China: Exit the dragon?
Chinese banks have had a fairly busy 2004, bidding and participating in several aircraft finance deals in the Asia-Pacific region. However, 2005 could be a different story as Beijing reins in lending as it attempts to control the overheating economy.
Chinese banks, flush with cash, are able to outperform any export credit agency (ECA) financing that a foreign bank can offer - and add more agreeable terms into the bargain. One of the first deals to finance an aircraft leased by a domestic Chinese leasing company to a Chinese airline (a B-767 to Hainan Airlines) closed in February 2004. Market sources suggested the principal reason for the transaction was simple: none of the Chinese banks was keen to lend directly to the highly geared operator.
It is worth taking a closer look at the Chinese banking system. Among financial systems globally, China faces some of the greatest challenges. Although the domestic regulator and the banks themselves are attempting to improve various aspects of the industry, the sector is characterised by poor asset quality, low profitability and low capitalisation, while regulatory supervision is only at an embryonic stage.
China will find it difficult to avoid the risks associated with a banking industry in transition without an enforceable and transparent commercial code, a strong regulatory regime and effective corporate governance. The four wholly state-owned commercial banks and their traditional areas of specialisation are:
Industrial & Commercial Bank of China (ICBC), which provides working capital loans to the industrial and urban sectors;
Bank of China (BoC), which focuses on foreign exchange and international transactions;
China Construction Bank (formerly the People's Construction Bank of China), which offers long-term infrastructure loans to construction and infrastructure projects; and
Agricultural Bank of China (ABoC), which specialises in agricultural and rural loans and deposits.
These banks have diversified their business focuses. Among the four, ICBC is the largest in terms of its total assets, followed by China Construction Bank (CCB), BoC and ABoC. The total assets of these four institutions account for about two-thirds of the market.
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