Major banks in the world are paying the price for their heedless involvement in subprime-mortgage related assets. Citibank, for instance, lost $37.5 billion in the past five quarters, despite a small profit jump in the first two months of this year.
But no major Chinese banks have endured such losses. In a speech at the China Development Forum 2009 held on March 21-23 in Beijing, Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC), argued that the financial crisis would have a limited impact on domestic banks. Edited excerpts follow:
According to our general judgment, the sweeping financial crisis has indeed imposed certain negative effects on the Chinese banking sector, but the damages are manageable. We have been sticking to reform and opening up for years. Our prudent supervision over markets, products and financial institutions is forceful, comprehensive and unfailing.
In the era of globalization, nobody can be immune from the aftermath of the financial turmoil. But what we can do is to distinguish ourselves from the financial chaos while maintaining stable operations, which is reflected in the following aspects.
First of all, the amount of non-performing loans (NPLs) of Chinese banks has been falling. By the end of last December, the balance of NPLs had dropped by 700 billion yuan ($102 billion), while the NPL ratio dropped to 2.45 percent, down 3.71 percentage points compared with the beginning of last year.
Second, risk management has been further strengthened. Banks have been prepared for possible bad debts. By the end of 2008, the ratio of allowance for bad loans had reached 153 percent, rising 122.2 percentage points year on year among state-owned commercial banks. The ratio reached almost 200 percent at joint-equity commercial banks.
Third, the number and scale of financial lawsuits are declining. In 2008, the number of cases among banking institutions was 309, a 29-percent drop year on year. We fought hard against illegal financial activities in the past five years, which turned out to be quite effective.
Fourth, banks' profitability has been rising substantially. Last year, confronted with the global financial turmoil, Chinese banks under the supervision of the CBRC had made a provision of large sums of money to cover potential losses incurred in buying toxic assets. In spite of the huge provision, their return on capital still remained a robust 17.1 percent, supposedly far exceeding the average level of banks worldwide. In 2008, the net profit after tax of domestic banks surpassed 580 billion yuan ($83 billion), surging 30.6 percent from that of last year.
The performance of Chinese banks in 2008 might top the world in three areas: profit, profit growth and return on capital.
Despite all the strengths mentioned above, we must be fully aware that our economy is overly dependent on foreign economies. As the financial crisis worsens, we must take consolidated measures to support the long-term growth of banks while avoiding any potential risks that pose a big challenge to the supervisory capability of the CBRC.
This year, we will strengthen supervision over cooperation between Chinese and foreign banks. Domestically, the CBRC will cooperate closely with the central bank, the State Administration of Foreign Exchange, the China Securities Regulatory Commission and the China Insurance Regulatory Commission. Internationally, we will forge closer ties with overseas supervisory departments to counteract further banking deterioration and cushion the blow of potential risks.
The healthy development of banks is conducive to the smooth and sound development of the national economy.