Chinese Finacial System may Face Great Reform
Linkedin

Chinese Finacial System may Face Great Reform

Shanghai : China | Apr 24, 2012 at 10:23 PM PDT
XX XX
Views: Pending
 

Limited competition has made China's big banks profitable but lazy. That may be about to change.

Speaking Tuesday, Chinese Premier Wen Jiabao criticized the 'monopoly' profits of state-owned banks. He has a point. Industrial & Commercial Bank of China, 1398.HK +2.00%China's biggest by assets, grew its net profit by 26% in 2011, despite a slowing economy and a credit squeeze for small business.

On average, the four biggest Chinese banks generate a return on equity of about 25% and a return on assets of between 1% and 1.6%. By comparison, U.S. banks with more than $10 billion in assets generated an average return on equity over the past 10 years of 9.2% and an average return on assets of 0.9%, according to Federal Deposit Insurance Corp. data. Even J.P. Morgan Chase, JPM -2.22%the biggest U.S. bank by assets, posted a return on equity for 2011 of just 11%.

While U.S. banks operate in a competitive market for funding and have been hamstrung by super-low interest rates, the biggest Chinese banks benefit from government-set deposit and lending rates. That results in a decent spread for the banks: With the one-year deposit rate set at 3.5% and the loan rate at 6.56%, banks can generate a net interest margin of 3.06 percentage points.

While not spectacular, the margin is pretty much guaranteed. Big U.S. banks posted a net interest margin of 3.5 percentage points in last year's fourth quarter, according to the FDIC, but this spread can fluctuate depending on lending and funding conditions.

And big Chinese banks tend to reap more of their profit from interest income. At Agricultural Bank of China, 1288.HK +2.40% net interest incomes accounted for 80% of operating income in 2011; at J.P. Morgan, 2011 net interest income was about 50% of total net revenue.

But changes in China's financial system, along with the possible upheaval signaled by Premier Wen's remarks, mean big Chinese banks may face a more uncertain and less-profitable future.

Most important is the explosive growth of wealth-management products─investment instruments that offer savers higher returns than a conventional deposit. These products aren't subject to government quotas, unlike traditional lending, so they can grow faster. Citigroup estimates assets in these products almost doubled in 2011 and are now equivalent to about 7% of deposits in the banking system.

The margin on a wealth-management product is about one percentage point, Citigroup estimates. The more the sector grows, the more it eats into banks' fat profits.

There could be worse to come. In March, central-bank Governor Zhou Xiaochuan said the time was 'basically ripe' for interest-rate overhaul. If the regulatory ceiling on deposit rates is lifted, banks could see margins come under even more pressure rotary kiln. Mr. Wen also appears more eager to see private capital play a bigger role in the financial system─increasing competition.

Last month, former central bank adviser Li Daokui said China's state-run banks were like dinosaurs cone crusher. Extinction isn't on the cards, but these latter-day T-Rex's will have to evolve, fast.

rotary kiln:http://www.hxjq-crusher.com/23.html

cone crusher:http://www.hx-china.com/5.html

1 of 1
Barack Obama delivers remarks on finacial reform
Barack Obama delivers remarks on finacial reform
hahahahaha123 is based in Hong Kong, , China, and is a Stringer for Allvoices.
Report Credibility
 
  • Clear
  • Share:
  • Share
  • Clear
  • Clear
  • Clear
  • Clear
 
 
 
Advertisement
 

News Stories

 
  • Bank profits show fastest growth in 4 years

      China News
    Lenders' net income in China rose 39 percent last year to 1.25 trillion yuan ($178.4 billion), the fastest growth in at least four years, the banking regulator said on Tuesday. The China Banking Regulatory Commission said the increase was driven by a...
  • China's Big Four banks hit by slowdown, costs

      Turks and Caicos Free Press
    China 's Big Four banks' reported weaker-than-expected first-quarter earnings on Friday, with the sector facing growing pressure from a slowing economy and rising funding costs. Regulators have also closed in on the banks' freewheeling practice of...
  • Analysis: Elusive China equity returns now face growth slowdown

      Turks and Caicos Free Press
    Investors who have endured two decades of miserable stock market returns in China may have to wait a while yet for their bets to pay off as turbo-charged economic growth runs out of steam and a new economic model starts to evolve. China has been the...
  • With Bo Xilai's ouster, China's premier pushes more reform

      Washington Post
    A series of bold pronouncements by the premier in recent weeks has been backed by editorials in the state-run media, leaving little doubt that Wen and the reformist faction in the party have gained the upper hand, at least for now, in the tussle over...
  • China's Banks Report Weak Growth Amid Slowdown In Economic Progress

      International Business Times
    China Construction Bank Corp (CCB )reported a weak growth in the first quarter due to slowdown in the economy...The banks are planning to lend more to small businesses to increase their earnings growth. In recent months, China cut the percentage of...
  • Wen: China committed to sustainable development

      China News
    Visiting Chinese Premier Wen Jiabao said Wednesday China was committed to sustainable development and had made it a national development strategy. Speaking to a sustainable development forum here, Wen recalled that, 40 years ago, Stockholm hosted the...

Blogs

 >
  • Chinese Finacial System may Face Great Reform

      www.freepressreleases.com
    But changes in China's financial system, along with the possible upheaval signaled by Premier Wen's remarks, mean big Chinese banks may face a more uncertain and less-profitable future. Most important is the ... If the regulatory ceiling on
  • Introduction of Cone crusher manufacturers - yooarticles.com

      www.yooarticles.com
    Cone crusher crushes materials by the working surface between the movable cone and fixed cone. So it is more advanced and efficiency efficient thanjaw crusher. The movab. ... Two major advantages of China rotary kiln. Author : hxjqwang ...

Images

 >
 

More From Allvoices

Related People

Report Your News Got a similar story?
Add it to the network!

Or add related content to this report



Use of this site is governed by our Terms of Use Agreement and Privacy Policy.

© Allvoices, Inc. 2008-2014. All rights reserved. Powered by PulsePoint.