CHINA must break up the country’s State-owned commercial banks into smaller units to jump-start banking sector reform, a recently released Citibank/Salomon Smith Barney report said.

　　Citibank and Salomon Smith Barney are both units of Citigroup Inc.

　　Breakup

　　The inadequacy of government bank sector reform plans makes the breakup of the banks along geographical or business lines essential, the Greater China Insights: Is China Heading for a Banking Crisis report said.

　　“We believe that breaking up at least some of the State-owned commercial banks is a necessary step to both foster competition and facilitate reform,” the report said.

　　“The sizes of the banks also mean that China cannot afford to let any of them fail (and) this generates the moral hazard problem, which is very bad for the reforms.”

　　Bad loans

　　China’s banking sector is dominated by four large State-owned commercial banks: the Industrial & Commercial Bank of China, the Agricultural Bank of China, the China Construction Bank, and the Bank of China.

　　A legacy of decades of government-directed policy lending has left the four banks with non-performing loan ratios of more than 20 percent.

　　The banks also suffer from management and accounting system deficiencies that in recent months have been blamed for losses of hundreds of millions of dollars in embezzlement scandals from the Bank of China alone.

　　Benefits

　　The report said that a breakup of State-owned commercial banks would be far more effective in pushing reform than proposals produced by China’s blue-ribbon Central Financial Works Conference in February.

　　The proposals agreed upon by the conference include introducing foreign and domestic strategic investors in preparation for public listings of the banks within five years, the report said.

　　“It is simply impractical to expect that all elements of all the four State-owned commercial banks will become competitive (but) this situation may change once the banks are split into several components,” the report said.

　　“And if some (newly created) smaller banks fail, there would be no devastating macroeconomic implications...and breaking up will facilitate the processes of introducing foreign strategic investors and public listing.”

　　Bubbles

　　The report said new threats to China’s banks from the bond and property market bubbles add to long-standing problems of non-performing loans and low capital adequacy ratios.

　　China’s non-performing loan and capital adequacy ratios are probably ranked among the worst in Asia, the report said.

　　Citibank/Salomon Smith Barney estimates that the non-performing loan ratios of the four State-owned commercial banks — including “huge unrecognized bad assets” — is currently 33 percent, while capital adequacy ratios fell to around 5 percent by the end of last year.

　　“China’s banks are among the most vulnerable in Asia and they need a quick fix to avoid a banking crisis (though) an immediate meltdown is unlikely due to capital account control and implicit State guarantee of deposits,” the report said.

　　China’s yuan only trades on the current account and is kept within a tight margin relative to the U.S. dollar.

　　The report said that the banks were also threatened by the 829.1 billion yuan (US$100.13 billion) in treasury bonds they held by the end of May, constituting 6.3 percent of State-owned commercial banks’ total fund utilization.

　　The lack of liquidity of China’s bond market means the banks will be unable to sell the bonds in an emergency, while the around 3 percent rates the banks bought the bonds at will be problematic when interest rates eventually start to rise, the report said.

　　Extensive mortgage and property development lending in recent years has also left China’s banks vulnerable to a possible property bubble.

　　The report warned that the rapid growth of building projects and an 8 percent rise in the residential housing vacancy ratio in the first five months of this year indicated that property prices may soon peak.

　　A property bubble will severely impact the banks because they have lent about 23 percent of total funds for property development nationwide and held close to 10 percent of all outstanding property and mortgage loans by the end of June.

　　A future downturn in China’s stock market also holds significant risk for the banks, the report said.

　　“...Although it is prohibited by policy, many institutions borrowed from the banks to speculate in the stock market (and) we estimate the total amount was about 770 billion yuan last year...equivalent to more than one-third of the market capitalization of the tradable shares in China,” the report said.

　　(SD-Agencies)

　　CHINA must break up the country’s State-owned commercial banks into smaller units to jump-start banking sector reform, a recently released Citibank/Salomon Smith Barney report said.

　　Citibank and Salomon Smith Barney are both units of Citigroup Inc.

　　Breakup

　　The inadequacy of government bank sector reform plans makes the breakup of the banks along geographical or business lines essential, the Greater China Insights: Is China Heading for a Banking Crisis report said.

　　“We believe that breaking up at least some of the State-owned commercial banks is a necessary step to both foster competition and facilitate reform,” the report said.

　　“The sizes of the banks also mean that China cannot afford to let any of them fail (and) this generates the moral hazard problem, which is very bad for the reforms.”

　　Bad loans

　　China’s banking sector is dominated by four large State-owned commercial banks: the Industrial & Commercial Bank of China, the Agricultural Bank of China, the China Construction Bank, and the Bank of China.

　　A legacy of decades of government-directed policy lending has left the four banks with non-performing loan ratios of more than 20 percent.

　　The banks also suffer from management and accounting system deficiencies that in recent months have been blamed for losses of hundreds of millions of dollars in embezzlement scandals from the Bank of China alone.

　　Benefits

　　The report said that a breakup of State-owned commercial banks would be far more effective in pushing reform than proposals produced by China’s blue-ribbon Central Financial Works Conference in February.

　　The proposals agreed upon by the conference include introducing foreign and domestic strategic investors in preparation for public listings of the banks within five years, the report said.

　　“It is simply impractical to expect that all elements of all the four State-owned commercial banks will become competitive (but) this situation may change once the banks are split into several components,” the report said.

　　“And if some (newly created) smaller banks fail, there would be no devastating macroeconomic implications...and breaking up will facilitate the processes of introducing foreign strategic investors and public listing.”

　　Bubbles

　　The report said new threats to China’s banks from the bond and property market bubbles add to long-standing problems of non-performing loans and low capital adequacy ratios.

　　China’s non-performing loan and capital adequacy ratios are probably ranked among the worst in Asia, the report said.

　　Citibank/Salomon Smith Barney estimates that the non-performing loan ratios of the four State-owned commercial banks — including “huge unrecognized bad assets” — is currently 33 percent, while capital adequacy ratios fell to around 5 percent by the end of last year.

　　“China’s banks are among the most vulnerable in Asia and they need a quick fix to avoid a banking crisis (though) an immediate meltdown is unlikely due to capital account control and implicit State guarantee of deposits,” the report said.

　　China’s yuan only trades on the current account and is kept within a tight margin relative to the U.S. dollar.

　　The report said that the banks were also threatened by the 829.1 billion yuan (US$100.13 billion) in treasury bonds they held by the end of May, constituting 6.3 percent of State-owned commercial banks’ total fund utilization.

　　The lack of liquidity of China’s bond market means the banks will be unable to sell the bonds in an emergency, while the around 3 percent rates the banks bought the bonds at will be problematic when interest rates eventually start to rise, the report said.

　　Extensive mortgage and property development lending in recent years has also left China’s banks vulnerable to a possible property bubble.

　　The report warned that the rapid growth of building projects and an 8 percent rise in the residential housing vacancy ratio in the first five months of this year indicated that property prices may soon peak.

　　A property bubble will severely impact the banks because they have lent about 23 percent of total funds for property development nationwide and held close to 10 percent of all outstanding property and mortgage loans by the end of June.

　　A future downturn in China’s stock market also holds significant risk for the banks, the report said.

　　“...Although it is prohibited by policy, many institutions borrowed from the banks to speculate in the stock market (and) we estimate the total amount was about 770 billion yuan last year...equivalent to more than one-third of the market capitalization of the tradable shares in China,” the report said.

　　(SD-Agencies)