Transforming China’s Economy and Banking Sector - A Titanic Story of Reform
Editor’s note: Despite setting ambitious targets in its current five-year plan, China can achieve its objectives to promote inclusive growth, rebalance the economy and protect the environment, maintains Liu Mingkang, the Fung Global Institute’s first Distinguished Fellow. In a 31 May keynote address at the Institute’s inaugural Asia-Global Dialogue, he also recalled the urgent reforms he led to avert disaster for China’s banking sector.
I am very honoured to be part of the Fung Global Institute and delighted to participate in its inaugural Asia-Global Dialogue. Andrew has invited me to talk about how I did my job as Chairman of China’s banking sector regulator, and how China will be able to achieve the objectives set out in its 12th five-year plan. If you’ll bear with me, I’ll address the second topic first because, to be honest, I find it easier to talk about the 12th five-year plan than banking reform, a topic in which I was so personally involved.
In March last year, China’s National People’s Congress approved the 12th five-year plan, for the period from 2011 to 2015, with three key objectives: the first is to promote inclusive growth and reduce social inequality; the second is to rebalance the economy; the third is to protect the environment. In other words, China wishes to build a middle-income economy that is in harmony with society, nature and the rest of the world. These objectives, if achieved, will clearly bring huge opportunities to everyone. As people in this room understand, though, the targets are not easy to achieve. Chinese leaders also appreciate how difficult the challenges are.
China’s economic reforms have lifted millions out of poverty and turned its economy into the second largest in the world within three decades. However, most Chinese are only too aware that, in Premier Wen Jiabao’s words, China’s economic growth is “unsteady, unbalanced, uncoordinated and unsustainable’’ I guess, in best Chinese tradition, we can label them The Four “Uns”.
Can anyone here imagine what the consequences would be of a collapsing Chinese economy now, especially when the news from Europe remains so worrying and recovery in the US remains fragile? To me, the greatest contribution China can make as a responsible global stakeholder in building a new global economic and social order is to keep its own house in order – namely, to make its own economy more steady, more balanced, more coordinated, and more sustainable. We can call those The “Four Mores”.
Can China reach the ambitious targets it set for itself in the 12th Five Year Plan? And, if so, how?
Let us examine this important question by taking as an example environmental protection – one of the three planks of the current five-year plan.
Climate change linked to greenhouse gas emissions is an increasingly high-profile public concern in China, along with the mounting health issues linked to pollution. The government is committed to reducing its carbon emissions per unit of GDP by 17 per cent over the next five years. By 2020, China will bring down its energy intensity, measured by energy consumption per unit of GDP, by 40-50 per cent from 2005 levels. And China is determined to reduce its water and air pollutants and harmful particulates by reducing levels of both Chemical Oxygen Demand and SO2 by 8 per cent, and NOX by 10 per cent, over the next five years. Moreover, China’s new “green economy” strategy also calls for an increase in forest coverage from 20 per cent to 21.7 per cent over the next five years.
Once again, we must ask if China can achieve such targets. In my view, the answer is “yes” so long as we do our homework and know where to focus our attention and efforts. One imperative is to design and build energy efficient residential housing and office buildings. Another is to develop energy efficient modern industries.
From 2006 to 2010, China ranked number one in the world in terms of new housing construction, which has increased to 7.42 billion square meters. I expect this trend to continue for the next five years because China’s population, currently standing at 1.3 billion, will peak at 1.6 billion by 2020. By then, more than 130 million people will have moved from rural to urban areas – that is greater than the entire population of Japan. A further 100 million urban residents will need better housing. If all new residential housing and public buildings can be built with proper insulation materials, and are air-conditioned by green technologies, you can imagine how much it will reduce China’s carbon footprint and energy intensity. This is the case not even counting the rapid progress being made with clean coal, shale gas and renewable energy.
Similarly, China has huge possibilities for improving the energy efficiency of its rapid-growing industries. Large and medium-sized industrial enterprises currently account for up to 40 per cent of China’s GDP. This is too high. By boosting the services component of the economy, China can also reduce its energy consumption.
Moreover, China can leapfrog the next stage of its industrialisation if industry operating standards and prices for energy and resources can be rationalised through regulatory and market incentives. We would soon see the emergence of a greener, more sustainable economy. To me, this would be an achievement as impressive and visible as building the Great Wall.
By leveraging a full spectrum of public and private resources, China can also work with other Asian countries on the creation, commercialisation and spread of green technology in the region and beyond. I believe that together, we could even exceed the sustainability targets of the 12th five-year plan.
Let me now turn to some personal recollections on the reform of China’s banking sector. When I was appointed the first Chairman of the China Banking Regulatory Commission, or CRBC, in 2003, I took a close look at all kinds of regulatory and market data and information. What I saw was quite terrifying. Some of you might remember the estimations about China’s non-performing loans by outsiders, which ranged from 25 per cent to 60 per cent. I felt like the captain of The Titanic. Only, unlike Captain Edward Smith 100 years ago, I did see the iceberg dead ahead. We had to alter course dramatically and immediately or we were doomed.
I briefed Premier Wen on my plan to turn around China’s entire banking sector. I assured him that we would succeed so long as I was allowed to be tough and to act fast. The Premier gave his endorsement right away. Soon after, my plan was approved formally and I was able to begin implementation.
It was one of the most difficult periods of my life. Night and day all I could think about was transforming the banking sector. I knew we had to seize all available opportunities and introduce major reforms decisively and quickly.
We restructured almost all the banks, big and small. It required a combination of articulating a broader vision of what we should do over time, with a series of practical steps that could be taken immediately. It was a “building-block” approach, carefully designed to preserve stability while relentlessly advancing reform. We also decided early on to disclose to the whole world the real picture about our banks’ operations, the lessons we had already learnt – sometimes painfully – and where we were heading. This transparency was crucial in building trust at home and credibility overseas. Further, we were very specific about the pace at which we were planning to turn the banks around.
Honesty simplifies almost all problems. Through transparency, the market was able to grasp my ideas and understand my determination to break old habits. I had also done a lot to cultivate awareness within CRBC and among other stakeholders about the need for reform. People started to acknowledge the importance and urgency of my – and also their – tasks. And results soon spoke loudly for themselves: 41 foreign strategic institutional investors joined 32 Chinese banks, ranging from the top five to a very small bank situated in a remote area of Sichuan Province; nine foreign banks invested in 41 township financial institutions.
Bit by bit, bad assets were hived off, new capital was injected and new skills and knowledge poured in. As we skirted the iceberg and sailed on, opinions about China’s banking sector began to change.
Today all four big state banks and ten medium-sized mixed ownership banks are listed at home or abroad, with price/book ratios at over three times. Their revenues have increased by 15-20 per cent annually. Meanwhile, the cash pool set aside for bridging the gap between the book value and bid value of bad assets carved out at the start of the reforms continued to fill until it brimmed over. In other words, Chinese taxpayers did not have to pay a penny to reinvigorate the Chinese banking industry, something in which my colleagues and I take great personal pride.
The transformation was so fast that every day counted. When the last big state bank was floated on the Hong Kong and Shanghai stock markets in June 2008, it had a price/book ratio of 3.3. Luck was on our side with the timing. As you all know, three months later, Lehman Brothers went bust. The average price/book ratio dropped sharply and has still not returned to its original level. But, all in all, it has been a good deal both in terms financial returns and pushing through China’s banking reform.
While I am gratified that the overall outcome of these efforts has been positive, I must honestly admit that reforming China’s banking sector was no easy job. There were no short cuts. CBRC had to start by transforming itself. This meant studying international best practices, in particular, focusing on how to assess risks when operating under existing global rules and environments. We knew that talent was critical to capacity building and would provide the foundation for transforming the whole sector. So we formed a world-class International Advisory Council, benefitting from the wisdom of Sir Edward George, Sir Howard Davies, Jerry Corrigan, Jaime Caruana, Andrew Sheng and many others. We also worked closely with the Hong Kong Monetary Authority to place experts from Hong Kong into our structure to help us introduce new technology, build our data system and deal with the many complexities of the reform process.
Each year, I recruited talented employees from abroad and sent others overseas to pursue their MBAs. With the innovative ideas and practical knowledge they brought to CBRC, we soon had teams of capable supervisors on standby to fix problem banks.
It is worth remembering that when China’s reform and opening started in the late 1970s, per capita income was only US$182 and trade accounted for 11.2 per cent of GDP. Last year, per capita income stood at US$5,414 and trade accounted for 65 per cent of GDP. This spectacular success is the fruit of the dedication and hard work of two generations. For many, it was a long, hard road. In my own case, after leaving home in my teens, I tilled the land and, for more than 20 years, experienced nothing but rejection as I tried to better myself. But I never gave up.
Last October, I delivered my final quarterly briefing on current economic and financial conditions to all my regulated bodies. Such sharing of information and views had become a regular practice during my eight years at CRBC. Soon after, I had left CBRC for good and was attending a concert when a senior executive from a big Chinese bank came over during the interval. He said: “I just want to thank you for all the forecasts and warnings you gave in your quarterly briefings”. He said, “We admire you for this”. Before I could respond, he had gone. “We admire you for this.” At that moment, I no longer felt like the captain of Titanic. So while my last job was at times a thankless task, just to be part of such an endeavour was reward enough. And, unlike poor Captain Smith, I am lucky that I had lived to tell the tale.
Ladies and gentlemen, I have new oceans to explore in this next stage of my life. But wherever I go, my love of China and my commitment to this region of economic miracles grows deeper. Through our cooperation, and especially through gatherings such as this, I know we can make Asia even better, not just for its four billion people but for the world. Thank you.
> Visit the Asia-Global Dialogue 2012 Website
In March last year, China’s National People’s Congress approved the 12th five-year plan, for the period from 2011 to 2015, with three key objectives: the first is to promote inclusive growth and reduce social inequality; the second is to rebalance the economy; the third is to protect the environment. In other words, China wishes to build a middle-income economy that is in harmony with society, nature and the rest of the world. These objectives, if achieved, will clearly bring huge opportunities to everyone. As people in this room understand, though, the targets are not easy to achieve. Chinese leaders also appreciate how difficult the challenges are.
China’s economic reforms have lifted millions out of poverty and turned its economy into the second largest in the world within three decades. However, most Chinese are only too aware that, in Premier Wen Jiabao’s words, China’s economic growth is “unsteady, unbalanced, uncoordinated and unsustainable’’ I guess, in best Chinese tradition, we can label them The Four “Uns”.
Can anyone here imagine what the consequences would be of a collapsing Chinese economy now, especially when the news from Europe remains so worrying and recovery in the US remains fragile? To me, the greatest contribution China can make as a responsible global stakeholder in building a new global economic and social order is to keep its own house in order – namely, to make its own economy more steady, more balanced, more coordinated, and more sustainable. We can call those The “Four Mores”.
Can China reach the ambitious targets it set for itself in the 12th Five Year Plan? And, if so, how?
Let us examine this important question by taking as an example environmental protection – one of the three planks of the current five-year plan.
Climate change linked to greenhouse gas emissions is an increasingly high-profile public concern in China, along with the mounting health issues linked to pollution. The government is committed to reducing its carbon emissions per unit of GDP by 17 per cent over the next five years. By 2020, China will bring down its energy intensity, measured by energy consumption per unit of GDP, by 40-50 per cent from 2005 levels. And China is determined to reduce its water and air pollutants and harmful particulates by reducing levels of both Chemical Oxygen Demand and SO2 by 8 per cent, and NOX by 10 per cent, over the next five years. Moreover, China’s new “green economy” strategy also calls for an increase in forest coverage from 20 per cent to 21.7 per cent over the next five years.
Once again, we must ask if China can achieve such targets. In my view, the answer is “yes” so long as we do our homework and know where to focus our attention and efforts. One imperative is to design and build energy efficient residential housing and office buildings. Another is to develop energy efficient modern industries.
From 2006 to 2010, China ranked number one in the world in terms of new housing construction, which has increased to 7.42 billion square meters. I expect this trend to continue for the next five years because China’s population, currently standing at 1.3 billion, will peak at 1.6 billion by 2020. By then, more than 130 million people will have moved from rural to urban areas – that is greater than the entire population of Japan. A further 100 million urban residents will need better housing. If all new residential housing and public buildings can be built with proper insulation materials, and are air-conditioned by green technologies, you can imagine how much it will reduce China’s carbon footprint and energy intensity. This is the case not even counting the rapid progress being made with clean coal, shale gas and renewable energy.
Similarly, China has huge possibilities for improving the energy efficiency of its rapid-growing industries. Large and medium-sized industrial enterprises currently account for up to 40 per cent of China’s GDP. This is too high. By boosting the services component of the economy, China can also reduce its energy consumption.
Moreover, China can leapfrog the next stage of its industrialisation if industry operating standards and prices for energy and resources can be rationalised through regulatory and market incentives. We would soon see the emergence of a greener, more sustainable economy. To me, this would be an achievement as impressive and visible as building the Great Wall.
By leveraging a full spectrum of public and private resources, China can also work with other Asian countries on the creation, commercialisation and spread of green technology in the region and beyond. I believe that together, we could even exceed the sustainability targets of the 12th five-year plan.
Let me now turn to some personal recollections on the reform of China’s banking sector. When I was appointed the first Chairman of the China Banking Regulatory Commission, or CRBC, in 2003, I took a close look at all kinds of regulatory and market data and information. What I saw was quite terrifying. Some of you might remember the estimations about China’s non-performing loans by outsiders, which ranged from 25 per cent to 60 per cent. I felt like the captain of The Titanic. Only, unlike Captain Edward Smith 100 years ago, I did see the iceberg dead ahead. We had to alter course dramatically and immediately or we were doomed.
I briefed Premier Wen on my plan to turn around China’s entire banking sector. I assured him that we would succeed so long as I was allowed to be tough and to act fast. The Premier gave his endorsement right away. Soon after, my plan was approved formally and I was able to begin implementation.
It was one of the most difficult periods of my life. Night and day all I could think about was transforming the banking sector. I knew we had to seize all available opportunities and introduce major reforms decisively and quickly.
We restructured almost all the banks, big and small. It required a combination of articulating a broader vision of what we should do over time, with a series of practical steps that could be taken immediately. It was a “building-block” approach, carefully designed to preserve stability while relentlessly advancing reform. We also decided early on to disclose to the whole world the real picture about our banks’ operations, the lessons we had already learnt – sometimes painfully – and where we were heading. This transparency was crucial in building trust at home and credibility overseas. Further, we were very specific about the pace at which we were planning to turn the banks around.
Honesty simplifies almost all problems. Through transparency, the market was able to grasp my ideas and understand my determination to break old habits. I had also done a lot to cultivate awareness within CRBC and among other stakeholders about the need for reform. People started to acknowledge the importance and urgency of my – and also their – tasks. And results soon spoke loudly for themselves: 41 foreign strategic institutional investors joined 32 Chinese banks, ranging from the top five to a very small bank situated in a remote area of Sichuan Province; nine foreign banks invested in 41 township financial institutions.
Bit by bit, bad assets were hived off, new capital was injected and new skills and knowledge poured in. As we skirted the iceberg and sailed on, opinions about China’s banking sector began to change.
Today all four big state banks and ten medium-sized mixed ownership banks are listed at home or abroad, with price/book ratios at over three times. Their revenues have increased by 15-20 per cent annually. Meanwhile, the cash pool set aside for bridging the gap between the book value and bid value of bad assets carved out at the start of the reforms continued to fill until it brimmed over. In other words, Chinese taxpayers did not have to pay a penny to reinvigorate the Chinese banking industry, something in which my colleagues and I take great personal pride.
The transformation was so fast that every day counted. When the last big state bank was floated on the Hong Kong and Shanghai stock markets in June 2008, it had a price/book ratio of 3.3. Luck was on our side with the timing. As you all know, three months later, Lehman Brothers went bust. The average price/book ratio dropped sharply and has still not returned to its original level. But, all in all, it has been a good deal both in terms financial returns and pushing through China’s banking reform.
While I am gratified that the overall outcome of these efforts has been positive, I must honestly admit that reforming China’s banking sector was no easy job. There were no short cuts. CBRC had to start by transforming itself. This meant studying international best practices, in particular, focusing on how to assess risks when operating under existing global rules and environments. We knew that talent was critical to capacity building and would provide the foundation for transforming the whole sector. So we formed a world-class International Advisory Council, benefitting from the wisdom of Sir Edward George, Sir Howard Davies, Jerry Corrigan, Jaime Caruana, Andrew Sheng and many others. We also worked closely with the Hong Kong Monetary Authority to place experts from Hong Kong into our structure to help us introduce new technology, build our data system and deal with the many complexities of the reform process.
Each year, I recruited talented employees from abroad and sent others overseas to pursue their MBAs. With the innovative ideas and practical knowledge they brought to CBRC, we soon had teams of capable supervisors on standby to fix problem banks.
It is worth remembering that when China’s reform and opening started in the late 1970s, per capita income was only US$182 and trade accounted for 11.2 per cent of GDP. Last year, per capita income stood at US$5,414 and trade accounted for 65 per cent of GDP. This spectacular success is the fruit of the dedication and hard work of two generations. For many, it was a long, hard road. In my own case, after leaving home in my teens, I tilled the land and, for more than 20 years, experienced nothing but rejection as I tried to better myself. But I never gave up.
Last October, I delivered my final quarterly briefing on current economic and financial conditions to all my regulated bodies. Such sharing of information and views had become a regular practice during my eight years at CRBC. Soon after, I had left CBRC for good and was attending a concert when a senior executive from a big Chinese bank came over during the interval. He said: “I just want to thank you for all the forecasts and warnings you gave in your quarterly briefings”. He said, “We admire you for this”. Before I could respond, he had gone. “We admire you for this.” At that moment, I no longer felt like the captain of Titanic. So while my last job was at times a thankless task, just to be part of such an endeavour was reward enough. And, unlike poor Captain Smith, I am lucky that I had lived to tell the tale.
Ladies and gentlemen, I have new oceans to explore in this next stage of my life. But wherever I go, my love of China and my commitment to this region of economic miracles grows deeper. Through our cooperation, and especially through gatherings such as this, I know we can make Asia even better, not just for its four billion people but for the world. Thank you.
> Visit the Asia-Global Dialogue 2012 Website
