Bank M&A

China’s Banks in for Major Changes in the Next Five Years

intl-currency.jpgIf there’s one thing that threatens the power of the Communist Party of China (CPC), it is social unrest. And if there’s a list of things that can cause social unrest, rising inflation and income disparity have to be near the top. Confronted with both these issues, top Party members are on edge. That’s why when the National People’s Congress (NPC) gathered in Beijing in early March, they put their heads together to create a new “Five-Year Plan” that reflects their concern and reassures citizens of their commitment to control inflation and close the income gap. The plan puts bankers on notice about industry changes required in next five years.   

In an outline of the CPC’s 12th Five Year Plan, the NPC’s website summarizes environmental concerns, reform and social welfare sections. At the top of the list, though, are economic targets and restructuring. To drive home the government’s dedication to the people, the plan addresses inflation and reducing income disparity in almost every section.

The official website and subsequent discussions leave one glaring hole. They fail to mention just how the CPC will achieve its objectives. Predictions about accomplishing the monumental tasks set forth in the plan are just beginning to emerge. The consensus- achieving these goals will be no easy task and extensive banking reform is necessary to accomplish the job.

Yang Kaisheng, an insider in the CPC and president of Industrial and Commercial Bank of China (ICBC) was the first banker to talk openly about the new plan’s impact on banking. “Banks will have more space to develop as they support the economic restructuring,” he says.  

First steps to liberalize interest rates are underway. Changes that the government promises will help attract first-time depositors-many keep their money hidden at home–are less clear, but expected to materialize.  The banks will have real challenges, however. Yang says: “(Banks) will have to transform their asset structure, profit model, services and business structure.” You read that right. Over the next five years, Chinese bankers are expected to change basically everything about their business models.

While they’re busy restructuring themselves, Yang says banks should also support the new economic structure, by making more loans to green industries and restricting loans to traditional industries with surplus capacity – like steel, cement and shipbuilding. (This seems like a good place to mention that when the Chinese government says banks should do something, bankers take action. For example, the 2006 Five-Year Plan suggested bankers should make more loans to steel, cement and shipbuilding, which led to today’s surplus capacity in those industries).  

Yang uses ICBC’s plans to stress how other banks should react to the new plan: “Take ICBC for example: our loans to strategic new industries and energy-saving industries amounted to more than 6.1 trillion yuan (US$928 billion) at the end of last year, up by 17 percent. We plan to double that figure in the next three to five years.”

Yang recommends banks continue to lend more to small and medium sized enterprises (SMEs). The 2010 National People’s Congress first issued this mandate when it met last spring.  As a result, ICBC increased loans to SMEs by 45 percent in 2010. The ICBC intends to continue to grow them.

The government has managed to throw one more suggestion into the ambitious Five-Year Plan. Out of Beijing comes news that Chinese banks should further develop international operations. Yang says simply following Chinese businesses overseas is not the best way to expand operations internationally.  He thinks banks should also include offering high-quality financial services to locals in other countries. ICBC got a jump start on international expansion with its January 24, 2011, announced purchase of an 80 percent interest in Bank of East Asia (USA), which has 10 branches in California and three in New York.

Most bankers will take Yang’s suggestions to heart and do all they can to achieve the lofty standards he and the ICBC are setting. The big question is whether enough bankers will make the grade to create solid changes in China’s banking system. And, even if they do make the changes, how exactly will that help address Beijing’s overriding concerns- controlling inflation and closing the gap between rich and poor? Still, Chinese leaders believe their power is threatened and they have sent out the call. Bankers realize they should do whatever is necessary to help the Party maintain the status quo.

Jerri Moss