Review of IFC’s Role in China’s Financial
Sector Transformation
Yanni Chen & Chaoying Liu
Development Impact Department
March 19 2013
Agenda
1. Context and Methodology
2. Key findings – Advisory Services
3. Key findings – Local Currency Financing
4. Key findings – Investment Operations
5. Conclusions and Lessons Learned
•2
Agenda
1.
2.
3.
4.
5.
Context and Methodology
Key findings – Advisory Services
Key findings – Capital market
Key findings – Investment
Conclusion and Lessons Learned
•3
Context
IFC’s engagement in China’s financial sector
China started financial sector reform in 1990s. Successful financial sector
reform would have huge impact on the country’s economic development and
poverty reduction
•1992 – IFC office in China
•1995 - IFC's Operations and Strategy in China
•2002 – IFC AS facility in Chengdu, Western region of China
•2003 - World Bank and IFC’s country strategy for China
•2007- IFC’s financial sector strategy for China
Operations
•First investment to Bank of Shanghai in 1999, 50 Investments in FIs,
valued at $1b
•AS facility in Western of China - 46 Advisory services projects , valued at
$50m
•3 Bond issuances, valued at $300m
•4
Objective of the review
•To understand if and in what ways IFC has
contributed to the financial sector reform in China
•To identify lessons learned for future strategy and
operations
•First such review in IFC covering IS, AS and treasury
operations - focusing on IFC’s contribution
•5
Scope of the review
•Advisory Services
•Policy work relating to financial infrastructure (secured transactions
and credit reporting system), Microfinance, Housing finance, Green
credit, and sector-wide capacity building
•Investment Operations
•Commercial bank investments and Microfinance
•Local Currency Financing
•Renminbi denominated bond, Swaps facility
•6
Data sources
•Primary
• Interview: unstructured interviews with over 30 key
stakeholders, investment clients, government
agencies, and IFC staff
• Site visit and in-depth interviews with beneficiaries of
IFC’s clients: SME banking, microfinance, RMBdenominated bonds
• Secondary
• Project documents
• Available evaluations and reviews
• Media materials
•7
Analytic Framework
IFC’s intervention
Results chain
Storyline
•Secured Transactions
•Commercial banks
•Credit Reporting
•MFs
•Green Credit
•Energy Efficiency
•Capital markets
•Sector-wide capacity building
Sector
•How IFC
contributed to
creating a favorable
environment?
Institution
Beneficiary
•How IFC
contributed to
building institution
capacity?
•How IFC
intervention helped
improve business
access to finance?
•8
Agenda
1. Context and Methodology
2. Key findings – Advisory Services
−
−
−
−
Secured transactions reform
Credit reporting system
Green credit policy
Sector-wide capacity building
3. Key findings – Capital market
4. Key findings – Investment
5. Conclusions and Lessons Learned
•9
Supported Secured Transactions Reform
Context
• 2005/2006 SME survey – 70% SMEs no access to finance due to
lack of acceptable collaterals
• Lenders’ concern – no proper legal framework, no single registry
• $9 trillion in dead capitals locked in SME sector
Intervention
A 5 year collective effort of WB, IFC and Chinese government,
costing $1.6m
• Legal framework – passed the property laws in 2007
• Infrastructure – a centralized registry
• Capacity building – regulators, bankers and public
•10
Supported Secured Transactions Reform
Results
• Enabled a strong growth of movables financing
− Loans secured by movable assets comprise 40% of the total loans in China
during 2008-10 vs 4% in 2005
− $3.5 trillion cumulative value of accounts receivable financing as of 2012
• Increased SME lending portfolio - 7 large commercial banks reported 45% in
2008-10 vs. 20% in 06-08 period
• Removed barrier for SME access to finance – 68,575 SME received financing
secured by accounts receivable over $1 trillion
• 60% of the surveyed SMEs believe that without their current access to
accounts receivable financing, their business development would be severely
impacted
•11
Advised the establishment of Credit Reporting System
Context
• Before 2003, China had no consumer credit database
Intervention
A 7 year effort, costing $400,000
• Regulation – PBOC Regulation on Consumer Credit
Information Database; CBRC - administrative rules
requiring all FIs to report credit information
• Infrastructure - Consumer credit information database
• International best practice, capacity building
•12
Advised the establishment of Credit Reporting System
Results
•The largest credit information database in the world built
in 2006. By the end of 2010, the database covered more
than 777 million individuals
•2007 China was recognized as one of the top 10 reformers
in Doing Business
•By the end of 2010, the cumulative number of inquiry for
812 million consumer database
•Credit reporting system helps enterprises and individuals
build up their credit history, and facilitate loans to the
lower-end of the market. From 2006 to 2009, the number
of enterprises with bank loans increased by 50%; the
number of individuals with bank loans increased by 145%.
•13
Promoting Green Credit Policy
Intervention
• Started in 2007, Provided policy advice to and PBOC and CBRC on
formation of Green Credit Policy, eg., Guidelines on Credit Granting for
Energy Conservation and Emissions Reduction; Provided training and
study tours.
Results
• IFC’s PS and EP are now well established within key Chinese banks
• Green Credit Guidelines launched in 2012 which specified how to
integrate energy-efficient financing practices into lending
• Demonstration effect
The IFC-China Green Credit partnership model has been expanded to
Vietnam, the Philippines, Malaysia and Indonesia
• South-South knowledge exchanges
• Too early to tell the impact on the ground
•14
Sector-wide Capacity Building
Institutions
China Banking Association
China Banking Regulatory Commission
People's Bank of China
Shanghai International Banking & Finance Institute
National Development and Reform Commission
Total
Training Topic
Bank Certification and CCB (City Commercial
Banks) Capacity
1. Reviewing drafts of leasing law;
2. Low and Moderate Income Housing,
Mortgage Lending, Mortgage Insurance, etc.
1. NDTL(Non-Deposit-Taking Lending
Institutions) Regulation, Microfinance
Development and Mobile Banking
2. Best Practice in Credit Registry, Credit
Reporing, Legistration on Credit Information
Services in China
3. Legislation and Practice of Secured
Transactions Law in China
4. International Best Practices in Secured
Transactions, Rural Collateral System Reform;
5. Mobile Banking Market
1. "Credit Analysis and Commercial Lending"
Workbook
2. General capacity building topcis for banks
1. International Experience on Promotion of
SME
2. Drafting the report of CSR (Corporate Social
Responsibilities) in China
3. Drafting the report of external financing
regime in China
Number of
workshop Number of
s/training participants
Number of
women
participants
33
2654
356
43
2868
290
91
11352
1463
154
25
1228
192
18256
2109
•15
Agenda
1. Methodology
2. Key findings – Advisory Services
3. Key findings – Local currency financing
–
–
Renminbi denominated bond
Renminbi swap facility
4. Key findings – Investment
5. Conclusions and Lessons learned
•16
Local currency financing
Intervention
Renminbi denominated bond
•In 2005 IFC and ADB became the first foreign issuer of bonds on the
Chinese domestic market through yuan-denominated “Panda Bonds.”
•From 2005-2011, in total IFC issued 3 Bonds at valued at $300m or RMB
2.15b.
Renminbi swap facility
•In 2011 IFC signed a swap legal agreement with 2 banks and became the
first multilateral institution authorized to conduct transactions with Chinese
financial institutions in the domestic local-currency swap market
•In 2012 Board approved a lend of $50 million to Jiangsu Financial Leasing to
be funded through the Swap Facility
•17
Local currency financing
Results
•Opened the Chinese bond market to international financial
institutions
•Improved and strengthen regulatory framework
•Introduced international good practice
•Supported high quality domestic companies with long-term
local currency financing, with low interest rate
•Job creation, research development, GHG emission reduction
•Evaluation of impact on the local capital markets is underway
•18
Agenda
1.
2.
3.
4.
Context and Methodology
Key findings – Advisory Services
Key findings – Local currency financing
Key findings – Investment
- Commercial Banking
- Microfinance
5. Conclusions and Lessons Learned
•19
Commercial Banking
•20
Context in the 1990’s
• Financial sector dominated by banks
• Banking sector dominated by the “Big Four”
state-owned banks
• High NPLs in banking sector: 25-40%
• Regulation prohibits foreign investment in banks
• No foreign banks were interested
• Bank loans most important source to firms
• No access to finance for SMEs: 1% bank loans to
private sector
•21
What Did IFC Do?
- Investments
(Excluding CHUEE facilities)
Category
IFC First
Board
Approval
Year
1999
2001
2006
2001
2004
2004
2005
2006
2007
2008
2009
Total IFC
Investment
Amount ($)
Bank of Shanghai
Bank of Nanjing
Bank of Nanjing
Minsheng Bank
Industrial Bank
Xi'an Commercial Bank
Bank of Beijing
Hangzhou URCB
Tianjin Binhai RCB
UCB China
Deyang CCB*
Total
City commercial Bank
City commercial Bank
City commercial Bank
Joint stock commercial bank
Joint stock commercial bank
City commercial Bank
City commercial Bank
Rural commercial bank
Rural
commercial
bank
Foreign
invested commercial
bank
City commercial Bank
Data source:
Data notes:
IFC project documents
*: pending Chinese government approval
**: IFC nominated an independent director
***: IEG XPSR 2006 rating. DOTS rating not available.
IFC Equity Share
IFC
Latest DOTS
Appointed Development
Director? Outcome Rating
88,500,000
5% increased to 7%
Yes
Successful
26,600,000
15%
Yes
Successful
47,600,000
Loan Nominated
27,000,000 0.92% increased to 1.1%
**
Satisfactory***
52,200,000
4%
Yes
Highly successful
3,250,000
2.5%
Yes
Mostly Successful
59,000,000
5%
Yes
Highly successful
27,630,000
5%
Yes
Successful
63,930,000
10%
Yes
Successful
45,000,000
Loan
31,000,000
15%
471,710,000
•22
What Did IFC Do?
- Advisory
Category
Bank of Shanghai
Bank of Nanjing
Minsheng Bank
Industrial Bank
Xi'an Commercial Bank
Bank of Beijing
Hangzhou URCB
Tianjin Binhai RCB
Total
City commercial Bank
City commercial Bank
Joint stock commercial bank
Joint stock commercial bank
City commercial Bank
City commercial Bank
Rural commercial bank
Rural commercial bank
Data source:
Data notes:
IFC project documents
IFC Advisory
AS AS Services
Strategic Risk
Amount ($) Planning Mgmt
1,000,000
487,500
700,000
700,000
1,200,000
4,087,500
Yes
Yes
Yes
Yes
Yes
5
Yes
Yes
Yes
Yes
Yes
5
AS AS AS - Int'l
AS - IFC Stress
Credit Corporate Accounting SME
Test in
Training Governance Standards Banking
2005
Yes
Yes
Yes
Yes
4
Yes
Yes
Yes
Yes
Yes
Yes
Yes
7
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
5
5
Yes
4
This table was compiled using information from various IFC projects documents. It is possible that not all IFC advisory
services to these banks have been documented in the materials reviewed for this study.
+
Sector level seminars and training programs
Presentations to the banking regulator
•23
Results
• Demonstration
effect
Year IFC Invested or nearest available
920
73
656
309
Bank of
Shanghai
Year IFC Invested or nearest available
2011
24 76
282
Bank of
Nanjing
361
Minsheng
Bank
956
851
341
25 41 102
Industrial
Xi'an
Bank
Commercial
Bank
233354
Bank of
Beijing
6,335
5,807
3,235
2,934
1,391
267
166909
Bank of
Shanghai
Year IFC Invested or nearest available
2007
Bank of
Nanjing
Minsheng
Bank
2007
2011
25,597
2,409
Non-Performing Loans
• Corporate
governance
• Strategic focus
on SMEs
2007
28,061
2,229
• Business
strategy and
risk
management
Profits (RMB Million)
Assets (RMB Billion)
8,946
8,586
3,348
1,107 1,686
112
1,101
Industrial
Xi'an
Bank
Commercial
Bank
Return on Equity
2011
Year IFC Invested or nearest available
2007
2011
22.2%
34.0%
19.9%
18.0%
3.0%
2.6%
2.5%
2.41%
0.98% 1.79%
0.78% 1.15%
0.38%
Bank of
Shanghai
Bank of
Nanjing
Bank of
Beijing
4.96%
0.98%
Industrial
Xi'an
Bank
Commercial
Bank
11.1%
5.9%
24.0%
15.9%
18.2%
16.0% 14.6%
13.6%
Hangzhou
URCB
22.8%
23.0%
19.3%
10.5%
6.5%
5.8%
2.06%
0.91%
0.79%
0.53% 1.3%
Bank of
Beijing
25.3%
24.7%
Bank of
Shanghai
Bank of
Nanjing
Minsheng
Bank
Industrial
Xi'an
Bank
Commercial
Bank
Bank of
Beijing
•24
Structure of China’s Financial Sector
•25
Results - cont’d
IFC contribution limited in a few of the banks due
to:
•
•
•
•
Small stake
Less developed region
Heavy government influence
Management not receptive to international
investors’ influence
•26
Microfinance
•27
Context in late 2000’s
• ~ 300 NGO type programs, unsustainable
• Regulatory environment, “formative” – no
clarity on which agency regulates and licenses
MFIs
• Lack of professionally managed MFIs
• Government experimenting different models,
including VTBs
• Legal status of MCCs only established in 2008
•28
What Has IFC Done?
- Institutional Level
Existing Investments
Zhong An Credit
MicroCred China
Renshou VTB *
Bayan VTB
CFPA MF
Shenzhen VTB
Beichuan VTB *
XinJiang MCC
Fullerton Credits**
Total
Data source:
Data notes:
Institution
Type
Type
MFI
MFI
VTB
VTB
MFI
VTB
VTB
MFI
MFI
Existing
Greenfield
Greenfield
Greenfield
Transformation
Greenfield
Greenfield
Greenfield
Existing
IFC
Board
IFC
IFC Share
IFC
IFC Advisory
Approval Investment of Total Investment Services
Year Amount ($) Equity Instrument Amount ($)
2007
2007
2009
2009
2010
2010
2010
2011
2012
2,500,000
1,149,425
1,464,504
1,746,586
5,770,484
2,930,017
1,731,288
1,050,000
50,000,000
68,342,305
15%
20%
14%
10%
10%
10%
-
C Loan
Equity
Equity
Equity
Equity
Equity
Equity
Equity
A Loan
Latest DOTS
Development
Outcome Rating
710,000
Successful
1,000,000 Mostly Unsuccessful
784,000
835,000
1,000,000
Successful
- Too Early To Tell
1,000,000
2,050,000
7,379,000
IFC project documents
*: pending Chinese government approval
**: includes Fullerton Credit Sichuan, Fullerton Credit Chongqing, and Fullerton Credit Hubei.
•29
Results
• Most investments too early to tell yet
• Success story: CFPA Microfinance Co.:
- NGO transformation
- Strong business performance
- Clear focus on poverty reduction
- Opportunities for women
• Challenges faced:
- Delayed government approval
- Slow ramp-up
- Funding constraints, partly due to regulatory issues
•30
Agenda
1. Methodology
2. Key findings – Advisory Services
3. Key findings – Local currency
financing
4. Key findings – Investment
5. Conclusions and Lessons learned
•31
Conclusion of the Review
• China’s financial sector experienced transformational
changes in the past 20 years.
• Many factors were at play, and an important force
behind the change was the Chinese government.
• IFC has made significant positive contributions to this
progress by playing roles of
- a catalyst
- a strategic investor
- and a technical advisor, facilitator, and knowledge
broker.
•32
Lessons Learned
• Taking calculated strategic risk pays off
• Remaining relevant to government’s priorities
and having strong client commitment help move
forward agenda
• A programmatic approach and long-term view is
crucial for delivering systemic impact
• Combining local knowledge and international
expertise is critical
• Co-investing and collaborating closely with
strategic investors enhances success chances
•33
Lessons Learned – cont’d
• Being supply-driven leads to less success
• Better resource allocation within IFC would
help increase impact
• Timing and mode of entering less-developed
region needs to be better planned out
• Small stakes restrict influence
•34
Feedbacks from Clients
“Not just to Bank of Shanghai, but to the entire banking sector in China, IFC
brought in international best practices in bank management.”
- Han Wenliang, Director of Board Supervisory Office, Bank of Shanghai
“There would not be today’s Bank of Nanjing without IFC. IFC was a pioneer in
pushing through China’s financial sector reform.”
- Zhang Weinian, Head of Executive Office, Bank of Nanjing
“IFC was a pioneer. Since IFC’s investment in 2005, Bank of Beijing has seen
improvement in all aspects. IFC has played an irreplaceable role.”
- Yang Shujian, Board Secretary, Bank of Beijing
“The most important contribution of IFC was to bring in the concepts of corporate
governance and balancing shareholder interests.”
- Tang Bin, Director of Board Secretariat, Industrial Bank
“IFC contributed to the transformation of the bank from a rural cooperative to a
rural commercial bank.”
- Long Yun, Chief, Office of Board of Directors, United Rural Commercial Bank
•35
Feedbacks from Clients
They also told us that IFC:
• Is bureaucratic, slow, and inefficient
• Uses cookie-cutter approach, lacks customization and
flexibility
• Is big on ideas and concepts, weaker on
implementation and technical support
• Lacks continuity in relationship management
sometimes
• Was HQ-centric back then: meetings at 12am Asia
time; no decision-making power in region
•36
Looking Forward
Challenges facing China and IFC’s Strategic Focuses
•
•
•
•
Climate change
Access to finance
Balanced growth between urban and rural
Integration in the world economy
•37
•Lessons Learned: M&E Recommendations
Thank You!
•38