited owned by BBL, valued at $106 million dollars. (“Industrial and
Commercial Bank of China to Buy Thailand’s ACL Bank ,” 2009) As of April 2010
ICBC completed its acquisition of ACL, Thailand’s smallest bank, purchasing a 97.24
percent share for $551 million dollars. (Jittapong, 2010)
Compared to ICBC’s investments in Standard Bank and Bank of East Asia USA,
these were lower-profile transactions due to the small size of the banks acquired, even as
they resulted in a majority holding. The ICBC-Bank Halim Indonesia deal was conducted
shortly after the former successfully listed on the Hong Kong and Shanghai stock
exchanges, arguably a concurrent strategic move made in an effort to raise ICBC’s profile
in the international banking system. This deal, and the acquisition of Thailand’s ACL
38
Bank, were approved easily and conducted with relatively little obstruction by regulators.
As to the aforementioned ICBC-BEA Canada deal, it later became apparent that it was a
precursory move, serving as a stepping-stone for ICBC to propose a majority share
purchase of BEA Canada’s American counterpart. (Wei, 2011) As ICBC Chairman Jiang
Jianqing stated, the investment in BEA Canada would “enable ICBC to establish its
banking business and customer base in Canada…provid[ing] a strong platform to further
expand…businesses across North America.” (Alexander, 2009)
Table 4: Chinese Financial Institutions and OFDI in the Finance Sector, Major Deals
Chinese Financial Institution
Foreign Financial Institution
Shareholding Value (USD)*/Percentage**
Date of Investment
Industrial and Commercial Bank of China
Bank Halim Indonesia
$8.9 million/90.0 December 2006
China Investment Corporation
Morgan Stanley $3 billion/9.9 May 2007
China Development Bank
Barclays $3 billion/3.0 July 2007
Industrial and Commercial Bank of China
Seng Heng Bank $584 million/80.0 August 2007
China Minsheng Bank
UCBH $96.1 million/9.9 September 2007
Industrial and Commercial Bank of China
Standard Bank in South Africa
$5.6 billion/20.0 October 2007
Industrial and Commercial Bank of China
BEA Canada $72 million/70.0 June 2009
Industrial and Commercial Bank of China
ACL Bank Public Company Limited
$551 million/97.2 September 2009
Industrial and Commercial Bank of China
BEA-USA $140 million/80.0 January 2011***
* Initial Purchase Value; **Ultimate Shareholding Percentage; ***Proposed
39
Like non-finance sector OFDI, the finance sector is going global. In light of the
central government’s focus on “rebalancing” the economy, OFDI will be important
means to achieve this goal.5 (“Fourth Plenary Session, 11th National People’s Congress,”
2011; Harris, 2011) In places like South Africa, Australia, and Canada, China is buying
rights to primary commodities and natural resources such as metals, coal, and timber. In
Latin American countries, China is investing in agricultural goods and minerals. In the
Middle East and Central Asia, China is investing in oil and natural gas. (Gao, 2009, p.
237-240; Wang, 2002, p. 196, 201; Brown, 2008, p. 148) Europe and the US have
received OFDI from China as well, in high-technology industries such as
telecommunications, renewable energy, biotechnology, and pharmaceuticals. (Child &
Rodrigues, 2005, p. 391; Rosen & Hannemann, “An American Open Door?”, p. 30) With
OFDI on an upward swing and becoming increasingly prominent in China’s national
economic development plans, one will expect finance sector OFDI to increase as well to
support this priority. The role of commercial banks as financiers becomes more important
than ever.
5 Cumulative OFDI in 2010 reached $220 billion dollars. In the Twelfth Five-Year Plan (2011-2015), reorienting the balance of payments became an additional motivation to invest abroad. The plan stated the need to continue “opening-up” to the global economy—not only by reorienting imports and exports in a more balanced manner within its trade profile, but also by sustaining the “going global” policy in increasing outbound investment to reach a level comparable with inward investment.
40
Figure 5: China’s Outbound Foreign Direct Investment, 1976-2006 (USD 100 million)
0
100
200
300
400
500
600
700
800
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Year
Va
lue
(U
SD
10
0 m
i lli
on
)
Source: China Trade and External Economics Yearbook Figure 6: China’s OFDI By Region, Percentage of Total Amount, 2005-2010
Source: The Economist
41
Chapter 6: The Link between Finance and Non-Finance Sector OFDI and Implications for Banking Reforms
Given the discussion of problems in the banking system, reluctance on behalf of
the government to enact reforms begs explanation. The answers can largely be found in
the underlying motivating factors driving the finance sector transactions described earlier
in the thesis. While some reasons are related to strengthening China’s banks and assisting
in the reform process—such as asset-seeking—they are indirect and marginal. At its very
core, the phenomenon of China’s finance sector ODFI can be traced back to the need to
support SOEs abroad. Finance sector OFDI that has occurred furthers the ultimate
objective of keeping the banking system as a linchpin of SOE financing. This priority
outweighs the preferences of policymakers to engage in reforms that would jeopardize
the relationship between lender and borrower.
6.1 Finance Sector OFDI Strategies and National Economic Development Goals 6.1.1 The Internalization Factor in Practice
The main reason Chinese banks are conducting investment abroad is
straightforward—they are following non-finance sector OFDI. All five SOCBs have
operations outside China, while joint-stock commercial banks have made similar
ventures. (China Banking Regulatory Commission, 2009) As of 2011, ICBC has
established branches in Malaysia, Abu Dhabi, Vietnam, Kazakhstan, across Europe, and
the US. BOC has branches in Australia, Brazil, South Africa, Vietnam, across Europe,
and the US. These are wholly owned subsidiaries not involving local firms. Many are
located in countries where there is already a substantial volume of investment or business
activity conducted by Chinese nationals, giving the host country an incentive to approve
42
the establishment of bank branches that will be responsible for financing Chinese
investment projects, especially in OFDI-heavy sectors such as manufacturing. The
establishment of branches overseas can be considered an act of internalization under the
eclectic paradigm. Chinese banks have decided to absorb the costs associated with:
partnering with a local firm, potential taxes or fees levied on foreign corporations doing
business in the host country, and overcoming foreignness and unfamiliarity with business
rules governing the host country, because directly serving clients in the host market is
expected to outweigh the transaction costs described. There is no impetus to build brand
recognition in this case because a majority of the clients served are already familiar with
the bank brand and services, and are more interested in having a convenient way to
repatriate profits back to China.
6.1.2 Beyond Wholly Owned Subsidiaries
Internalization via the establishment of wholly owned banking branches is one
way Chinese banks are supporting economic activity overseas. Overseas branches are
able to take deposits and provide an array of retail banking services to their clientele, but
they have yet to operate in conjunction with local banks to broaden their client base and
expand into commercial banking functions. Establishing wholly owned subsidiaries can
also be a difficult endeavor given strict rules governing the operations of foreign banks in
some countries. For these reasons, purchasing stakes in local banks is another way
China’s banks are operating abroad.
As the largest of the four SOCBs, ICBC has taken the lead when it comes to
conducting OFDI. The ICBC deals that have already occurred are an attempt to prepare
43
China for future investments involving its other SOCBs. ICBC’s purchase of Standard
Bank is a telling example. As The Economist points out, “Instead of trying to buy a global
rival, ICBC has taken a minority stake in Africa's largest bank. This way, it can better
(and less obviously) direct Chinese investments in a key continent for future energy and
commodity supplies.” (“Trojan Dragons,” 2007) Standard Bank has benefited in the
sense that it now has access to additional capital and the Chinese market, but it is
ICBC—and by extension, the Chinese government—that saw itself as truly gaining from
this deal. Standard Bank has an extensive network of clients across Africa, including with
political elites, which is very attractive to China. It was considered a monumental move
in securing natural resources and commodities in numerous African countries.1 (Kandell,
2010) In addition, as previously mentioned ICBC hopes to capitalize on Standard Bank’s
connections with African political elites in order to be more competitive in national
infrastructure development project bids. Lastly, there is an increasing population of
Chinese businesses and laborers in Africa’s economy—through a partnership with
Standard Bank, ICBC would more easily be able to serve Chinese nationals’ personal
banking needs. In this particular case, the motivations are threefold: to begin involving
SOCBs in OFDI by using the largest one as an initial step in the process; secure access to
1 As an example, over 30 percent of China’s oil is imported from different countries on the African continent, in addition to the various minerals and metals that are exported. Many of the ICBC—Standard Bank agreements involved a financing-for-commodities swap; for example, a $1.25 billion dollar investment in Uganda in exchange for rights to one-third of petroleum assets held by the U.K.'s Tullow Oil Company, and $6 billion dollars worth of infrastructure projects in the Democratic Republic of Congo in exchange for rights to the country’s copper and cobalt deposits were proposed. The deal also involved the creation of a one billion dollar “mining and resources fund, which would invest in resources in emerging markets and help finance China's commodity needs.” Since these are all proposed or recently developed projects, the viability and fruitfulness of the results remain to be seen.
44
important energy resources and primary commodities, both integral to national economic
development; and make Chinese national enterprises more competitive in the region by
serving as a gateway to investment opportunities.
For the same reason, ICBC was not hesitant in buying out two Southeast Asian
banks—Bank Halim Indonesia and Thailand-based ACL Bank. Majority or full
ownership was more significant than a name change. It meant offering commercial and
retail banking services at arms’ length to Chinese enterprises operating in these two
countries. As a whole, China’s investment in Southeast Asia is increasing, following on
the coattails of advanced East Asian economies Japan and South Korea, both long having
production subsidiaries in the region. (Bernard & Ravenhill, 1995, p. 198) Prior to the
China—ASEAN Free Trade Agreement, Chinese manufacturers had already been
moving production activities to locales such as Indonesia and Vietnam. (Wong and Chan,
2003, p. 384) Singapore, Malaysia, and Thailand are also receiving increasing amounts of
Chinese OFDI. With the implementation of the FTA, Chinese investment is expected to
continue rising at an increasing rate to the region. (ASEAN, 2009)
This brings the discussion to the current proposed purchase at hand, the one
between ICBC and BEA-USA. Chinese OFDI is increasing across diverse sectors of the
US economy. Investment is being funneled into everything from industrial goods,
electronics, coal, oil, gas, automobiles, telecommunications, home appliances, to medical
devices. (Rosen & Hannemann, 2011, p. 30) The US market is also highly attractive to
China because of the potential to partner with and learn from firms populating high-
technology innovative industries. Since research and development and the move to a
45
more innovative, higher value-added economy has now become a priority for China in
the next few years, OFDI to destinations such as the US is expected to increase.2 Rosen
and Hannemann explicate ICBC’s motivation in a recent Asia Society study: “…a recent
attempt by ICBC to purchase a controlling stake in the US subsidiary of the Bank of East
Asia indicates a rising desire on the part of Chinese banks to support their traditional
clients that have come to America. ICBC’s foray, if successful, would likely presage
additional overtures by China’s banks…to enter the North American market.” (Rosen &
Hannemann, 2011, p. 30-31) Taking the argument a step further, ICBC may have a
“desire,” but it certainly has been mandated to support its clients in the US.
2 This priority is made explicit in the NPC’s 12th Five Year Plan.
46
Chapter 7: Has OFDI Made China’s State-Owned Commercial Banks More Competitive?
To answer this question, ICBC’s OFDI experience is telling. A few points can be
made. One is that acquisitions and stake purchases have followed non-finance sector
OFDI quite closely in terms of location. Overseas branches offer a variety of commercial
and corporate banking services, including trade finance, remittances, deposit/loan
transactions, and foreign currency exchange, largely serving the needs of enterprises
operating abroad. Services have been tailored to serve the overseas Chinese enterprise
and individual client community. Since a majority of enterprises investing abroad are
state-owned, it is fair to argue that the global expansion of Chinese banks is really to the
benefit of SOEs. The second point is that these investments have had little to no impact
on the bank’s reform efforts. ICBC, being the largest commercial bank globally when
measured by market capitalization, has invested in banks much smaller in terms of asset
size, capitalization, and scale of operations. Therefore, it seems that the motivations
behind these investments have less to do with asset-seeking; i.e. seeking factors of
production that are currently lacking and may assist in the reform process, than with
supporting Chinese non-finance sector investments overseas.
OFDI theoretically can assist in the reform process in some of ways that would
help the banks themselves. Partnering with foreign financial institutions can help Chinese
banks meet international regulatory standards, develop their own national regulatory and
supervisory system, improve management and staff capabilities, and improve business
practices when it comes to determining creditworthiness and making loans. Mature
47
foreign financial institutions possess intangible assets such as management experience
and advice, established and efficient operations, and knowledge about providing
commercial and retail banking services that would be beneficial and attractive factors to
Chinese banks. OFDI in foreign banks also lends a degree of credence to the image that
China’s banks are globally competitive.
However, these are not primary motivations. The central purpose of finance sector
OFDI is part of a broader strategy to assist in fulfilling OFDI objectives as part of
national economic development. In turn, economic goals include building the
competitiveness of SOEs and securing supplies of natural resources, commodities, and
energy, all of which are critical to production. With regard to the first goal, SOEs must
have access to capital for production activities and projects in order for economic growth
to continue, which means that the role of banks must be stable. In other words, banks
need to lend in order for 7-8 percent annual growth to continue. The second goal
comports with the explanation by researchers that finance sector OFDI follows non-
finance sector OFDI. This was observed in ICBC’s 20 percent purchase of Standard Bank
and acquisitions of Bank Halim Indonesia and Thailand’s ACL Bank in Southeast Asia.
In the first case, the increasing significance of Africa as a source of energy and crucial
production inputs made it a logical decision for ICBC to partner with a local bank so it
could more easily finance the projects of Chinese enterprises in the region. Discussions
for ICBC to move into Latin America arguably are motivated by similar interests. In the
second case, rapidly expanding non-finance sector OFDI in Southeast Asia requires a
more cost-efficient banking relationship between lender and borrower.
48
These fundamental priorities mean that OFDI is not conducted with the reform
process of China’s banks as a central consideration. Moreover, China’s expanding OFDI
profile will provide less of an incentive to undertake critical reforms for the banks.
China’s banking system suffers from a structural problem driven by the incentive to not
enact certain reforms fundamental to the health of banks, because an overhaul of the
system would mean eliminating the banks’ central function of supporting SOEs at all
necessary costs. Finance sector OFDI potentially could assist in the reform process by
allowing China’s banks to seek beneficial ownership factors, but investment decisions
made in such a context either have not bore fruit or have not yet been shown to provide
such benefits. As SOCBs and other commercial banks expand abroad, the guiding factor
will be how they will support non-finance investment by facilitating arms’ length banking
services, especially in markets with increasing OFDI flows. As Walter and Howie point
out, “…the Party wants the banks to support the SOEs in all circumstances. If the SOEs
fail to repay, the Party won’t blame bank management for losing money; it will only
blame bankers for not doing what they are told. Simply reforming the banks cannot
change SOE behavior or that of the Party itself.” (Walter & Howie, 2011, p. 43) The
vitality of the banking system has been sacrificed for political interests. At best, stagnant
performance will continue to be backed by state support. As a result, OFDI is limited in
helping the reform process and making China’s banks competitive.
49
Chapter 8: Implications and Going Forward 8.1 The Potential for Foreign Direct Investment in the Finance Sector
True liberalization must occur if foreign direct investment is to have any impact
on the reform process. With regard to inward investment, this means allowing foreign
ownership beyond current limits set by the government. It means allowing foreign
investors to buy controlling stakes and reallocating board seats, hence giving them an
influential position in the operation of and diversifying ownership in Chinese banks. In a
study of Chinese banks, Berger et al found that ones with minority foreign ownership
were more profitable than state-owned ones. (Berger, Hasan, & Zhou, 2009) The former
category benefited from foreign representation on the board, which improved the
management of the bank. In other instances, bank employees also received training from
the foreign bank. (Berger et al, 2009, p. 127) In terms of outbound investment, it means
allowing banks to make decisions to invest in foreign financial firms based on the need to
address competitive disadvantages; in other words, seeking advanced factors of input that
are currently lacking in the domestic system. If banks are conducting OFDI as self-
interested firms, and not due to state-mandated policies, a more coherent and beneficial
strategy will emerge. The prospects for banking liberalization to occur internally are
minimal, given the priorities of the central leadership as discussed in this thesis.
What impact has finance sector OFDI had on the national economy? Without
carrying out more rigorous methods of assessing the link, it is difficult to make a
definitive statement. ICBC’s investment in Standard Bank is a telling example. Since the
goal of purchasing a stake in a bank located in the same region that was an important
50
source of energy and primary commodity exports was to secure access to those resources,
it would serve as a good starting point to evaluate the effectiveness of this strategy.
According to at least one source, the deal has not been as beneficial as initially
anticipated. Agreements to partner on deals have slowed due to a combination of
bureaucratic and political roadblocks. For one, having a presence in the region does not
guarantee returns. China still has to compete with comparatively well-established
Western firms for access to natural resource deposits such as oil and metals. (Kandell,
2010) Deals involving natural resource access in exchange for infrastructure projects are
sometimes opposed by Western firms that are competitors. (Kandell, 2010) While this
hardly can serve as conclusive evidence, it does point to some of the unforeseen obstacles
China faces in achieving the goals associated with its OFDI strategy.
Outbound foreign direct investment is a rising trend in China, driven by the
government’s goals of further economic liberalization and the “going global” strategy.
While various theories all have contributed to the literature on theories of FDI, they all
are needed in conjunction to explicate China’s finance sector OFDI behavior. Due to the
critical role banks play in the domestic economy—especially SOCBs—a case-specific
approach is needed.
As a microcosm of China’s general OFDI activity, banking and financial services
sector investments span almost all continents. ICBC has plans to open a wholly owned
subsidiary in Brazil (ICBC do Brasil Banco Multiplo SA), and there has been speculation
about ICBC possibly investing in the Argentine arm of Standard Bank. (Webber &
Stovin-Bradford, 2011) Given that Latin America is an important source of agricultural
51
and primary commodity exports for China and hence significant to national economic
policy goals, these decisions would hardly be surprising. It also adds another observable
case to assess the theoretical link between finance sector OFDI and non-finance sector
investments, in addition to other variables discussed by scholars.
Firms invest abroad to increase their profitability and improve competitiveness.
For China’s banks this would mean OFDI in foreign financial institutions is supposed to
strengthen competitive capability, either by pushing them to meet higher levels of
regulatory standards or support the reform process by providing the necessary
management and staff training to increase productivity and determine creditworthiness;
as well as advisement on improving balance sheets, developing better business practices
to increase efficiency, and expanding banking services.
Unfortunately for China’s banks, these goals have taken a backseat in favor of
addressing national economic development objectives. Policies in finance sector OFDI
are guided by broader political and economic interests with little consideration to profit
and the improvement of capabilities. China’s banking system is going global, but not
necessarily to the benefit of the banks themselves. The banks’ necessary role as absolute
lenders has marred their ability to be efficient, profitable, and competitive. OFDI will be
of limited assistance in the reform process unless the banks commit to stringent—and
painful—measures of eliminating inefficiency, non-performing loans and other bad
assets; meet higher standards of capital-adequacy ratios and liquidity to address potential
macroeconomic shocks; and stop lending based on political interests. The role of China’s
banks as critical financers in order to continue the economy’s 7-8 percent growth per
52
annum is irreplaceable, but it hardly seems like a sustainable strategy if the sacrifice is
the welfare of the banks themselves.
53
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Appendices
Appendix A: Household Deposits, Total and as a Percentage of Total Bank Funds
Year Value (USD 100 million) % of Total Bank Funds 1980 522.33 19.9 1981 632.54 20.8
1982 777.27 22.8
1983 963.85 24.8
1984 1149.05 22.6
1985 1507.37 23.4
1986 1977.09 24.1
1987 2690.32 27
1988 3328.71 28.8
1989 4451.12 32.7
1990 6042.84 35.9
1991 7962.8 38.6
1992 10087.5 41.6
1993 12490.43 37.8
1994 16039.6 35 1995 22157.8 41
1996 39884.9 50.5
1997 47812.8 50.3
1998 55155.5 50
1999 61748.1 50.1
2000 66975.3 49.4
2001 76845.7 49.6
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Appendix A continued
2002 90674.9 49.3
2003 108516 48.2
2004 125081.7 47.6
2005 147254.8 48.8
2006 169001.3 46.3
2007 172534 38
2008 217885 40.5 Source: China Statistical Yearbook, 2009
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Appendix B: Foreign Exchange Reserves, China
Year Value (USD 100 million) 1978 1.67 1979 8.4 1980 -12.96 1981 27.08 1982 69.86 1983 89.01 1984 82.2 1985 26.44 1986 20.72 1987 29.23 1988 33.72 1989 55.5 1990 110.93 1991 217.2 1992 194.43 1993 211.99 1994 516.2 1995 735.97 1996 1050.29 1997 1398.9 1998 1449.59 1999 1546.75 2000 1655.74 2001 2121.65 2002 2864.07 2003 4032.51 2004 6099.32 2005 8188.32 2006 10663.4 2007 15282.49 2008 19460.3
Source: China Statistical Yearbook, 2009
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Appendix C: China’s OFDI By Region, 2008 Region Value (USD 10000) % of Total Amount Asia 4354750 77.9 Africa 549055 9.8 Europe 87579 1.6 Latin America 367725 6.6 North America* 36421 0.65 Oceania 195187 3.5 Total 5590717 100 Source: China Statistical Yearbook, 2009 *The noticeably low figure for North America is due to a reported dramatic drop in OFDI to Canada from 2007-2008. It went from 103257 to 703 (USD 10000). OFDI to the US rose in the same period by over two-fold, from 19573 to 46203 (USD 10000).
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Appendix D: China’s OFDI By Sector, 2008
Sector Value (USD 10000) % of Total Amount Agriculture 17183 0.31 Mining 582351 10.4 Manufacturing 176603 3.2 Wholesale and Retail Trade 651413 11.7 Transportation 265574 4.8 Leasing and Business Services
2171723 38.8
Banking and Financial Services
1404800 25.1
Real Estate 33901 0.61 Other 287169 5.1 Total 5590717 100
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