Chinese Bank 'Resignation': Purge or Window Dressing?
Stratfor summary:
The chairman of China Construction Bank has resigned under dubious
circumstances. The "resignation" indicates that China's attempts to prepare
itself for competition with foreign banks are failing -- putting the country
well on track for a major financial crisis.
Analysis
Zhang Enzhao, chairman of China Construction Bank (CCB) -- one of China's
"Big Four" financial institutions -- resigned March 15, citing personal
reasons.
The "personal reasons" behind Zhang's resignation, however, likely have
something to do with rumors that he is under house arrest as part of ongoing
investigations into corruption. Specifically, the government suspects Zhang
of receiving kickbacks from information technology firms in exchange for
cheap loans. Considering that China's economic system is predicated upon easy
access to credit, and that the IT sector has been singled out for favored
treatment, Zhang undoubtedly will soon face charges of embezzlement.
Corruption is endemic to the Chinese financial system, where banks are seen
less as sources of loans than as sources of capital. The cost of credit is
kept inordinately low in order to keep throughput at factories high and
employment maximized. Such cheap loans allow Chinese firms to stay in
business despite bad management, substandard products, insufficient demand
and a host of other normal business killers.
Simply put, Beijing has decided the best way to keep the disgruntled workers
from causing political problems is to keep them in the factories -- no matter
how pointless the factories. A hefty percentage of the loans that keep these
monuments to government fear operating are not repaid on time, if at all;
they are the "bad loans" occasionally reported in the media. Various
estimates of the total amount of money from bad loans in the Chinese
financial sector range upward of $800 billion, versus a total Chinese gross
domestic product of only $1.6 trillion.
A similar setup exists in much of the rest of Asia, but in China it goes a
step further. China's sheer size means there are literally thousands of local
branches for each of the major banks - the CCB alone has more than 16,000.
Local bank managers and officers, therefore, establish close, often personal,
connections with myriad firms - making every handshake an opportunity for
corruption.
To put it bluntly, it should come as no surprise if Zhang turns out to have
run his business this way. He has worked with the CCB since the age of 18,
getting most of his experience in Shanghai, where he served as governor of
the bank's division from 1987 to 1999 -- the golden age of Chinese
development. Zhang only took over as CCB president in 2002 after his
predecessor, Wang Xuebing, began serving a 12-year prison sentence for
accepting bribes.
Beijing feels it needs to hang executives like Wang and Zhang. The China
Banking Regulatory Commission says it is investigating 157 independent cases
of regulation breaches -- code for the type of activities in which Zhang
appears to have been involved. Under China's accession agreement to the World
Trade Organization, Beijing must give all foreign banks full rights to
compete with its own state network of banks by the end of 2006. If that
happened today, most Chinese depositors would flee the government banks for
the foreign banks, where they could receive higher rates of interest for
their deposits. Foreign banks, after all, do not subsidize their loans. The
loss of depositors would kill the state banks and leave the government
footing the entire bill for sustaining the country's industrial non-sector --
an obligation that likely would bankrupt the government within a year.
To head off that dark -- and rapidly approaching -- future, Beijing is
attempting to follow a dual track. First, it is trying to bring foreign
investors into the Chinese banks as minority shareholders in order to get
more cash to support the system and expertise to make it stronger. Second,
Beijing wants the banks to launch initial public offerings (IPOs) on
international stock markets to raise working capital to cushion later shocks
and smooth current operations. The CCB hopes to raise $10 billion in its IPO.
Probably, neither of these will happen -- not so much the because of the
recent spate of bank corruption scandals (the most recent involving the
embezzlement of $8 million from a CCB Jilin branch) as because the scandals
have become so common they have faded into the background. The Zhang case,
however, cannot be easily ignored. In light of such a development, foreigners
will simply need a few more months to gauge the quality -- or lack thereof --
of the CCB's corporate governance.
Still, the Chinese government is working night and day to improve the system.
All told, since 1999 Beijing has transferred more than $200 billion in dud
bank assets to other institutions to clean up balance sheets. In late 2003,
the government provided the CCB with $22.5 billion to recapitalize the gap.
When even that was not enough, in 2004 the government allowed the CCB and the
Bank of China (another of the Big Four) to move another $33.7 billion in
non-performing assets off their books.
The core problem is that none of these banks is really a bank, but a means of
allowing the government to extend credit to its herd of white elephants, the
state-owned companies. As recently as 2002 the government officially referred
to the CCB as "the dispersing agency for the Ministry of Finance." The
government can spit and polish all it wants, but the Zhang case demonstrates
Beijing's failure to fundamentally reform these institutions. The government
has made no meaningful change in lending policies -- and so no meaningful
change in performance.
What has happened is an effort to clear out some of the worst of the
personnel. Whether China is truly serious about that crackdown, however, will
become apparent as soon as the authorities appoint Zhang's permanent
replacement (CCB President Chang Zhenming is filling the former chairman's
shoes temporarily). If the new chairman comes from private enterprise or --
even better -- from abroad, there might be a glimmer of hope. If the new
president comes from somewhere within the Big Four system, however, business
as usual will prevail -- until the crash arrives. |
