INB 311
India and China
Dr. Lairson
Finance
Banking in India and China
China:
The Chinese government has always controlled the financial system as a core
feature of its economic policy. This was true under Mao and under Deng.
The Chinese banking system reflects the overall system of state capitalism:
Central Bank – Peoples’ Bank of China (PBOC)
Large State-Owned Banks (IPOs with partial private ownership)
Bank of China
China Construction Bank
Industrial and Commercial Bank
Agricultural Bank
Local and ministerial state-owned banks (partial private and foreign
ownership)
Shanghai Pudong Bank
Other Mixed state-private banks
Private regulated banks
Wenzhou model
Private shadow banking system (mostly unregulated)
Foreign owned banks
tightly controlled except in Shanghai Free Trade Area
low market share – 2% of bank assets
Chinese government controls interest rates:
High savings
Low rates for borrowing
Encourage investment and savings and discourage consumption
Liberalization of Interest rates
Now banks can charge market rates
Soon banks can pay market interest rates for savers
Chinese SMEs have trouble obtaining credit
Chinese Bank Lending:
Source: McKinsey
Does Size Matter?
Shadow Banking In China
What is a shadow bank?
Why do shadow banks exist?
Expansion of private and SME sector in China
Poor access to credit
Demand for credit creates high price and supply of funds follows
Low interest rates to savers in China creates demand for higher returns
“Trusts” (Regulated by China Banking Regulatory Commission (CBRC)
http://www.nytimes.com/interactive/2013/07/02/business/Questionable-Lending-in-China.html?ref=global
Poor access to credit for consumers
Example of Yangzijiang Shipbuilding (Entrusted Loans)
IN THE town of Jingjiang, a few hours’ drive from Shanghai, Yangzijiang Shipbuilding is making
21 huge container ships for Seaspan, a Canadian shipping firm. An enormous sign declares, “We
want to be the best shipyard in China.” It is certainly among the most profitable, earning 3 billion
yuan ($481m) last year. But only two-thirds or so of that came from building ships. The rest came
from lending money to other companies using a local financial instrument called an entrusted loan.
This puts Yangzijiang at the forefront of another industry: shadow banking.
Over two-fifths of Yangzijiang’s loans go to property developers in smaller Chinese cities; land
makes up nearly two-thirds of its collateral.
Trusts
Several trust products have defaulted, although investors in most of them have got their money
back one way or another. Over $400 billion-worth of trust products are due to mature this year—
and borrowers will want to roll over many of those loans. Many observers worry that investors
will lose faith in trusts, prompting a run, which may, in turn, blight certain industries and other
parts of the financial system. No country, pessimists point out, has seen credit in all its forms grow
as quickly as China has of late without suffering a financial crisis.
Network (Guanxi) borrowing – Hangzhou
Potential Chinese Banking Crisis
Lending patterns
Local government borrowing and infrastructure development
Non-performing loans
Real Estate bubble from empty Chinese houses (condos)
IHS, a consultancy, recently predicted that such a property crash could reduce
China’s GDP from a forecast 7.5% this year to 6.6%, and to 4.8% next year. That may
not sound like the end of the world, but by China’s standards, it would be an
alarming slowdown.
India:
Basic Features:
Central Bank – Reserve Bank of India (RBI)
Raghuram Rajan – head of RBI
Strong liberalizer
Commercial Banks
State-Owned banks – Public Sector - 27 banks
State-Owned Rural Banks – Regional Banks – 196 banks
Public Banks dominate Indian banking system – 90% assets; 75%
loans
Commercial Private Banks
RBI Plans to expand licenses for banks
Non-bank banks
Specialized Banks
Investment Banks
Development Banks
Mutual Funds
Microfinance
Foreign Banks – 5-6% of India bank assets; plans for liberalizing
foreign banking in India
In 1969, India’s PM Indira Gandhi nationalized the banking system, an action that
seemingly gave the Indian government comparable control over the Indian finance.
Reform has been partial and has left a strange mixture of public and private.
 Public banks still dominate and provide ¾ of all loans even as foreign banks
provide about 5%.
 Private banks are important, even as a major role is to finance government
debt. Banks must put 23% of capital in government bonds, 4% in Reserve
Bank of India, and direct 40% of loans to priority sectors, mainly agriculture.
 There is a large – but uncertain sized – shadow banking system.
 There is a substantial non-performing loan (NPL) volume and many include
politically connected firms.
 The most sophisticated part of Indian banking is carried out offshore and is
linked to foreign banks.
 The system remains subject to rapid declines in the value of the rupee
The Indian financial system is burdened by the fiscal difficulties of the government:
Permanent fiscal deficit, persistent current account deficit and large external
debt.
Much is a result of flat revenue despite growing economy and using budget to
win votes
Financial system must supply funds for the deficit and finance the borrowing
needs of the private sector
Capital controls and Hot Underground Money
In Guangdong, Pearl River Delta cities like Zhuhai, Shenzhen, Guangzhou and Dongguan are
major underground conduits for Chinese hot money. The province, where imports and exports
amounted to $984 billion last year — a quarter of Chinese foreign trade — has served as a portal
for capital flows since China’s economic opening three decades ago. Collectively, the cities are a
hotbed of underground banking that also extends to Macau and Hong Kong. Macau, a gambling
center, and Hong Kong, a global financial hub, are special administrative territories of China, with
financial systems separate from the mainland’s.
In Zhuhai alone, more than 1 billion renminbi is transferred daily through underground networks,
according to six agents who spoke to Reuters — part of a tight-knit group of some 100 agents
operating in the border area. “Our business has gone up some 30 percent in the past three years,”
said one agent, who gave his name as Li.
Globalization of the RMB
Exchange Rates
Pacific Exchange Rate Service
http://fx.sauder.ubc.ca/plot.html
US Dollar and Chinese RMB -2005-present
1RMB = XXX $
1 $ = XXXRMB
US Dollar and India Rupee
India Exchange Rate
The trigger for the rupee’s 30% slide against the dollar from May to August, as well as
for declines in the currencies of Indonesia, Turkey and some other emerging markets,
was fear over their growing balance of trade and current account deficits. For years,
financial markets ignored this issue. Then, suddenly, after the U.S. Federal Reserve
announced in May that it was likely to soon begin reducing the size of its $85 billion
monthly bond purchases, the focus turned to current account deficits in emerging
countries.
India and Energy
Highly regulated fuel prices for consumers, fuel subsidies that are shouldered by the
government and state-owned upstream companies, and inconsistent energy sector
reform currently hinder energy project investment. Some parts of the energy sector,
chiefly coal production, remain relatively closed to private and foreign investment,
while others such as electric power, petroleum and other liquids, and natural gas
have regulated price structures that discourage private investment.
About 30% of India’s energy needs are met by petroleum. But some 80% of this oil is
imported — the major factor behind the country’s ballooning trade and current account
deficits. In the fiscal year ending March 2013, India’s net oil import was 2.6 million
barrels per day (bpd), at Brent crude prices averaging $110 per barrel. Over the past
decade, the more than five-fold rise in India’s net oil import bill to $109 billion last year
enlarged its trade deficit to $196 billion, causing a current account deficit of $88 billion
or 4.8% of its $1.8 trillion GDP. It is this data that hurt the rupee last summer and led
some nervous foreign investors to pull their money out of the country.
A puzzling aspect of India’s oil imports is that domestic refining capacity is four million
bpd, 400,000 barrels more than domestic consumption. Most of the recent capacity
increase has come from Reliance Industries’ 1.2 million bpd complex in Jamnagar and
Essar Oil’s 400,000 bpd plant in Vadinar. These privately owned plants are expected to
help reduce imports as well as boost exports of higher-value refined products. But Indian
refiners are likely unable to compete in global markets, unless subsidized by the Indian
government, against lower-cost producers from the Middle East, especially Qatar, given
their far cheaper input costs.
India’s proven crude oil reserves are estimated to be about 5.5 billion barrels, with 53%
of it onshore and the rest offshore. That is barely enough to meet domestic consumption
over the next four years. Exploration and production of major oil deposits, if any, take
decades. The railways and coastal shipping, using India’s long coastline, are both highly
energy-efficient transportation alternatives that will sharply reduce oil imports. But to do
this, as well as develop other major sources of energy like solar and nuclear plants, the
Indian government will have to spend hundreds of billions of dollars, a difficult prospect
since India is also running a budget deficit which was officially put at 5.2% of GDP last
year.
So, policies to curb the growth as well as sharply reduce consumption of petroleum
products need to be aggressively implemented. But the Indian government spends an
estimated US$25 billion a year to subsidize the purchase of diesel, kerosene and other
petroleum products that benefit farmers, truck transport operators and car and other
automobile owners. Last year, there were 2.7 million cars sold in India plus 800,000
commercial vehicles and 13.8 million two-wheelers, such as scooters and motorcycles
Source: Economist