The Rise and Fall of Abacus Banking in Japan and China phần 8 pps

Exhibit 5.8 Bank Assets (1980–1997) Source: State Statistical Bureau (various years). The Rise of Abacus Banking in China 119 the Chinese government by and large remains the majority owner of SOEs and the successors of CEs, township and village enterprises (TVEs). This means that their board and management are either directly or in- directly controlled by the Communist Party or national, provincial, and town governments, which appoint the managers who run them. Appointed by a Communist Party–selected board, managers’ primary objective is to maximize ‘‘people’s’’ welfare, that is, the welfare of the Communist party, the national, state, and local government bureaucrats, the large number of SOEs, and the surrounding community. Even the emerging private enterprises and joint ventures are at the mercy of pro- vincial and local governments, as they must enjoy good relations with them if they want to be and remain in business. The same arguments can be made regarding the banking sector, where bank assets are almost 100 percent owned by the government, compared to about 30 percent in Argentina and Mexico. 21 As Mookerjee and Peebles observe: ‘‘During the 1980s and continuing into the 1990s the monetary system, together with the state industrial sector which it was created to serve, have remained the least reformed parts of the economy.’’ 22 Wei and Zeckhauser are more emphatic: For more than a decade, China has been talking about reforming its financial sector, cleaning up its bad loan problems. Some progress has been made, but far from enough; reform is painfully slow. It has not seemed urgent, and it is tied to complex problems of reforming state-owned enterprises. 23 Indeed, in spite of the many financial liberalization measures an- nounced, the state banking system continued to account for roughly two- thirds of all financial assets, a figure that is probably much higher if many of the bank-owned ITICs are included in the calculations (see Ex- hibit 5.9). In fact, in 1994, there was only one ‘‘privately owned’’ ITIC, the Shanghai AJ Finance, with RMB 2.4 billion in 1995. In 1997, bank deposits accounted for almost 80 percent of total bank assets in China, compared to 60 percent in the United States (see Exhibits 5.10 and 5.11). And China’s central banking continues to display a mix of an independ- ent central bank and a central planing instrument, displayed in the tra- ditional ‘‘operational principles of central planning’’—that is, unified planning (the central bank rations credit to the banking industry), fund availability (banking liquidity controls), account division (the independ- ence of specialized banks from central banking), and interbank lending. 24 In practice, this means that credit planning is still in effect in China, Exhibit 5.9 Financial Assets Distribution (1986–1994) Exhibit 5.10 Bank Deposits in China (1980–1997) (percent of total assets) Exhibit 5.11 Bank Deposits in the United States (1980–1995) (percent of total assets) The Rise of Abacus Banking in China 123 and the PBC pulls the strings to have it implemented. The PBC, for in- stance, ‘‘combines all banks’ fund sources and uses, which are aggre- gated from the banks’ regional branches. The national credit plan controls credit uses, both quantitatively and qualitatively, by specifying mandatory annual credit targets.’’ 25 In addition, the PBC injects funds to banks unable to meet loan demand by SOEs and adjusts interest rates to accommodate credit plan targets. The PBC further continues to control interest rates that allow banks to earn seigniorage. This means that Chi- nese banks have a long way to go before they are transformed into sound financial institutions, as defined by the market. As Melloan observes: ‘‘It appears that whatever might be happening to the banking system, it remains a very long way from becoming a financial structure that allo- cates capital effectively, as banks do in well-run market economies.’’ 26 Banks by and large remain government departments, operating within a central planning environment and promoting the welfare of the ‘‘peo- ple’’ rather than true enterprises operating in a market system and pro- moting the interests of their stockholders. As Kime puts it, China’s state banking system functions essentially as an agency of the govern- ment, ‘‘selling’’ deposits much as a finance ministry would sell government se- curities. In effect, one agency of the Chinese government borrows from the non-state public and ‘‘lends’’ the money to another part of the government, the state enterprise sector. 27 Bank managers are recruited from the ranks of Party members and gov- ernment bureaucrats appointed by Communist Party-controlled boards, and that constrains their freedom to allocate credit according to the prin- ciples of risk management. Bank managers, therefore, lack the will and the freedom to assume risks and to adjust their inputs and outputs to changing market conditions. For instance, they have limited freedom to evaluate the performance and to even lay off excess labor or introduce technological processes that may displace labor, as is often the case with the banks of market economies. Bank managers have little freedom to allocate credit outside of the parameters of the credit plan that continues to be biased toward SOEs, which absorb close to 80 percent of overall credit. 28 Coming from the ranks of government bureaucrats and the Communist Party rather than from business schools, Chinese bank managers lack the skills to under- stand, analyze, and appraise traditional and non-traditional banking risks. In fact, China has a large shortage of professional managers. After all, this is the country that for centuries looked down on economics and 124 The Rise and Fall of Abacus Banking in Japan and China business education, especially during the communist regime, which de- nounced capitalist management or reduced it to just an engineering op- eration. 29 Reflecting the attitudes toward business education, the percentage of economic, finance, and management graduates in the total number of university graduates declined from an average of 10.3 in the period 1928–1947 to 2.1 in the period 1966–1976, and it remained at 3.6 in the period 1977–1985. 30 Given these constraints, the rational choice for the government- appointed managers is to confine themselves to routine and predictable businesses (i.e., expand the volume of lending rather than the quality of lending or venture to the genuine and unpredictable business of devel- oping new products and services). As J. Thomas Macy observed in the 1998 World Forum on Asia, management standards have improved, but China’s banks, even its best ones, are still way behind their Western counterparts, particularly in areas such as investment technology. To put it differently, volume lending rather than quality lending or innovation has been the business strategy of Chinese banks, a strategy reflected in the size of China’s banks. In 1945, for instance, with more than $30 billion in assets and close to $2.5 billion in profits, China’s four state banks— Bank of China, Industrial and Commercial Bank of China, China Con- struction Bank, and Agricultural Bank of China—occupied the first four out of the top ten positions of Asia’s largest banks. 31 To sum up, the Chinese banking industry has always been a tightly regulated industry, especially during the early communist era, when government ownership and central planning reduced it to a treasurer of the Ministry of Finance. But even during the later communist era, even after the 1978 reforms, banks largely remained under government own- ership and control, and bankers continued to act as government account- ants, monitoring the money flows between households and government departments, rather than as credit risk managers, with two differences. First, robust economic growth boosted savings and lending to SOEs. Sec- ond, it made money flows less predictable than before, especially since corporate clients were exposed to the wild swings of the global economy in the aftermath of the Asian crisis, an issue that will be addressed in the next chapter. NOTES 1. For a detailed discussion, see King (1965). 2. Determined within the central plan, SOE profit is more an accounting rather than an economic concept. The Rise of Abacus Banking in China 125 3. Arayama and Mourdoukoutas (1999), p. 49. 4. One could even trace China’s attempt to create a world market frontier even earlier than that, back to the Han dynasty (206 B . C . to 220 A . D .) and the construction of the ‘‘Silk Road.’’ 5. In fact, China was a founding member of GATT in 1948 but it dropped out after the communist victory. 6. For a detailed discussion, see Harding (1987), ch. 6. 7. King (1965), p. 97. 8. Ibid., p. 11. 9. Ibid., p. 97. 10. Ibid., p. 20. 11. Lu and Yu (1998), p. 148. 12. Ibid., p. 93. 13. Hsiao (1971), p. 90. 14. Lu and Yu (1998), p. 159 15. Ibid., p. 129. 16. Hsiao (1971), p. 130. 17. Ibid., p. 91. 18. Kime (1998), p. 14. 19. Zhang (1998), p. 1. 20. Yu and Xie (1999), p. 43. 21. ‘‘A Survey of Banking in Emerging Markets,’’ The Economist, April 12, 1997, p. 12. 22. Mookerjee and Peebles (1998), pp. 152–153. 23. Wei and Zeckhauser (1998), p. 365. 24. Lu and Yu (1998), pp. 150–151. 25. Ibid., p. 151. 26. G. Melloan, ‘‘Asia Revives, but Whither Japan and China?’’ Wall Street Journal, March 2, 1999, p. A19. 27. Kime (1998), p. 16. 28. Fry (1999). 29. Indeed, China, a country rich in labor, is poor in specialized labor, espe- cially skilled management. 30. Xu-Yao, Ke-Chun, and Chan-Min (1989). 31. ‘‘A Survey of Banking in Emerging Markets,’’ pp. 5–48. Chapter 6 The Fall of Abacus Banking in China A bank lives on credit. Till it is trusted it is nothing; and when it ceases to be trusted it returns to nothing. —Walter Bagehot 1 For almost two decades since the late 1970s, globalization, the increasing integration and interdependence of world markets, has shown the world its bright side, especially to the emerging economies of Asia and most notably to China. It has provided them with a genuine opportunity to develop themselves. Fewer trade restrictions, for instance, have made it easier for these economies to sell their labor-intensive products to West- ern markets. Fewer capital restrictions have allowed foreign investment to pour into their factories. Lower ideological tensions and improved international relations allowed communist countries like China access to Western commodity, technology, and capital markets, which propelled the country’s robust economic growth, as discussed in the previous chap- ter. By the mid-1990s, globalization began to show the world and the econ- omies of Asia in particular its dark side, that of intensified competition, price destruction, and declining local currencies. In this sense, globali- zation has turned from a source of opportunity to a source of uncertainty that threatens to slow down or even reverse the early gains that these [...]... weakening The Fall of Abacus Banking in China 129 • Economic growth has slowed down • The interest rate spread has turned negative Arguing these points, this chapter takes a close look at the Chinese economy since the mid-1990s, especially since the aftermath of the Asian crisis, and explains how external and internal pressures have been changing the rules of the game for banks, eliminating most of the. .. products and processes, thus creating sustainable competitive advantages associated with them China s lack of an expanding world market frontier and her inability to innovate have taken their toll on her economy and her banking industry in particular, eliminating most of the conditions that supported and reinforced the abacus banking strategy • Commodity prices have been declining • Government regulation and. ..1 28 The Rise and Fall of Abacus Banking in Japan and China countries have made in developing their economies Globalization has further turned into a major challenge to the institutions and policies that for many years have supported the successful entry of these countries into world markets, especially the banking institutions that have been enjoying an almost risk-free environment... visible and evident in Asian NIEs and in Japan, coming off a system of highly protected and regulated domestic markets that eliminated competition and the risks and uncertainties associated with them For instance, in Japan, discussed in Part I of this book, globalization has contributed to the disbanding of the ‘‘escorted convoy’’ system and the intensification of domestic competition that have led to the. .. decline and fall of the abacus banking system and the banking crisis Globalization’s dark side is less visible and less evident in China, which has been a latecomer to the world economy and therefore under less pressure to open her economy to foreign products and competition Due to a low degree of integration in world markets, as manifested in the continuing tight currency and interest rate controls, the. .. 132 The Rise and Fall of Abacus Banking in Japan and China which has regulated the world textile and clothing market through voluntary export restraints (VERs) for over two decades) is to be phased out by the year 2005, tariffs on textiles and clothing remain high in industrial markets.’’3 Besides, a number of countries, including Japan, have begun to renegotiate bilateral agreements with China, placing... number of factors, including low per capita income, persistent income inequalities, low The Fall of Abacus Banking in China 133 population density, high illiteracy rates, and poor physical market integration China is a tale of two economies—that of the rapidly modernizing southeastern coastal economy from Haina and Guandong to Liaoning, and that of a backward central-southwestern and northwestern... product, as is reflected in excess business inventories and in a 1.9 percent decline in retail prices in February 19 98, and in the decline in retail prices that fell from close to 16 percent in 1994 to less than 2 percent in 19 98, 8 and were expected to fall to Ϫ2 percent in 1999.9 In the words of Roberts et al., ‘‘Deflation is ravaging Chinese enterprises These companies, most of them state-owned, have... who maintain their grip on the economy, especially on SOEs and the banking system, as discussed in the previous chapter China s inability and incapability to innovate have by default left volume expansion of conventional products as the sole competitive strategy The country, for instance, consistently expanded its zinc production from 4.4 percent in 1 980 to 10.9 percent in 1990 and 18. 6 percent in 1997... controls, the Chinese economy seems to have weathered the crisis that ravaged the other Asian economies Her currency remained stable, and the conditions for the abacus banking industry, discussed in the previous chapter, remained intact This also could explain why China has thus far avoided a full-blown banking crisis Yet China has not completely escaped from the Asian crisis In fact, even before the Asian . gains that these 1 28 The Rise and Fall of Abacus Banking in Japan and China countries have made in developing their economies. Globalization has further turned into a major challenge to the institutions. billion in assets and close to $2.5 billion in profits, China s four state banks— Bank of China, Industrial and Commercial Bank of China, China Con- struction Bank, and Agricultural Bank of China occupied. large shortage of professional managers. After all, this is the country that for centuries looked down on economics and 124 The Rise and Fall of Abacus Banking in Japan and China business education,