China’s Financial System Growth and Inefficiency Dominique de Rambures and Felipe Escobar Duenas China’s Financial System Dominique De Rambures • Felipe Escobar Duenas China’s Financial System Growth and Inefficiency Dominique De Rambures Felipe Escobar Duenas Master Banque Finance Master Banque Finance Paris I University Panthéon Sorbonne Paris I University Panthéon Sorbonne Paris, France Paris, France ISBN 978-3-319-40450-9 ISBN 978-3-319-40451-6 (eBook) DOI 10.1007/978-3-319-40451-6 Library of Congress Control Number: 2017930599 © The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright. 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Cover illustration: Mode Images / Alamy Stock Photo Cover Design: Liron Gilenberg Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Contents 1 Introduction 1 2 China’s Decision Making System 5 3 A Non-Independent Central Bank 21 4 Chinese Banks: Between Control and Profitability 37 5 Sidelined Foreign Banks 63 6 Credit Black Market 75 7 Fast Growing Internet Banking and Finance 91 8 Government Controlled Financial Institutions 101 9 Under-developed Financial Markets 131 v vi Contents 10 An International Non-Convertible Currency 163 11 Conclusion 179 Bibliography 183 Index 187 List of Abbreviations and Acronyms ABC Agricultural Bank of China ADA Abu Dhabi Investment Agency ADB Asia Development Bank AIIB Asia Infrastructure Investment Bank AMC Asset Management Company ANZ Australian & New Zealand Bank APEC Asia Pacific Economic Cooperation AVIC Aviation Industry Corp. B2B Business-to-Business BBVA Banco de Bilbao Viscaya Argentaria BEIC British East India Company BMG Beijing Municipal Government BOC Bank of China BOCOM Bank of Communications BRICS Brazil, Russia, India, China, South Africa C2C Consumer-to-Consumer CBRC China Banking Regulatory Commission CCB China Construction Bank CCP Chinese Communist Party CCT China Credit Trust CD Certificate of Deposit CDB China Development Bank vii viii List of Abbreviations and Acronyms CEXIM China Export and Import Bank CIBIC Commercial and Industrial Bank of China CIC China Investment Corp. CICC China International Capital Corp. CIDM China Insurance Deposit Mechanism CIRC China Insurance Regulatory Commission CITIC China International Trust and Investment Corp. CNAPS China National Advanced Payment System CNCC China National Nuclear Corp. CNIG China National Investment & Guarantee Co Ltd CNPC China National Petroleum Corp. COSCO China Ocean Shipping Cy. CP Group Chaoren Pokphand Group CPB Consumer Protection Bureau CPIC China Power Industrial Corp. CSI China Shipbuilding Corp. CSPG China Southern Power Grid CSRC China Securities Regulatory Commission CSSC China State Shipbuilding Corp. DVP Delivery versus Payment ECB European Central Bank EFT Exchange Traded Fund EM Europay EMS European Monetary System FCPB Financial Consumer Protection Bureau FDI Foreign Direct Investment FSA Financial Supervision Agency FSR IMF Financial Stability Report FTAAP Free Trade Area of Asia Pacific GITIC Guangdong Investment and Trust Company Guotai Guotai Junan Securities Co. HKE Hong Kong Securities Exchange and Clearing Ltd HKMA Hong Kong Monetary Authority HKSE Hong Kong Stock Exchange HKSFE Hong Kong Securities and Futures Commission HPVS High Value Payment System List of Abbreviations and Acronyms ix HSBC Hong Kong and Shanghai Bank Co. HUIJIN Central Huijin Investment Co. IBRD International Bank for Reconstruction and Development IBOC International Bank of China ICBC Industrial and Commercial Bank of China IFC International Finance Company IIBA Infrastructure Investment Asian Bank IMF International Monetary Fund IPO Initial Public Offering Jiany China Jiany Investment Ltd. KKR Kohlberg Kravis Robert LGFVs Local Government Financing Vehicles LME London Metal Exchange MDE Mainland Designated Companies MOF Ministry of Finance MOR Ministry of Railways MSCI Morgan Stanley Commodity Index NASDAQ National Association of Securities Dealers Automated Quotation NCSSF National Council of Social Security Fund NDB New Development Bank NDRC National Development and Reform Commission NSSF National Social Security Fund NYSE New York Stock Exchange P2P Peer-to-Peer (or Person-to-Person) PBOC People’s Bank of China PICC People’s Insurance Company of China PMC Party Military Commission PSBC Postal Savings Bank of China PwC Price WaterhouseCoopers QFII Qualified Foreign Institutional Investors QIA Quatar Investment Agency RBS Royal Bank of Scotland RDSC Research Department of the State Council ROE Return on Equity RQFII Renminbi Qualified Foreign Institutional Investors x List of Abbreviations and Acronyms RTGS Real Time Gross Settlement System SAFE State Agency of Foreign Exchange SAMA Saudi Arabia Monetary Agency SASAC State Owned Asset Supervision and Administration Commission SCO Shanghai Cooperation Organization SDR Special Drawing Rights SEA Special Economic Area SEC Security and Exchange Commission SEZ Special Economic Zone SIC Government of Singapore Investment Corp. SMEs Small and Medium-sized Enterprises SOE State Owned Enterprise SSE Shanghai Stock Exchange SWF Sovereign Wealth Fund SWIFT Society for Worldwide Interbank Financial Telecommunication TIC Trust and Investment Company TPG TPG Capital fund (ex Texas Pacific Group) TPP Trans Pacific Partnership TVE Township & Village Enterprise WMP Wealth Management Products WTO World Trade Organization List of Figures Fig. 2.1 Chinese political and economic organization 10 Fig. 4.1 Market share by assets of banking institutions 46 Fig. 4.2 Returns of banking institutions 46 Fig. 4.3 NPLs of banking industry 59 Fig. 6.1 Social financial flow 78 Fig. 6.2 AUM and annual growth of trust and WMPs 78 Fig. 6.3 China’s local government debt by source 87 Fig. 7.1 China online and mobile payments 94 Fig. 7.2 P2P lending transaction volume 98 Fig. 8.1 Investment banking volume 106 Fig. 8.2 Imputed investment banking fees 107 Fig. 8.3 Total AUM of funds in 2014 114 Fig. 9.1 The nominal value of exchange traded bonds 133 Fig. 9.2 Issuances of major bonds 134 Fig. 9.3 Yield curves of government securities on the interbank bond market 138 Fig. 9.4 Foreign currency corporate loans 142 Fig. 9.5 Breakdown of A shares held in 2014 149 Fig. 10.1 Offshore-onshore Renminbi spread 173 xi List of Tables Table 4.1 Listed banks’ net interest margins (%) 61 Table 5.1 Total asset of foreign banks 64 Table 5.2 Foreign and regional banks 69 Table 6.1 Shadow banking 76 Table 8.1 Foreign investment banks in China 111 Table 8.2 Geographic distribution of CIC shareholding (%) 117 Table 8.3 CIC’s international asset distribution (%) 118 Table 8.4 Insurance company premiums 121 Table 8.5 Assets portfolio of Chinese insurance companies (Rmb billion) 121 Table 8.6 The ten largest dedicated funds in China ($billion) 124 Table 8.7 Foreign banks having a shareholding in Chinese security firms 126 Table 8.8 The largest asset management companies (% market share) 127 Table 9.1 China’s debt (%) 136 Table 9.2 Distribution of the bond market by investor (%) 137 Table 9.3 Market capitalization ($ billion) 146 xiii 1 Introduction Before addressing the strengths and weaknesses of its financial system, it is worth remembering that China experienced one of the fastest growth rates over a long period (an average of 10% a year over 30 years, 1978–2008). It was much higher than England during the Industrial Revolution (less than 1% a year over a century) [1]. Based on its eco- nomic and social achievements, the Chinese economy is by far the most effective. In 2015, China was outperformed only by India (7.5% as opposed to 6.9%), although India started far behind and from a much lower level. However, the Chinese growth model that triggered such a remarkable economic performance, thanks to a combination of market and State stimuli, might well be the cause of the steadily declining growth rate and the deteriorating growth model. The policy of reform and opening up initiated in 1972 by Deng Xiao ping has progressively extended: from the agricultural field (household contracts) to the industrial one, from the people’s communes and State owned industries to private companies, and more recently to the bank- ing and financial sector. The Chinese financial Big Bang took place in the first decade of the 2000s as a follow up to the wave of privatiza- tion of State owned banks and companies. The control of the financial © The Author(s) 2017 1 D. De Rambures, F. Escobar Duenas, China’s Financial System, DOI 10.1007/978-3-319-40451-6_1 2 China’s Financial System industry is naturally a power struggle between political factions. Today, the allocation of key positions mirrors the political strength of the chal- lenging teams (princelings, Shanghai gang, Party Youth Movement, Party school and research centres, regional connections, etc.).