Without even a nice note to public share holders, Chinese banks are in the process of reversing years of progress and is reverting back to state banks in a planned economy. Granted, socialism is the economic system of our time. However, unlike elsewhere, the Chinese government, which is the majority shareholder of most of China’s banks, is directly ordering banks to finance a large part of the economic stimulus. The interest of minority shareholders, who care about profit, is increasingly taking a backseat. Shareholders at the very least deserve some clarification on how the promises from a few years ago that Chinese banks will commercialize are being systematically undermined. A note should look something like this…
Dear Chinese Banks Shareholders,
We wish you a prosperous new year of the ox! First of all, thank you for having so much confidence in our ability to transform ourselves into commercial entities. We really worked hard at it! The multiple bailouts we received from our majority shareholder, the Chinese government, helped a lot, but we have also restructured credit approval process and trained our managers in risk management in the past decade. Non-performing loan ratio fell to a historical low of less than 3% at the end of December last year. We wish we could say that we are continuing down this path, but we have some bad news.
As you know, the world economy and China are facing hard time. Export from China dropped for two months in a row, and our majority shareholder, the Chinese government, is worried about unemployment and social instability. So, they told us to forget about risk and profit and to focus on pumping money into the economy. Even our really tough regulator, the CBRC, has hold us to not worry so much about non-performing loans and profit. Well, they are the bosses, so we really don’t have any choice but to follow their directions. We hope you understand our predicament.
You have probably heard of the 4 trillion RMB stimulus package launched by the central government. We are going to finance about half of it. By the way, the central government has ordered us to provide 1 trillion RMB of it before the end of February because they want the money out there as soon as possible. As you can understand, even if we don’t sleep for the next two months, we won’t have time to conduct careful risk evaluation on these projects in such a short time! Well, we don’t have to look too carefully since these projects will be guaranteed by the central government. We will place these projects on a “green passage” for quick approvals and just cross our fingers and hope that these loans will not default.
That’s not all though. Local governments all over China are clamoring for loans from our branches. They want us to help them finance over 20 trillion RMB worth of local projects. Yes, we know that most local governments run annual deficits and would have a hard time paying back loans. We are trying very hard to say no to them. But you know, our majority shareholder, the central government, has told us not to say no all the time because it would be selfish to do so. We will say yes to most of the requests from provincial and major municipal governments. Even if we have doubts about their proposed projects, we are pretty sure that the central government will bail out provinces if they run into major financial trouble–we are hoping at least. We know this is not what you want to hear, but again, we have little choice in the matter.
Then, a couple of weeks ago, we got a strange order from our regulator the CBRC. Before, they were very tough on us and were constantly telling us to be very careful about risky borrowers. However, it seems they changed their minds completely. In the decree, they told us to lend to firms which are in financial trouble due to the global recession. We couldn’t quite believe what we were reading, but our regulator is now telling us to find firms in trouble and give them loans. We got a bit confused because we had been told to only lend to healthy firms with good balance sheets and cash flow. Things must be really changing.
The property sector is also not doing very well. Because we got a bit greedy in 2007 and gave real estate developers and speculators willing to pay higher interests many loans, we are a bit worried that they will stop paying us back. In fact, many of them have done so already, and many of us have had to increase provisioning to deal with rising defaults. Sorry, this means less profit into the foreseeable future. Relatedly, the central government has urged us to automatically refinance all of our mortgage assets at 30% lower interest rates. Of course, they want to boost consumption and possibly decrease delinquencies. But you see, this will mean less profit for us and for you, we are sorry to report.
If you haven’t sold our shares yet, you are probably thinking about it. We don’t blame you because we have really taken some large steps backward. Here is maybe some good news. Our majority shareholder, the central government, does not want to see our share prices go into a free fall. So, they are using their giant foreign exchange reserve to buy up bank shares to support their prices, albeit at a pretty low level. Share prices may be maintained, but we forsee declining profit and possibly significant losses for some of us in the medium future. We suppose our majority shareholder will just buy up more and more public shares. Pretty soon, maybe we won’t need to write this note to our public shareholders any more.
Listed Chinese Banks