Transcript Further Reforms after the “BIG BANG”: The JGB Market

China’s WTO Entry and
Its Financial Sector Reforms
S. Ghon Rhee
College of Business Administration
University of Hawai’i
FIMA Research Center,
University of Hawai'i
1
Size of China’s Economy
2000 GDP ($billion) Per Capita GDP ($)
USA
Japan
China
Korea
Taiwan
Hong Kong
Indonesia
Thailand
Singapore
Malaysia
Philippines
9,873
4,750
1,080
457
309
163
135
116
92
90
66
$35,000
37,000
850
10,940
13,275
23,960
640
2,010*
22,860
3,850
845
* As of 1999
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University of Hawai'i
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Asian Stock Market
Performance
1995 – 1999
2000
16.10%
11.84
7.56
-0.81
0.01
-3.51
-5.11
2.06
3.47
-18.74
24.56
60.43%
-14.39
-38.50
-27.19
-50.92
-16.33
-30.26
-22.29
-43.85
-44.14
-6.18
China
Hong Kong
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
USA
FIMA Research Center,
University of Hawai'i
2001
-21.89%
-20.01
-5.80
-23.52
37.47
2.42
-21.84
-15.74
17.02
12.88
-7.10
1st Quarter, 2002
-2.23%
-1.10
22.89
4.57
29.10
8.62
20.16
11.06
11.10
23.07
3.82
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Expected Changes
after WTO Entry
1.
Banking Sector
a. Corporate Banking by foreign banks:
b. Individual Banking by foreign banks:
2.
2 years
5 years
Insurance Sector
a. Life Insurance: 50% foreign ownership
b. Property & Casualty Insurance: Majority foreign
ownership
3.
Fund-Management Industry
a. Initially 33% foreign ownership
b. 49% foreign ownership in 3 years
4.
Subsidies and tax breaks for State-Owned
Enterprises (SOEs) must be phased out
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University of Hawai'i
4
Unexpected Surprises after
December 11 WTO Entry (1)
1.
Banking Sector
a.
Foreign banks are allowed to open one branch per year.
b.
Agricultural Bank of China:
50,000 branches
Industrial and Commerce Bank of China: 44,000 branches
Construction Bank:
23,000 branches
Bank of China:
13,000 branches
Foreign bank branches’ loan guarantee income is shrinking
fast because of local competition from Chinese banks
Return on Assets earned by foreign bank branches is only
0.03%.
Still undefined, but equity capital requirement for foreign
banks may be prohibitively high.
c.
d.
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University of Hawai'i
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Unexpected Surprises after
December 11 WTO Entry (2)
2.
Insurance Sector
a.
New insurance licenses granted before December 11, 2001:
9 European insurers
2 US insurers
Government approval on each licensee’s insurance business
plan….may take more than a year.
The above insurance business plan needs local insurance
company as a partner…..Negotiations with potential local
partners may be lengthy and prolonged process.
Purchase of a local partner’s equity share….will be
prohibitively expensive.
Unresolved Issue: American International Group (AIG) has a
wholly owned subsidiary in China. New licensees want an
“equal treatment”… WTO arbitration may take years.
b.
c.
d.
e.
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University of Hawai'i
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Unexpected Surprises after
December 11 WTO Entry (3)
3.
Fund-Management Industry
Foreign fund management companies have
two ways of establishing a joint venture:
(i)
(ii)
Buy a 33% stake in an existing domestic fund
management company or
create a joint venture with an existing domestic
securities company company.
BUT, 15 domestic companies already have foreign partners.
Government approval on the creation of a joint venture with
a local securities company may take years.
This means that a 33% stake in a domestic fund management
company will carry a huge premium…..too expensive to buy!
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University of Hawai'i
I
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Weak Links in
Chinese Economy
Chinese government has all the incentives
to create entry barriers for foreign firms
Why?
Government officials are keenly aware of
weak links in its economy
1.
2.
3.
Ailing State-Banking Sector
Struggling State-Owned Enterprises
Weaknesses in Capital Markets
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University of Hawai'i
8
Ailing State-Banking Sector (1)
Current Status
a.
Big 4 state banks hold 75% of banking assets and 60%
of bank deposits
Agricultural Bank of China
Bank of China
Construction Bank of China
Industrial and Commerce Bank of China
b.
Non-Performing Loan Ratio
Official Statistics:
Unofficial Estimates:
25.37%
50% of total loans
Unofficial Estimate of NPLs: $350 billion
($169 billion of NPLs transferred to four Asset
Management Companies in 1998)
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University of Hawai'i
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Ailing State-Banking Sector (2)
Current Status
c.
Poor Profitability: ROA=0.19%
i.
d.
Interest receivable treated as income until loans are
declared default
ii.
Loan-loss provision is subject to 1% of outstanding
loan regardless of loan quality
AMCs are a viable solution in China?
i.
Virtually illiquid markets for real assets
i.
How can you sell SOEs?
ii.
Approximately 60% of new loans (extended after
NPLs were transferred to AMCs) still go to cashstrapped SOEs in the form of working capital
iii.
No legal framework is in place to facilitate sale of
AMC assets to foreign investors
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University of Hawai'i
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SOE Sector Problems (1)
Snap Shot of SOE Sector
a.
b.
b.
60% of industrial fixed assets
29% of industrial output
Employs 55% of urban workers
Average capacity utilization:
Below 60%
TV: 46.0%
VCR: 40.3%
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Telephone: 51.4%
Air Con:
33.5%
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SOE Sector Problems (2)
c. Redundant Workers: 15 million
or 10-15% of SOE work force
d. Average debt ratio = 65 - 70%
e. 1 out of 4 SOEs is money-losing
f. Plan to create 30-50 giant SOEs to
compete with foreign multinational
companies:
Feasibility?
Another series of handouts to failing SOEs?
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University of Hawai'i
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Weaknesses in
Capital Markets (1)
a.
Stock Market is Too Small
Total Market Capitalization:
Tradable Shares:
Savings Deposits:
b.
$550 billion
$192 billion
$773 billion
Investment Vehicles Are Limited
Number of Financial Products Owned by
Individual Investors
Hong Kong:
Korea:
Taiwan:
China:
6.9
5.2
4.4
3.7
Source: McKinsey & Co.
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University of Hawai'i
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Weaknesses in
Capital Markets (2)
c.
Corporate Bond and Financial Derivatives
Markets are Undeveloped
1.
2.
3.
d.
No corporate bond market
Financial derivatives market for bond futures
were banned due to excessive speculation
since 1995
Equity index futures and options are needed
for risk hedging
Improvement in Corporate Governance and
Financial Disclosure is desperately needed.
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University of Hawai'i
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To Sum Up
1. China will open the markets
gradually at its own pace.
2. When the markets open, entry
barriers will be high.
3. Financial sector will see the highest
barriers.
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University of Hawai'i
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Mahalo
for You Attention!
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University of Hawai'i
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