Contemporary Financial Topics of ChinaTopic 1 China’s Financial System
Zongxin Qian
School of Finance, Renmin University of China
July 1, 2014
目录
Introduction to financial system
Introduction to banking theory
China’s financial systemOverviewBanking reform ILoan discriminationFinance and developmentBanking efficiencyBanking reform IIInternationalizationDevelopments of financial markets in China
Function of the financial system
Source: Levine (1997)
How does a typical financial system look like: A chart fromMishkin
目录
Introduction to financial system
Introduction to banking theory
China’s financial systemOverviewBanking reform ILoan discriminationFinance and developmentBanking efficiencyBanking reform IIInternationalizationDevelopments of financial markets in China
Basics of banking theory
I Liquidity risk: invested in a long-term project but need to useyour money now
I Adverse selection: ex ante problem of finding the right type
I Moral hazard: interim problem of monitoring the action
I Costly state verification: ex post problem of verifying thefinancial status
Basics of banking theory
I Liquidity risk: invested in a long-term project but need to useyour money now
I Adverse selection: ex ante problem of finding the right type
I Moral hazard: interim problem of monitoring the action
I Costly state verification: ex post problem of verifying thefinancial status
Basics of banking theory
I Liquidity risk: invested in a long-term project but need to useyour money now
I Adverse selection: ex ante problem of finding the right type
I Moral hazard: interim problem of monitoring the action
I Costly state verification: ex post problem of verifying thefinancial status
Basics of banking theory
I Liquidity risk: invested in a long-term project but need to useyour money now
I Adverse selection: ex ante problem of finding the right type
I Moral hazard: interim problem of monitoring the action
I Costly state verification: ex post problem of verifying thefinancial status
Basics of banking theory
I Liquidity risk: invested in a long-term project but need to useyour money now
I Adverse selection: ex ante problem of finding the right type
I Moral hazard: interim problem of monitoring the action
I Costly state verification: ex post problem of verifying thefinancial status
Role of the bank
I Diversification of depositors provide liquidity insurance
I Adverse selection: you can signal that you are a less riskyborrower by putting in more own money in the project, butthat is going to be costly since you bare part of the risk
I Diversification of borrowers and their projects lowers the costof signaling since the risk of project failure is diversified
Role of the bank
I Diversification of depositors provide liquidity insurance
I Adverse selection: you can signal that you are a less riskyborrower by putting in more own money in the project, butthat is going to be costly since you bare part of the risk
I Diversification of borrowers and their projects lowers the costof signaling since the risk of project failure is diversified
Role of the bank
I Diversification of depositors provide liquidity insurance
I Adverse selection: you can signal that you are a less riskyborrower by putting in more own money in the project, butthat is going to be costly since you bare part of the risk
I Diversification of borrowers and their projects lowers the costof signaling since the risk of project failure is diversified
Role of the bank
I Diversification of depositors provide liquidity insurance
I Adverse selection: you can signal that you are a less riskyborrower by putting in more own money in the project, butthat is going to be costly since you bare part of the risk
I Diversification of borrowers and their projects lowers the costof signaling since the risk of project failure is diversified
Role of the bank
I Typically, a project is financed by many investors
I Without coalition, each investor has to pay a verification costK
I With coalition as a bank, the cost K only has to be paid once
I Through specialization, bankers can be a better monitor thanindividuals
Role of the bank
I Typically, a project is financed by many investors
I Without coalition, each investor has to pay a verification costK
I With coalition as a bank, the cost K only has to be paid once
I Through specialization, bankers can be a better monitor thanindividuals
Role of the bank
I Typically, a project is financed by many investors
I Without coalition, each investor has to pay a verification costK
I With coalition as a bank, the cost K only has to be paid once
I Through specialization, bankers can be a better monitor thanindividuals
Role of the bank
I Typically, a project is financed by many investors
I Without coalition, each investor has to pay a verification costK
I With coalition as a bank, the cost K only has to be paid once
I Through specialization, bankers can be a better monitor thanindividuals
Role of the bank
I Typically, a project is financed by many investors
I Without coalition, each investor has to pay a verification costK
I With coalition as a bank, the cost K only has to be paid once
I Through specialization, bankers can be a better monitor thanindividuals
The role of collateral
I Risky and less risky borrowers
I The role of collateral is similar to self-finance
I Put your own-stake in the project if it is good
The role of collateral
I Risky and less risky borrowers
I The role of collateral is similar to self-finance
I Put your own-stake in the project if it is good
The role of collateral
I Risky and less risky borrowers
I The role of collateral is similar to self-finance
I Put your own-stake in the project if it is good
The role of collateral
I Risky and less risky borrowers
I The role of collateral is similar to self-finance
I Put your own-stake in the project if it is good
Firms’ external finance
I Least risky can borrow directly from markets
I Intermediate ones have to use financial intermediaries such asbanks
I Most risky one has to rely on its own fund
Firms’ external finance
I Least risky can borrow directly from markets
I Intermediate ones have to use financial intermediaries such asbanks
I Most risky one has to rely on its own fund
Firms’ external finance
I Least risky can borrow directly from markets
I Intermediate ones have to use financial intermediaries such asbanks
I Most risky one has to rely on its own fund
Firms’ external finance
I Least risky can borrow directly from markets
I Intermediate ones have to use financial intermediaries such asbanks
I Most risky one has to rely on its own fund
目录
Introduction to financial system
Introduction to banking theory
China’s financial systemOverviewBanking reform ILoan discriminationFinance and developmentBanking efficiencyBanking reform IIInternationalizationDevelopments of financial markets in China
China’s Financial System (Allen et al., 2011)
Source: Allen et al. (2011)
Main features (Allen et al, 2011)
I Dominated by a large banking system
I Financial Markets relatively small and inefficient and lessimportant than the banking system
I Most successful part: neither banking nor markets
I Alternative finance: internal finance, informal sector, tradecredit, coalitions
Main features (Allen et al, 2011)
I Dominated by a large banking system
I Financial Markets relatively small and inefficient and lessimportant than the banking system
I Most successful part: neither banking nor markets
I Alternative finance: internal finance, informal sector, tradecredit, coalitions
Main features (Allen et al, 2011)
I Dominated by a large banking system
I Financial Markets relatively small and inefficient and lessimportant than the banking system
I Most successful part: neither banking nor markets
I Alternative finance: internal finance, informal sector, tradecredit, coalitions
Main features (Allen et al, 2011)
I Dominated by a large banking system
I Financial Markets relatively small and inefficient and lessimportant than the banking system
I Most successful part: neither banking nor markets
I Alternative finance: internal finance, informal sector, tradecredit, coalitions
Main features (Allen et al, 2011)
I Dominated by a large banking system
I Financial Markets relatively small and inefficient and lessimportant than the banking system
I Most successful part: neither banking nor markets
I Alternative finance: internal finance, informal sector, tradecredit, coalitions
China vs. other EMs (2001-2007)
Source: Allen et al. (2011)
Comparison between banks (billion)
Source: Allen et al. (2011)
Banks vs. other FIs (billion)
Source: Allen et al. (2011)
Early banking Reforms
I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)
I 1984, separate deposit and loan business from the PBC andestablished it as the central bank
I 1994, PBC stopped lending to firms
I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china
I 1998, mandatory credit plan was abandoned
Early banking Reforms
I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)
I 1984, separate deposit and loan business from the PBC andestablished it as the central bank
I 1994, PBC stopped lending to firms
I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china
I 1998, mandatory credit plan was abandoned
Early banking Reforms
I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)
I 1984, separate deposit and loan business from the PBC andestablished it as the central bank
I 1994, PBC stopped lending to firms
I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china
I 1998, mandatory credit plan was abandoned
Early banking Reforms
I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)
I 1984, separate deposit and loan business from the PBC andestablished it as the central bank
I 1994, PBC stopped lending to firms
I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china
I 1998, mandatory credit plan was abandoned
Early banking Reforms
I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)
I 1984, separate deposit and loan business from the PBC andestablished it as the central bank
I 1994, PBC stopped lending to firms
I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china
I 1998, mandatory credit plan was abandoned
Early banking Reforms
I Before the reform, there is no financial markets and PBC isthe monopolistic financial intermediary (it held 90% offinancial assets in the country)
I 1984, separate deposit and loan business from the PBC andestablished it as the central bank
I 1994, PBC stopped lending to firms
I 1994, separate policy lenders from commercial banks,established China development bank, agricultural developmentbank of china, export-import bank of china
I 1998, mandatory credit plan was abandoned
State Commercial Banks: The Big Four
Since 1912; Initial specialization: foreign trade/investment
Since 1984; Initial specialization: commercial transactions
Since 1979; Initial specialization: rural area
Since 1954; Initial specialization: fixed investment
Growth of other financial intermediaries in the 1980s
I Regional banks
I RCCs and UCCs
I TICs
Growth of other financial intermediaries in the 1980s
I Regional banks
I RCCs and UCCs
I TICs
Growth of other financial intermediaries in the 1980s
I Regional banks
I RCCs and UCCs
I TICs
Growth of other financial intermediaries in the 1980s
I Regional banks
I RCCs and UCCs
I TICs
Breakdown of loans
Source: Allen et al. (2011)
Finance of listed firms
Source: Allen et al. (2011)
Finance of SOEs
Source: Allen et al. (2011)
Finance of non-listed, non-state-own firms
Source: Allen et al. (2011)
Sources of loan discrimination
I policy lending
I bailout possibility
I SOE and political promotion of local gov. officials
I Bankers’ incentive to have a good relationship with localgovernments
Sources of loan discrimination
I policy lending
I bailout possibility
I SOE and political promotion of local gov. officials
I Bankers’ incentive to have a good relationship with localgovernments
Sources of loan discrimination
I policy lending
I bailout possibility
I SOE and political promotion of local gov. officials
I Bankers’ incentive to have a good relationship with localgovernments
Sources of loan discrimination
I policy lending
I bailout possibility
I SOE and political promotion of local gov. officials
I Bankers’ incentive to have a good relationship with localgovernments
Getting out of loan discrimination
Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms
I have lower interest expenses
I more likely to get short-term loan when the monetary policy istight
I have better economic performance
However,
I integration of industry and finance is not limited to thenon-state owned sector.
I Many SOEs enter the financial industry for profit anddiversification
Getting out of loan discrimination
Many non-state owned non-financial firms hold significantownership in commercial banks.
Those firms
I have lower interest expenses
I more likely to get short-term loan when the monetary policy istight
I have better economic performance
However,
I integration of industry and finance is not limited to thenon-state owned sector.
I Many SOEs enter the financial industry for profit anddiversification
Getting out of loan discrimination
Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms
I have lower interest expenses
I more likely to get short-term loan when the monetary policy istight
I have better economic performance
However,
I integration of industry and finance is not limited to thenon-state owned sector.
I Many SOEs enter the financial industry for profit anddiversification
Getting out of loan discrimination
Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms
I have lower interest expenses
I more likely to get short-term loan when the monetary policy istight
I have better economic performance
However,
I integration of industry and finance is not limited to thenon-state owned sector.
I Many SOEs enter the financial industry for profit anddiversification
Getting out of loan discrimination
Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms
I have lower interest expenses
I more likely to get short-term loan when the monetary policy istight
I have better economic performance
However,
I integration of industry and finance is not limited to thenon-state owned sector.
I Many SOEs enter the financial industry for profit anddiversification
Getting out of loan discrimination
Many non-state owned non-financial firms hold significantownership in commercial banks.Those firms
I have lower interest expenses
I more likely to get short-term loan when the monetary policy istight
I have better economic performance
However,
I integration of industry and finance is not limited to thenon-state owned sector.
I Many SOEs enter the financial industry for profit anddiversification
Integration of industry and finance
Integration of industry and finance
Holding institutions Bank Securities company Insurance company Trust company Others
State Grid
Yingda Securities Yingda Taihe Life Insurance, Yingda Taihe
Property Insurance, Yingda Changan
Insurance Brokers Group
Yingda
International
Trust
China Power Financial co., LTD,
Yingda Futures
China National
Petroleum
Bank of Kunlun Generali China Life Insurance, Generali
China Insurance, Petrochina's exclusive
general insurance co., LTD
Kunlun Trust China Petroleum Finance, Kunlun
financial leasing co., LTD
China National
Offshore Oil
Corporation
Zhonghai insurance co., LTD Zhonghai Trust Zhonghai Fund
China Merchants
Group
China Merchants Bank China Merchants
Securities, China
Merchants Securities (HK)
China Merchants Insurance (HK), Houlder
Insurance Brokers Far East ltd, CIGNA &
CMC Life Insurance
China Merchants China Direct
Investments, China Merchants Fund
Chian Resources China Resources Bank China Resources
Trust
China Resources Investment, China
Resources Capital Management,
Harvest Capital Partners
China Huaneng Bank of communications,
Bank of Hangzhou
Great Wall Securities All Trust Insurance Huaneng Trust China Huaneng Fiance, Great Wall
Fund, Baocheng Futures
Minmetals capital
holdings LTD
Bank of communications Minmetals Securities Minmetals
International
Trust
Minmetals Futures, Minmetals finance,
China National Foreign Trade Financial
& Leasing
AVIC Capital AVIC Securities Groupama Avic Insurance AVIC Trust AVIC Future, AVIC Leasing, AVIC
Fund
Source: Huang (2013)
TVEs and the Rise and Fall of the ”Su nan” (SouthJiangsu) Model
I 1985-1997, TVEs grew more than 6-fold in real terms
I Rapid privatization in the mid-1990s: TVEs with joint liabilityfell from 78% to 43% in Zhejiang and Jiangsu
TVEs and the Rise and Fall of the ”Su nan” (SouthJiangsu) Model
I 1985-1997, TVEs grew more than 6-fold in real terms
I Rapid privatization in the mid-1990s: TVEs with joint liabilityfell from 78% to 43% in Zhejiang and Jiangsu
TVEs and the Rise and Fall of the ”Su nan” (SouthJiangsu) Model
I 1985-1997, TVEs grew more than 6-fold in real terms
I Rapid privatization in the mid-1990s: TVEs with joint liabilityfell from 78% to 43% in Zhejiang and Jiangsu
Economics of Joint Liability
I Self-selection
I Peer-monitor
I Social sanction
I Chinese feature: local gov. involvement
I Chinese feature: high profitability to reduce the likelihood ofcoordinated default
I Chinese feature: low real interest rate
Economics of Joint Liability
I Self-selection
I Peer-monitor
I Social sanction
I Chinese feature: local gov. involvement
I Chinese feature: high profitability to reduce the likelihood ofcoordinated default
I Chinese feature: low real interest rate
Economics of Joint Liability
I Self-selection
I Peer-monitor
I Social sanction
I Chinese feature: local gov. involvement
I Chinese feature: high profitability to reduce the likelihood ofcoordinated default
I Chinese feature: low real interest rate
Economics of Joint Liability
I Self-selection
I Peer-monitor
I Social sanction
I Chinese feature: local gov. involvement
I Chinese feature: high profitability to reduce the likelihood ofcoordinated default
I Chinese feature: low real interest rate
Economics of Joint Liability
I Self-selection
I Peer-monitor
I Social sanction
I Chinese feature: local gov. involvement
I Chinese feature: high profitability to reduce the likelihood ofcoordinated default
I Chinese feature: low real interest rate
Economics of Joint Liability
I Self-selection
I Peer-monitor
I Social sanction
I Chinese feature: local gov. involvement
I Chinese feature: high profitability to reduce the likelihood ofcoordinated default
I Chinese feature: low real interest rate
Economics of Joint Liability
I Self-selection
I Peer-monitor
I Social sanction
I Chinese feature: local gov. involvement
I Chinese feature: high profitability to reduce the likelihood ofcoordinated default
I Chinese feature: low real interest rate
Why TVEs Change
I Monitoring and enforcement become easier
I More collateral
I Increasing competition and less profitability
I Rising real interest rate
I Banking competition
Why TVEs Change
I Monitoring and enforcement become easier
I More collateral
I Increasing competition and less profitability
I Rising real interest rate
I Banking competition
Why TVEs Change
I Monitoring and enforcement become easier
I More collateral
I Increasing competition and less profitability
I Rising real interest rate
I Banking competition
Why TVEs Change
I Monitoring and enforcement become easier
I More collateral
I Increasing competition and less profitability
I Rising real interest rate
I Banking competition
Why TVEs Change
I Monitoring and enforcement become easier
I More collateral
I Increasing competition and less profitability
I Rising real interest rate
I Banking competition
Why TVEs Change
I Monitoring and enforcement become easier
I More collateral
I Increasing competition and less profitability
I Rising real interest rate
I Banking competition
Financing the Poorer
I Financial sustainability vs. Outreach
I Regional development vs. helping the very poor
I Incentive: repayment rate + stochastic auditing
Financing the Poorer
I Financial sustainability vs. Outreach
I Regional development vs. helping the very poor
I Incentive: repayment rate + stochastic auditing
Financing the Poorer
I Financial sustainability vs. Outreach
I Regional development vs. helping the very poor
I Incentive: repayment rate + stochastic auditing
Financing the Poorer
I Financial sustainability vs. Outreach
I Regional development vs. helping the very poor
I Incentive: repayment rate + stochastic auditing
NPL problem
I We talked about this before. Some more here
I Central Huijin Company injected foreign reserve money intothe big four since 2003
I Too-big-too-fail problem?
I Four AMCs: assume and liquidate the NPLs for the big fourbanks
NPL problem
I We talked about this before. Some more here
I Central Huijin Company injected foreign reserve money intothe big four since 2003
I Too-big-too-fail problem?
I Four AMCs: assume and liquidate the NPLs for the big fourbanks
NPL problem
I We talked about this before. Some more here
I Central Huijin Company injected foreign reserve money intothe big four since 2003
I Too-big-too-fail problem?
I Four AMCs: assume and liquidate the NPLs for the big fourbanks
NPL problem
I We talked about this before. Some more here
I Central Huijin Company injected foreign reserve money intothe big four since 2003
I Too-big-too-fail problem?
I Four AMCs: assume and liquidate the NPLs for the big fourbanks
NPL problem
I We talked about this before. Some more here
I Central Huijin Company injected foreign reserve money intothe big four since 2003
I Too-big-too-fail problem?
I Four AMCs: assume and liquidate the NPLs for the big fourbanks
Liquidation by AMCs
Source: Allen et al. (2011)
Bank Efficiency
I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)
I Germany: 0.998
I not quite comparable country
I India: 0.10; Malaysia: 0.285; Philippines: 0.313
Bank Efficiency
I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)
I Germany: 0.998
I not quite comparable country
I India: 0.10; Malaysia: 0.285; Philippines: 0.313
Bank Efficiency
I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)
I Germany: 0.998
I not quite comparable country
I India: 0.10; Malaysia: 0.285; Philippines: 0.313
Bank Efficiency
I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)
I Germany: 0.998
I not quite comparable country
I India: 0.10; Malaysia: 0.285; Philippines: 0.313
Bank Efficiency
I Sensitivity of bank credit to industry profit: elasticity = 0.07(1999q1-2012q2)
I Germany: 0.998
I not quite comparable country
I India: 0.10; Malaysia: 0.285; Philippines: 0.313
Sources of inefficiency
I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques
I Chinese featureState ownershipDominance of big banks?
Sources of inefficiency
I General sources
Credit rationingToo-big-too-failAgency problems in banksLack of techniques
I Chinese featureState ownershipDominance of big banks?
Sources of inefficiency
I General sourcesCredit rationing
Too-big-too-failAgency problems in banksLack of techniques
I Chinese featureState ownershipDominance of big banks?
Sources of inefficiency
I General sourcesCredit rationingToo-big-too-fail
Agency problems in banksLack of techniques
I Chinese featureState ownershipDominance of big banks?
Sources of inefficiency
I General sourcesCredit rationingToo-big-too-failAgency problems in banks
Lack of techniques
I Chinese featureState ownershipDominance of big banks?
Sources of inefficiency
I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques
I Chinese featureState ownershipDominance of big banks?
Sources of inefficiency
I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques
I Chinese feature
State ownershipDominance of big banks?
Sources of inefficiency
I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques
I Chinese featureState ownership
Dominance of big banks?
Sources of inefficiency
I General sourcesCredit rationingToo-big-too-failAgency problems in banksLack of techniques
I Chinese featureState ownershipDominance of big banks?
Increasing the efficiency of the banking sector
I Structural changes in business: consumer loan, housingmortgages, cars, etc
I Privatization: IPOs
I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)
I Better governance
I Bankruptcy law: bankruptcy as a way to evade debt!
Increasing the efficiency of the banking sector
I Structural changes in business: consumer loan, housingmortgages, cars, etc
I Privatization: IPOs
I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)
I Better governance
I Bankruptcy law: bankruptcy as a way to evade debt!
Increasing the efficiency of the banking sector
I Structural changes in business: consumer loan, housingmortgages, cars, etc
I Privatization: IPOs
I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)
I Better governance
I Bankruptcy law: bankruptcy as a way to evade debt!
Increasing the efficiency of the banking sector
I Structural changes in business: consumer loan, housingmortgages, cars, etc
I Privatization: IPOs
I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)
I Better governance
I Bankruptcy law: bankruptcy as a way to evade debt!
Increasing the efficiency of the banking sector
I Structural changes in business: consumer loan, housingmortgages, cars, etc
I Privatization: IPOs
I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)
I Better governance
I Bankruptcy law: bankruptcy as a way to evade debt!
Increasing the efficiency of the banking sector
I Structural changes in business: consumer loan, housingmortgages, cars, etc
I Privatization: IPOs
I Less entry barrier and bank competition (foreign entry, 2006;private entry, 2014)
I Better governance
I Bankruptcy law: bankruptcy as a way to evade debt!
Look at the title of this piece of news
I 国企破产重组带来生机一片(锦州日报,2010-04-27)
I In English: Bankruptcy and Restructuring brings a new chance(Jinzhou Daily, 2010-04-27)
Look at the title of this piece of news
I 国企破产重组带来生机一片(锦州日报,2010-04-27)
I In English: Bankruptcy and Restructuring brings a new chance(Jinzhou Daily, 2010-04-27)
Look at the title of this piece of news
I 国企破产重组带来生机一片(锦州日报,2010-04-27)
I In English: Bankruptcy and Restructuring brings a new chance(Jinzhou Daily, 2010-04-27)
Why bank internationalization?
I Diversify risk
I Improve efficiency: learning effect
I Help customers ”go out”
I Do banks simply follow the step of their customers?—who”go out” first?
Why bank internationalization?
I Diversify risk
I Improve efficiency: learning effect
I Help customers ”go out”
I Do banks simply follow the step of their customers?—who”go out” first?
Why bank internationalization?
I Diversify risk
I Improve efficiency: learning effect
I Help customers ”go out”
I Do banks simply follow the step of their customers?—who”go out” first?
Why bank internationalization?
I Diversify risk
I Improve efficiency: learning effect
I Help customers ”go out”
I Do banks simply follow the step of their customers?—who”go out” first?
Why bank internationalization?
I Diversify risk
I Improve efficiency: learning effect
I Help customers ”go out”
I Do banks simply follow the step of their customers?—who”go out” first?
Risk during internationalization: A case from MinshengBank
I Target: acquire shares of the United Commercial Bank
I A illusion: that the UCB is a solvent bank only in temporaryproblem
I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment
I However, Sept. 2009, UCB was caught for misreporting itsfinancial status
I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan
Risk during internationalization: A case from MinshengBank
I Target: acquire shares of the United Commercial Bank
I A illusion: that the UCB is a solvent bank only in temporaryproblem
I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment
I However, Sept. 2009, UCB was caught for misreporting itsfinancial status
I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan
Risk during internationalization: A case from MinshengBank
I Target: acquire shares of the United Commercial Bank
I A illusion: that the UCB is a solvent bank only in temporaryproblem
I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment
I However, Sept. 2009, UCB was caught for misreporting itsfinancial status
I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan
Risk during internationalization: A case from MinshengBank
I Target: acquire shares of the United Commercial Bank
I A illusion: that the UCB is a solvent bank only in temporaryproblem
I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment
I However, Sept. 2009, UCB was caught for misreporting itsfinancial status
I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan
Risk during internationalization: A case from MinshengBank
I Target: acquire shares of the United Commercial Bank
I A illusion: that the UCB is a solvent bank only in temporaryproblem
I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment
I However, Sept. 2009, UCB was caught for misreporting itsfinancial status
I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan
Risk during internationalization: A case from MinshengBank
I Target: acquire shares of the United Commercial Bank
I A illusion: that the UCB is a solvent bank only in temporaryproblem
I November 2008, US gov. injected 298.7 million USD into thebank which signaled that the bank could be a good investment
I However, Sept. 2009, UCB was caught for misreporting itsfinancial status
I November 2009, it was closed and Minsheng’s acquisitionfailed. The loss was more than 800 million yuan
Bank internationalization: Foreign assets
Bank internationalization: Number of Foreign Affiliates
RMB internationalization: Why? The Dollar Trap
I Current account surplus and the accumulation of dollar—losecontrol of monetary policy
I Dollar depreciation—lose of money
I FDI in China pays a high return while the US treasury billgives a low interest payment
RMB internationalization: Why? The Dollar Trap
I Current account surplus and the accumulation of dollar—losecontrol of monetary policy
I Dollar depreciation—lose of money
I FDI in China pays a high return while the US treasury billgives a low interest payment
RMB internationalization: Why? The Dollar Trap
I Current account surplus and the accumulation of dollar—losecontrol of monetary policy
I Dollar depreciation—lose of money
I FDI in China pays a high return while the US treasury billgives a low interest payment
RMB internationalization: Why? The Dollar Trap
I Current account surplus and the accumulation of dollar—losecontrol of monetary policy
I Dollar depreciation—lose of money
I FDI in China pays a high return while the US treasury billgives a low interest payment
RMB internationalization: Trade settlement using RMB
Obstacles for firms to use RMB: competition in exportmarket
Obstacles for firms to use RMB: Bargaining power ofexporters
I Among exporters, 75% are small firms, large firms onlyaccounts for 3%
I Around half the trade are processing trade
I Around half of the trade are done by firms with foreigninvestors
I High proportion of labor-intensive goods export
I Exports in machinery and electronics have low value added
Obstacles for firms to use RMB: Bargaining power ofexporters
I Among exporters, 75% are small firms, large firms onlyaccounts for 3%
I Around half the trade are processing trade
I Around half of the trade are done by firms with foreigninvestors
I High proportion of labor-intensive goods export
I Exports in machinery and electronics have low value added
Obstacles for firms to use RMB: Bargaining power ofexporters
I Among exporters, 75% are small firms, large firms onlyaccounts for 3%
I Around half the trade are processing trade
I Around half of the trade are done by firms with foreigninvestors
I High proportion of labor-intensive goods export
I Exports in machinery and electronics have low value added
Obstacles for firms to use RMB: Bargaining power ofexporters
I Among exporters, 75% are small firms, large firms onlyaccounts for 3%
I Around half the trade are processing trade
I Around half of the trade are done by firms with foreigninvestors
I High proportion of labor-intensive goods export
I Exports in machinery and electronics have low value added
Obstacles for firms to use RMB: Bargaining power ofexporters
I Among exporters, 75% are small firms, large firms onlyaccounts for 3%
I Around half the trade are processing trade
I Around half of the trade are done by firms with foreigninvestors
I High proportion of labor-intensive goods export
I Exports in machinery and electronics have low value added
Obstacles for firms to use RMB: Bargaining power ofexporters
I Among exporters, 75% are small firms, large firms onlyaccounts for 3%
I Around half the trade are processing trade
I Around half of the trade are done by firms with foreigninvestors
I High proportion of labor-intensive goods export
I Exports in machinery and electronics have low value added
Obstacles for firms to use RMB: Growth pattern
I investment leads growth
I Overinvestment requires sales outside the country, whichlowers bargaining power
I Overinvestment also push up demand for input, increasingbargaining power of foreign input suppliers
Obstacles for firms to use RMB: Growth pattern
I investment leads growth
I Overinvestment requires sales outside the country, whichlowers bargaining power
I Overinvestment also push up demand for input, increasingbargaining power of foreign input suppliers
Obstacles for firms to use RMB: Growth pattern
I investment leads growth
I Overinvestment requires sales outside the country, whichlowers bargaining power
I Overinvestment also push up demand for input, increasingbargaining power of foreign input suppliers
Obstacles for firms to use RMB: Growth pattern
I investment leads growth
I Overinvestment requires sales outside the country, whichlowers bargaining power
I Overinvestment also push up demand for input, increasingbargaining power of foreign input suppliers
Obstacles for firms to use RMB: Transaction cost of RMB
Obstacles for firms to use RMB: Higher funding cost forbanks
I RMB deposit interest rates are higher than the USD depositrates
I That means a higher funding cost of lending in RMB
I Higher RMB loan rates means the same amount of money canbe used for more profitable business
Obstacles for firms to use RMB: Higher funding cost forbanks
I RMB deposit interest rates are higher than the USD depositrates
I That means a higher funding cost of lending in RMB
I Higher RMB loan rates means the same amount of money canbe used for more profitable business
Obstacles for firms to use RMB: Higher funding cost forbanks
I RMB deposit interest rates are higher than the USD depositrates
I That means a higher funding cost of lending in RMB
I Higher RMB loan rates means the same amount of money canbe used for more profitable business
Obstacles for firms to use RMB: Higher funding cost forbanks
I RMB deposit interest rates are higher than the USD depositrates
I That means a higher funding cost of lending in RMB
I Higher RMB loan rates means the same amount of money canbe used for more profitable business
Obstacles for firms to use RMB: Arbitrage opportunities
I RMB more expensive in Hong Kong than in Mainland China
I RMB interest rate higher than dollar rate
I Space for arbitrage
Obstacles for firms to use RMB: Arbitrage opportunities
I RMB more expensive in Hong Kong than in Mainland China
I RMB interest rate higher than dollar rate
I Space for arbitrage
Obstacles for firms to use RMB: Arbitrage opportunities
I RMB more expensive in Hong Kong than in Mainland China
I RMB interest rate higher than dollar rate
I Space for arbitrage
Obstacles for firms to use RMB: Arbitrage opportunities
I RMB more expensive in Hong Kong than in Mainland China
I RMB interest rate higher than dollar rate
I Space for arbitrage
Example
I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter
I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank
I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)
I It will be positive is i RMB is much larger than i USD andE’/E is very small
I That is RMB interest rate is higher than the USD rate andRMB appreciates
Example
I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter
I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank
I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)
I It will be positive is i RMB is much larger than i USD andE’/E is very small
I That is RMB interest rate is higher than the USD rate andRMB appreciates
Example
I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter
I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank
I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)
I It will be positive is i RMB is much larger than i USD andE’/E is very small
I That is RMB interest rate is higher than the USD rate andRMB appreciates
Example
I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter
I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank
I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)
I It will be positive is i RMB is much larger than i USD andE’/E is very small
I That is RMB interest rate is higher than the USD rate andRMB appreciates
Example
I Importer deposits RMB, P, in the bank for 1 year which willgive 1+i RMB next year, this money is supposed to be paid tothe exporter
I The exporter uses the deposit as collateral to borrowUSD,P/E, at the rate i USD, and repay P/E(1+ i USD) tothe bank
I The total profit for the two firms in RMB is P (1+i RMB) -PE’/E(1+ i USD)
I It will be positive is i RMB is much larger than i USD andE’/E is very small
I That is RMB interest rate is higher than the USD rate andRMB appreciates
Obstacles for firms to use RMB: Investment opportunitieswith RMB
RQFII
I RMB Qualified Foreign Institutional Investors
I 2011, 20 billion RMB quota, up to 20% can be used to buystock
I Nov. 2012, quota increased to 270 billion
RQFII
I RMB Qualified Foreign Institutional Investors
I 2011, 20 billion RMB quota, up to 20% can be used to buystock
I Nov. 2012, quota increased to 270 billion
RQFII
I RMB Qualified Foreign Institutional Investors
I 2011, 20 billion RMB quota, up to 20% can be used to buystock
I Nov. 2012, quota increased to 270 billion
RQFII
I RMB Qualified Foreign Institutional Investors
I 2011, 20 billion RMB quota, up to 20% can be used to buystock
I Nov. 2012, quota increased to 270 billion
Development of financial markets in the 1990s
I 1990, SHSE and SZSE
I 1996, unified inter-bank market
I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)
I More information on the capital market from remaininglectures
Development of financial markets in the 1990s
I 1990, SHSE and SZSE
I 1996, unified inter-bank market
I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)
I More information on the capital market from remaininglectures
Development of financial markets in the 1990s
I 1990, SHSE and SZSE
I 1996, unified inter-bank market
I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)
I More information on the capital market from remaininglectures
Development of financial markets in the 1990s
I 1990, SHSE and SZSE
I 1996, unified inter-bank market
I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)
I More information on the capital market from remaininglectures
Development of financial markets in the 1990s
I 1990, SHSE and SZSE
I 1996, unified inter-bank market
I Development of institutional investors: closed-end fund(1997), open-end fund (2001), NSSF (2002), QFII (2003),QDII (2006), CIC (2007)
I More information on the capital market from remaininglectures
The Money Market
The Money Market
I Net lenders: State owned commercial banks, Joint-Stockcommercial banks, Policy banks
I Net borrowers: City commercial banks, securities companies,RCCs
The Money Market
I Net lenders: State owned commercial banks, Joint-Stockcommercial banks, Policy banks
I Net borrowers: City commercial banks, securities companies,RCCs
The Money Market
I Net lenders: State owned commercial banks, Joint-Stockcommercial banks, Policy banks
I Net borrowers: City commercial banks, securities companies,RCCs