China Finance
Presentation Outline
• Banking and non-banking Financial
Institutions
• Trade Finance
• Project Finance
• Securities markets
Banking Structure
• People’s Bank of China
Central bank of China--similar to US’s Federal
Reserve System
• Specialized banks:
(1) Bank of China, (2) Industrial and Commercial
Bank of China, (3) Agricultural bank, (4) China’s
Construction bank
• Commercial bank
• Foreign banks
People’s Bank of China (PBOC)
Duties:
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Implement/administer laws relating to banks
Regulate currency
Formulate interest rate policy
Control credit -loans
Manage FX reserves
Monitoring of banking sectors (M&A etc)
Bank of China (specialized bank)
Responsibilities:
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All foreign trade and remittance transaction
International inter-bank transactions
FX and gold
International loan syndication
Government bond and securities issues
Foreign investments
Consultancy services to investment on-shore and
off-shore
Industrial and Commercial Bank
of China (ICBC)
• Created in 1983
• Accept deposits and loans to individuals and
companies
• provide payroll management services for state
enterprises
• Operate securities, trust and real estate business
• Issue credit cards
• Deal with FX matters in SEZs
Agricultural Bank of China
• Created in 1979
• 2 largest specialized bank
• Serve rural area for functions similar to
ICBC’s functions in urban area
China’ s Construction Bank (CCB)
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Created in 1954
supervise and settle large scale finance of project
regulate investment funds of state enterprises
One of the 4 state-owned commercial bank that that control
about 80 per cent of the banking business in China
• First state-owned bank to remunerate plan for performancerelated bonuses (9/28/99)
– CCB president earns about $361 (monthly) under the
current system
– allow the most senior bank executives to have salary six
times that of the junior banker
China’ s Construction Bank (CCB)
• China Construction Bank (teamed up with Xiangcai
Securities) has become the first mainland financial
institution to offer securities-backed loans to stock
brokerages (March 2, 2000)
• The bank offers the firms short-term loans secured by
shares and securities investment funds.
• Traditionally, most brokerages illegally dipped into
clients' funds to finance daily operations but a
crackdown on the practice last year has left many
firms strapped for cash.
Commercial bank
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The Communications Bank of China
established in 1987
support modernization of China
Deal with both RMB and foreign currency
deposits and loans
• Operate the securities market
Foreign banks
• Foreign owned and joint venture banks are
allowed to operate in China since 1970s
• Book loans denominated in foreign currencies
• collect bills and remittances from overseas
• discount foreign exchange bills
• handle documentary credit arrangement
• conduct credit checks
• accept consulting engagement
• offer safe deposit services
• The Bank of China agrees to provide renminbi loans to
HSBC and Standard Chartered to bolster the business
of the two British banks in the Chinese market
(10/22/99 FT) -- as a good will by the Ziang Zemin’s
UK trip
• The deals are expected to total Rmb 3bn ($362m)
apiece, making them the largest such loans granted to
foreign banks in China since the rules on funding
lending business there were relaxed last summer.
• The deals should give the two banks an edge in the
Chinese market because they will have more money to
lend to corporate customers operating in China than
their competitors, all of whom have faced difficulties
raising renminbi in the local market.
• Foreign banks see lucrative opportunities in renminbi
lending in China but are not allowed to take deposits
from the public and may only lend Chinese currency to
corporate ventures financed with foreign investment.
• The Chinese government agreed in August to allow
foreign banks to raise large loans on fixed maturity
terms direct from Chinese banks -- a very short term
borrowing in the interbank market.
• But loans granted under the new rules have been much
smaller than those now being made available to the
British banks. For example, Bank of Tokyo-Mitsubishi
raised only Rmb50m in one of the first such deals in
August, 1999.
Privatization of Chinese Banks
• Shenzhen Development Bank, a state-owned
development, first bank to list shares (IPO) on
Shenzhen Stock Exchange after winning approval
from the SEZ’s government in early 1990s
• Shanghai Pudong Development Bank,
– established in 1993, focusing on project financing
– second state-owned bank to list shares (Shanghai’s
stock Exchange) as 400 million (16.6% of its
shareholding) A shares ($484 m) on Sept 23, 1999.
– First bank was approved with central government
mandate to list shares
– for strengthening capital base and expansion
Privatization (continued)
• China Minsheng Bank, another new regional bank, listed
on Shanghai Exchange on December 2000. It is China's
first and only private bank and the third bank listed on
exchanges. The eight-branch Minsheng is a relatively small
bank, with assets of Rmb43bn and 1,800 employees.
• Other banks such as, China Merchants Bank and Citic
Industrial Bank have shown in interest to raise public funds
• A handful of Chinese banks (Bank of Shanghai and Xiamen
International bank) has foreign financial institutions as
minority stakeholders. Now, Bank of communication (5th
largest bank) is inviting two foreign financial institutions to
be its 15 % holding to bolster its capital and management
skills to meet WTO challenges
Shenzhen-based CMB has received approval from
the China Securities Regulatory Commission
(CSRC) to go public on the Shanghai stock
exchange. CMB, the 4th bank to go public, is
preparing for a road show to educate domestic
investors about its A-share IPO (SCMP, 1/16/02)
• The country’s 4 major state-owned bank plan to
swap the debt for equity in the underlying
enterprises (to off-load the bad loans). The equity
stake will then be sold to the market
• China Construction bank has begun the process
Asset Management Companies (AMCs)
• Such set up is a bold attempt to clean up the mess in
its banking industry-- bad loans official estimate to be
about 1.8 trillion Yuan or $220 billion-- some
estimate to be US$1.08 trillion
• Cinda Asset Management Corporation, a registered
capital of RMB 10 billion provided by the ministry of
finance, was set up in April, 1999 to take over the
compromised assets (non-performing loans) of CCB
(RMB 220 billion)
• Cinda is funding via bond issues
• Cinda uses debt-for-equity swaps strategy to alleviate
the interest payment for state-owned enterprises
• Cinda did a debt-for-equity deal (RMB 60 million)
for Beijing Cement Plant.
• Beijing has launched an asset management
company to take over bad loans held by the Bank
of China. China Orient Asset Management
(COAM) is the second such company to be set up
as part of a drive to reduce banks bad debts.
COAM, a registered capital of Rmb10bn ($1.2bn),
would be allowed to sell stock and creditor rights
as part of its efforts to raise funds to buy Bank of
China's non-performing loans.
– Dongfeng-Citroen Automobile Co (Wuhan-based joint
venture between Chinese and French care makers)
convert part of its 12 billion Rmb ($1.45 b) debt into
equity.
• City of Shanghai has also launched its first stateowned asset management company as part of state
enterprise reform.
Asset
Management Affiliated
company
bank
Great Wall
Agricultural
Bank of China
Dongfang
Bank of China
Cinda
Bad Loan
($ billion)
$42.86
Companies
affected (e.g.)
Hualu Electronic
$32.30
Jiangxi Phoenix
Optical Appliance
Beijing Cement
Plant
China Constr.
$45.06
Bank and 5 other
companies
Huarong
Industrial &
$49.17
Commercial Bank
of China
Source: 11/8/99 and 2/21/01 WSJ
Ernest & Young
helps to sell bad
loans to foreigners
• Huarong Asset Management has cleared up 15.06
billion yuan of non-performance as of July 2001. There
were to debts sold to foreigners (road show in Europe
and US) (5/10/01 FT). Debts are convertible into
equity. The asset recovery rate was 31.7% while the
Finance Ministry’s standard is 30%.
• A total of 16.6 billion yuan in loans were up for auction by
Huarong. The consortium agreed to buy four of the five pools of
assets (45% being loans collateralised by property and the
remainder unsecured (11/30/01 SCMP). The Morgan Stanley-led
consortium-- Lehman Brothers, Salomon Smith Barney and
Chinese investors Zhongjin Fengde and KTH Capital
Management, agreed to buy a 10.8 billion yuan (about
HK$10.11 billion) portfolio of bad loans from Huarong.
• It is aiming to resolve 407.7 billion yuan.
• $170 million loans were transferred into 4 AMCs
• 30cents per dollar debt sale will be considered a
success.
• Bank of China reports a higher-than- previouslyestimated figure. The bad debt ratio is 28% of its
assets ($414 billion)- FT 5/14/01
Resistance to foreign Banks after
WTO
• Foreign banks must have US$72.3 m in operating capital to conduct
full services (higher than expectation)
• Only open a new branch a year
• Pricing out the foreign banks
– Offering loans with low interest rate (even below LIBOR), e.g. BP syndicated
loans
– Direct lending by Chinese banks to foreign firms without using standby letter
of credit from a foreign bank if the firm fails (a practice required by foreign
banks)
• Central Bank requires financial institutions to maintain 60% of
registered capital in local currency and demonstrate “a need” for an
office. The rule force banks to disperse capital to individual
branches rather than concentrating it at headquarters, boosting
operating costs
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China’s 80 financial local institutions have
announced plans to complete a national bank card
network (costing $200 m) by 2005 to combat
increased foreign bank competition. It aims to reach
40 cities. HSBC, Citbank and Bank of East Asia
have given approval to offer foreign currency
services to Chinese citizens in Beijing and Shanghai.
Note: Ericsson incident– The Nanjing-based
Ericsson joint venture (Swedish electronics
company) reported to dump its Chinese banks in
favor of Citbank because they cannot offer services
similar to the US competitor. (3/28/02 FT)
Counter Strategies by foreign Banks
• HSBC bought 8% stake in the Bank of Shanghai in 2001;
International finance corporation (private arm of World bank) bought
stakes in Pudong Development Bank and the Nanjing city
Commercial Bank.
• Investment in small Chinese banks allows up to 25% (which helps
smaller Chinese banks for foreign capital).
• Four big banks are expected to lose 1/3 of their most qualified staff to
foreign rivals, which offer better pay, bonuses and training
opportunities.
• Foreign banks now has 5% foreign deposits, 20% foreign loans, and
40% export settlements. They target the big customers for the big 4
banks which derive their 60% profits form these 10% clients. The
services include personal finance, credit cards, internet and telephone
banking and consumer credit.
Bond Issue
• Big four banks plan to issue up to $48
billion bond sale to retail investors to boost
the banks’ capital adequacy requirement of
8% by the end of 2002.
• Current corporate bond market is about rmb
12 billion.
• In 1998, ministry o finance issued Rmb 270
billion to re-capitalize the banks.
Other Financial Institutions
(non-bank financial institutions)
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International Trust and Investment Corporations
Rural Credit Cooperatives
Urban Credit Cooperatives
managed funds
Finance companies
Leasing Companies
others
Financial institutions (continued)
• All these financial institutions under the oversight
of the People’s Bank of China
• comprise 10% of the financial intermediation
• finance the non-state sector
• Centrally controlled credit plan does not extend to
these institutions, thus moral hazard problem
exists because controlling organizations use them
to evade regulation and supervision
(International) Trust and
Investment Corporations (ITICS)
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More than 200
Designed to promote investment in and from China
Power broader than banks
Make foreign exchange guarantees
raising funds via
– deposits (maturity > 1 year)
– issue bonds
– and overdrafts
• make S/T and L/T loans (infrastructure projects)
• ITICS (continued)
• borrow from foreign banks
• China International Trust and Investment
Corporation (CITIC) -- oldest
• Guangdong ITTIC (GITIC) failed in 1998
– second largest trust corporation
– more than $4.7 billion debts, a large portion
held by overseas creditors
• June 1998, closure of Venturetech
Investment Corporation
An Example-CITIC
• Leading state-owned conglomerate
• plans to group its expanding financial services under one holding
company, creating a financial services “supermarket”, which may
be listed in Hong Kong
• New structure (similar to U.S. Citigroup)
– commercial banking
– securities broking and leasing
– insurance
– fund management
• Subsidiaries:
– Citic Pacific (focus on infrastructure finance)
– Citi Industrial Bank - commercial banking
– Citi Securities - brokerage firm
Wholesale Shutdown of Trust Firms
• Government plans to close down more than half
of trust and investment companies in 2000
• invest in risky projects (real estate) while paying
sky-high interest rates
• Mergers and closures
– No. of trust is near 400 (in 1994)
– no. of trust is about 230 (in 1999)
Credit Cooperatives
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At least 50 years in history
support local economic development
enhance daily lives of communities
collectively owned and have independent
accounting and operating performance
• business- receive deposits/give credit, execute
settlement and remittance transactions for private
industry
• provide funds to small or medium size enterprises
Credit Cooperatives
• Two problems with cooperatives
– free riding and collusion
– non-borrowers and borrow may collude for not
paying (or settle) the loans
Rural Credit Cooperatives
• Exists in every rural township in China
• By September 1998, more than 50,000 rural
credit cooperatives
• a quarter of million village credit stations
Urban Credit Cooperatives (UCC)
• Gain popularity in 1990
• End 1998, 3200 UCC
• 80% of credit given to private enterprise of
SMEs
• Central bank has developed strategies to
merge UCC with urban cooperative banks
Pension Funds
• 1997, The Unified Pension System Reform
Law was set up to enforce a mandatory
pension programs for part of the population
• Not yet allowed pension funds to invest in
securities market
• The only country in Far East not have a
private fund cover.
Managed Funds
• Shenzhen Investment Fund Management first domestic fund manager in China, set up
in 1992
– for the purpose of fund launching, management
and investment
• Investment choices are bonds and publicly
issued stocks
Investment Industry
• Over 150 investment companies
• focus on infrastructure and high-tech
industries
• China National Investment Association
(CNIA), a quasi-governmental investment
organization, has 63 of these investment
companies
State Investment Co. (continued)
• Six new investment companies in 1988
• allocate budgetary funds to companies
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China National Energy Investment Corporation
China National Transportation and Communications
China National Raw Materials
China National Machinery, Electronics, Light Industry
and Textile Investment Corporation
– China National Agricultural Investment Corporation
– China National Forestry Investment Corporation
Others financial institutions
• Finance companies tend to be established
by commercial conglomerates
• Leasing companies, first introduced in
early 1980s
– leases provided a means to obtain foreign
capitals
Insurance Company
• 1979, The People’s Insurance Company of China
(PICC), state-owned, monopolistic, offer insurance
products
• Two subsidiaries (over 70% of market share):
– China Insurance Company
– Tai Ping Insurance Company
• Other: China Life Insurance
• 52 insurers in 2001 ( vs. one in 1980).
– Insurance assets: 400 billion yuan in 2001.
• Hard sell for life insurance in China; however, An
insurance market premium income was US$15bn in
1998
• China Insurance Regulatory Commission (CIRC), an
industry watchdog, launched a clean-up campaign in
1998, had ended most violations of its rules by
insurance agents and brokers.
– Sedgwick, the UK insurance brokerage, was forced to
suspend operations for three months for "serious violations
of China's insurance laws and regulations", while Jardine
Insurance Brokers was ordered to close its Beijing
representative office
• China will open more cities to foreign insurance
companies and issue more licenses to overseas
ventures.
• Currently, foreign companies are permitted to do
business only in Shanghai and Guangzhou.
Insurance related to Bank:
• Bank of China sets up an insurance company in
Shenzhen-- a strong indication that Beijing’s
regulatory demarcation between banks, insurance
companies, and brokerages may be crumble.
• Zhongyin Group Insurance Company is the first to
be set up by a bank. It is a registered as an
insurance company in HK (7/19/01 FT)
• ICBC (Asia) acquired equity stake in Tai Ping
insurer that recently won a licence to do business
across China
China Insurance Market
Premiums (billion RMB)
Year
Total
Shanghai
1998
125.6
10.3
1999
140.6
11.5
2000
159.6
12.7
2001
210.0
Source: Financial Times, 2/20/01. (Guangshou –10 % market)
Investment Outlay:
• Earlier, premiums are invested in bank deposits and T-bonds (whose
yields are below what the insurance companies agreed to most
customers)
• Starting November 1999, CIRC permits stock market investments by
insurance companies;
•About 4 % of insurance company’s assets are in now the stock
markets.
• 1992, US-based American International Group
(AIG) opened a branch in Shanghai. AIG is the only
foreign insurance company in Chain allowed 100 %
ownership of its life insurance operations.
•CIRC may ask the AIG to sell 50 % of its current
life-insurance operation and form a joint venture
with a local partner to expand in the future. Those
two moves would bring he U.S. insurer into
compliance China’s insurance regulations and WTO.
• Huatai Insurance will become the first insurance
company to list on exchange. Huatai would sell
less than 25 per cent of its shares (about HK$1.2
billion) to foreign firms (9/26/01).
• It could take one year for the property life insurer
to complete pre-listing preparations before
getting approval from the CSRC. Beijing has
been pushing mainland insurance companies to
list and raise funds to speed up restructuring for
its WTO entry.
• Other steps would include selling a stake to
foreign firms and setting up a joint-venture life
insurance firm.
Investment Bank
• China Everbright International Trust and
Investment Corporation (CEITIC)
• lease financing
• equity investment
• take deposits and loans in Chinese and
foreign currency
Chinese Stock market
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Stock market starts at 1990
Shanghai and Shenzhen Stock Exchanges
A/B shares
1100 companies
capitalization: 50 % of GDP
Most listed companies are SOEs; some are private
firms
– Shanghai Zhonglu Industrial (take over 54% of state-owned
Forever Bicycle) under “particular transfer” (PT), which
requires a long time before enabling rights offers.
– Sanlian Group of Shandong took control of Zhengzhou
Baiwen
• China intends to slash brokers’ commission on
stock-trading to 0.2 per cent of the transaction
from 0.35 per cent to cut costs and lift turnover
• A shares pay brokers a 0.35 per cent and 0.4
per cent to the government as stamp duty. B
shares -- 0.81 per cent
• South Korea - 0.09 per cent to 0.23 pr cent
First Open-End Fund
• Huaan Fund Management Co sets up the first open-end
fund with the assistance of JP Morgan.
– Set up with $600 million in initial capital
– Sold to Chinese individuals
– to launch in September, 2001
– sold through Bank of Communication outlets
– called Innovation Fund
– minimum/max purchases: $1,207/$36,231
• An open end fund fluctuates in price daily based
on capital flows and the underlying value of
shared held in fund. Easier-to-mange closed end
funds issue a fixed number of shares and then
trade like a stock
• Once China enters the WTO, foreign investment
banks and asset managers will be allowed to take
33 % stakes in domestic brokerage firms and fund
companies.
• That figure will rise to 49% three years later
• China's first Western-style mutual fund launch was
an instant hit September 11, 2001 with domestic
investors, who snapped up nearly all its three
billion yuan (about HK$2.81 billion) retail
subscription allocation, half in the first two hours.
• Ignoring rainstorms, risk warnings and 15-month
lows in the markets, investors flocked to 139 Bank
of Communications outlets in 13 mainland cities to
apply for units in the open-ended Huaan Innovation
Fund.
• The remaining two billion yuan of the five billion
yuan fund is to be sold to institutional investors.
• China Southern Fund Management is another
mainland open-ended funds. China Asset
Management signed a technical co-operation
agreement last year with British fund-management
firm Schroders for assistance in launching the third
open-ended fund.
• Mainland investors' choices were limited to closedend funds offered by 14 fund management companies
and managing assets worth 70 billion yuan as of late
July, 2001.
Foreign-funded Companies listed on
Exchanges
• The foreign-funded firms may allow to issue stocks but
must retain a minimum stake of 10%. It might lose their
preferential treatments such as tax benefits if foreign
holdings were diluted below 25%
• Unilever, The Bank of East Asia, HSBC Holdings,
insurer American International Group, French Alcatel
(French telecommunications equipment maker) and
Eastman Kodak also have an interest such plans
Trade Finance in China
• Cash in advance
• open account
• L/C -- procedure and documentation
Bank of China requires its bills officers to
comply directly to international code
Project Finance
• Since 1980s, private sector financing of
infrastructure investments revive
• projects -toll road, bridge, dams and
hydroelectricity, etc
• In recent years, private funding takes the
form of project finance
Project finance (continued)
• Principal features
Project -separate company
Major portion of project equity provided by
project manager or sponsor
Project company - comprehensive
contractual arrangements
High ratio of debt to equity
Parties to Project Financing
government
contractors
suppliers
Investors
Project Company
Project sponsor
customers
Lenders
Two Categories:
• Stock-type Projects
– exploit the existing stock of goods
– proceeds to service debt and provide a return to
investors
– examples --mines, oil and gas field
• Flow-type Project
– generate flows of business
– bridges, tool highways, tunnels, etc
When Project finance Is Right?
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Large, complex, and standalone project
parent is sensitive to debt capacity
parent concerns total risk of the project
Parent wants to maintain operating risk over
the project
Risks in Project Finance
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Resource risk -- equity-holder
Input Risk-- suppliers
Technical Risk--project manager
Timing risk--project manager and owner
Completion risk--lenders, project manager
Market Risk--customers
Operating Risk--lenders, sponsors
Political Risk--government, all parties
Functions of Project Finance
• Ownership Transformation
– vehicle company
• Resolving Principal-agent problems
• Non-recourse financing arrangement
Syndicated Loans
• A method provides large pool of credit
• Mandate initiated by borrower
• Lead bank with other banks via placement
memorandum
Parties of the Syndication
• Lead bank
– 4 functions: sourcing, structure, sell and service
• Participating bank
– Other banks participate in the loan process
• Agent
– responsible for collecting payments due and
disbursing these payments to the banks
Project Finance in China
• Legal framework of project finance
– Draft BOT Circular
– No government debt guarantee
– allow 100% foreign ownership of PRC power
projects
• Security Law of 1995
• Foreign-Related Security Rules
• Foreign Exchange Control Regulations of
1996
New BOT Structure
• Local government can invite international
developers to bid
• special purpose project company can be a wholly
owned enterprise, equity joint venture or
cooperative joint venture
• State guarantees the conversion of foreign
exchange required for the project in terms of
principle, interest and divided
• No government guarantees
Zhuhai Highway Co.
• In August 1996, Zhuhai Highway Co (Cayman
registered subsidiary of Zhuhai municipal
government) successfully launched a 2-tranche US
200-million revenue bond
• US$85 m, 10-year senior bonds (9.12%)
• US$115m, 12-year subordinated bonds (11.5%)
• First revenue bond in Asia
• First high-yield bond by Chinese entity
• Proceeds to finance infrastructure project
Three Gorges Dam Project
• The $24 billion project --spanning Yangtze River
is on the 2nd phase of construction
• financial Package includes state and domestic
sponsored funds (80%) and foreign funds (20%)
• China three Gorges Project Corporation is
considering an International bond issue and listing
its IPO on HK stock exchange and NYSE
exchange to raise capital