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India and China - Banking system - comparison [Copy link] 中文

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Post time 2010-5-11 09:03:04 |Display all floors
This article was writtenMr K.Subramanian, a Former Joint Secretary, Ministry of Finance, Government of India.

It's a realistic analysis of both counties' banking system and also gives some answers why China's economy ticks differently from the rest of the world.  The article is very long, therefore I limit it to the most interesting parts:


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In a recent meeting of the Planning Commission’s Mid-term Review, the Prime Minister ( of India) indicated the total capital to finance infrastructure at Rs.60,000 crores. Given the past performance and the fiscal constraints of the government, it is unclear from where this large volume of capital will flow. Meanwhile, there is deep regret that lack infrastructure is a drag on our growth and investment. Our banks are unable to meet the demand for credit for long term projects. As earlier explained, they find their balance sheets to be unequal to the job what with provisioning requirements of the RBI (which has been reduced to 15 percent in the latest Monetary Policy Review) and the rising volume of NPAs. Under our conditions and, in the absence of a well functioning bond market, banks will not be able to raise funds for long term projects. Even in the U.S. and Europe, the happy days when high value projects, mergers and acquisitions (M&AS) could be funded through banks initially and recouped through bond issues are over. The high tide of private equity is unlikely to revive even if the banking system turns normal.

China story has been different. The political leaders in China looked upon economic growth, infrastructure and job creation as an integrated process. Indeed, infrastructure was the main driver and they were obsessed with it. It was evident to them that for a poor and backward country like China it was necessary to promote infrastructure to promote trade and investment. One may add that they had even over done it. The other driver was the state-owned-enterprise (SOE). China’s economic growth depended on two pillars, viz. SOEs and SOBs which funded SOEs. It may not be known to many that China’s banks were prohibited from lending to private companies. They relied mostly on internal resources and retained earnings. This ban has been lifted only in recent years. Another issue is, notwithstanding all efforts to modernize, open and to integrate the economy with the global economy, Chinese authorities did not give up state ownership of banks and SOEs.

China had witnessed the collapse of former Soviet countries (CIS) under “shock” therapy. It did not want to risk a similar fate. It was determined not to seek foreign assistance and decided to draw on its own national resources, savings. Banking itself was not much developed then and there was distrust dating back to the communist era. Premier Deng had to create trust in the bank and appeal to his people to keep their money with the bank without fear of appropriation. He allowed anonymous accounts and deposits swelled. In a few years, the trust would grow and citizens would open regular accounts in their own names.

The Chinese leaders were not worried about the so-called “efficient market” theories and the abhorrence with which western economists, especially monetarists, looked upon “directed credit.” When there was a shortfall in government revenues, they encouraged the banks to fill the gap by lending to companies which had no capital and to SOEs. Zhou Xiachuan, the Governor of the Peoples’ Bank of China, defended this policy in a major conference in the World Bank. He told the audience of senior officials of the World Bank, “We were advised that this was wrong. But we decided to go ahead.” As he explained, directed lending was necessary “for them to survive in production, to maintain employment, for them to renew technology and to import new equipment, for them to slow-down lay offs, for them to train new skilled workers.” The banks were asked to support the Government’s fiscal over-drawings and, indeed, played a significant role in supporting project programs. The reform of the financial system, in particular, banks was gradual, pragmatic and adaptive. India’s decision to abolish term institutions and entrust term lending to commercial banks was unrealistic and unworkable. Perhaps, India had no choice and had to conform to the IMF stipulated norms. It created a vacuum in development finance.

China’s economy, like India’s, is bank dominated. In the course of its reform over thirty years, China maintained the umbilical connection between banks and economic growth. India snapped the relationship abruptly on the expectation that the links would be forged through market forces. China was pragmatic and maintained a dualist approach. At one level they opened up market opportunities for economic players and, at another, they did not give up control of the state owned banks and enterprises. For instance, to relieve pressure on commercial banks to lend loans to enterprises, they created four policy banks. These are: The Bank of China; the Industrial and Commercial Bank of China (ICBC); the China Construction Bank (CCB); and the Agricultural Bank of China (ABC).

The policy banks were enjoined to lend to SOEs to finance projects. Their lending itself was subject to an elaborate procedure which was dovetailed into Five Year Plans. Unlike in western countries, there are non-market components governing lending.

Deposits of citizens in banks are the major sources of funding. These are channeled through policy (development) banks. The disbursements are vetted by the National Development Reform Commission which is comparable to our Planning Commission. There are administrative procedures to evaluate the cost effectiveness and sustainability of loans/projects. The Communist Party of China (CPC) and the government also keep pressure on SOEs, etc to fund or open operations in newer areas. The central bank – Peoples’ Bank of China – is also a part of this public-investment funding system. Credit plans are drawn in accordance with Plan priorities and become the basis for bank lending. In earlier years, this control was somewhat rigid. Over years, these have turned into “window guidance.” Counties and Town and Village Enterprises (TVEs) are also associated in the process. There are accounts of intense competition (corruption!) to access loans from banks.

Policy banks extend loans and also subscribe to bonds issued by enterprises. The loans and bonds are guaranteed by government and there is no risk of default. Loans are also given on very low rates of interest depending on their priority, etc. Indeed, there are problems of non-performing loans and China’s banks are not unduly concerned about them like Indian banks. The loans in any case are backed by assets in the shape of infrastructure though, for various reasons, they have turned unviable. The Chinese government cleaned up the NPAs by drawing on its forex reserves.

In the decade after China commenced its financial reforms, there used to be global concern over the weakness of its banking system, especially their NPAs. The authorities in China, mostly the PbOC, took several measures to improve their functioning. They held discussions with the Bank for International Settlements (BIS) and introduced the best practices. The process is continuing and it may not be said that China has the best system. But, China can truly claim that it has a system which has been adaptive and has best served its interests, in particular, economic growth and poverty reduction. It has also been highly adaptive.

In a recent interview, Prof. Wendy Dobson, one of Canada’s leading economists, compared India’s experience with China’s. He said, “India has all the institutions that China does not. But they don’t work. India is a sort of gridlock. At the very top, India has absolutely first-rate managers. But in China, there is a very clear set of objectives. They ask what are the binding constraints on our growth? And focus on them.” (DNA, March 22, 2010.)

China could not have maintained its record of growth over two decades at near double digits without the funding provided by its banking system. World Bank documents and studies record the achievements of China and it is acknowledged that the high rate of growth had come through investments in infrastructure. Conventional wisdom relates finance (bank credit) with economic growth. In the case of China, as some economists point out, it is economic growth that strengthens finance or bank credit.

It is not only in economic growth that the banks have played a dominant role. Since 2004, the endeavour of the Chinese authorities has been to rebalance its economy. There are major programs to reduce reliance on exports and increase domestic consumption/demand. There are programs to redress backwardness in the western region. Here again banks have been playing a leading role as instruments of change.

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Post time 2010-5-11 09:36:54 |Display all floors
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When the global economic crisis erupted, China was hard hit, particularly because of its export dependence. There were doomsayers predicting that China would sink under such a global scenario.  (HOW TRUE    )  As in 1997 when it had to face the Asian crisis, China could announce a stimulus program of $570 billion through its banks. Not many believed that its program would work. But China surprised the world as the first country to come of the crisis. In fact, other countries, mostly in Asia, began to look upon China to lift them out of the crisis. As Time described, “On top of government outlays for new infrastructure and tax breaks, Beijing most significantly counted on massive credit growth to spur the economy. The amount of new loans made in 2009 nearly doubled from the year before to $1.4 trillion – representing almost 30% of GDP. The stimulus plan worked wonders, holding up growth even as China exports dropped 16% in 2009.”

China’s banks are globally respected and, before the financial crisis, major American banks were keen to take them over or hold big chunks of equity in them. China has resisted such pressures as their leaders are aware of the central role played by banks in maintaining growth and employment. In his book – On the Brink – Henry Paulson, former Treasury Secretary, refers to the debates he had with top Chinese leadership and how he failed to convince them to approve foreign holding in China’s banks. Apart from concerns over growth and stability, there is the utmost concern over protection of employment.

The financial crisis has led to many revisions and reviews of past theories and shibboleths. It has convincingly lain to rest the “efficient market” theory and the ability of a free market system to allocate credit. Lord Turner has argued this dramatically in his report. If a study of China’s banking development in recent years has any lesson it is that there are other ways or allocating credit.

There is a seminal analysis of China’s banking evolution and its adaptability done by Prof. Jean-Claude Maswana of Kyoto University, Japan. (2008). After a close study he takes the view that in a rapidly changing economic environment as in China, the co-evolving financial system is in no way limited to primarily attaining market efficiency. “Rather, the workability of the financial system depends on its different element fitting together: the system can be considered consistent insofar as its complementary elements take on values that lead to an optimum, even though such an optimum need not be most efficient. Had the Chinese authorities privileged financial return (allocative efficiency) from the start, as did their Russian counterparts, for instance, the macroeconomic system would have collapsed with incalculable economic and socio-political consequences.”

In the Indian situation, the adoption of the market based model has weakened the links of banks to economic growth. It is unclear from where the extra-ordinary push for promoting economic growth will come. Till then we have to live years of low growth and lamentation.

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Post time 2010-5-11 12:12:37 |Display all floors

A dishonest analysis by another Indian Government Bureaucrat!

He mean to say that there is "NPA" on government infrastructure projects?
When China's government public debt is only 20% of GNP, operating with a balance of payment surplus!. (as compare to near 60% of the Indian Government, and operating under a balance of payment defisit) (data picked up from the internet!)

ha ha ha


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[ Last edited by greendragon at 2010-5-11 12:17 PM ]

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Post time 2010-5-11 12:22:57 |Display all floors

NPA on SOE by banks is the main concern!

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Post time 2010-5-11 12:40:35 |Display all floors

Compared to India, China's banking assets now US$11 trillion (2009)!

Quite a huge expansion from 1998, when Bank Asset was only 50% of GNP.

Now it's more in tune with East Asian figures, Banking Assets almost double National GNP!
While India is only closer to US$1.8 trillion (2009).


How to compare?
So Big difference!


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Post time 2010-5-11 13:49:14 |Display all floors
Originally posted by greendragon at 2010-5-11 13:40



How to compare?
So Big difference!





A comparison is basically not wrong - even if differences are vast.

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Post time 2010-5-11 14:09:15 |Display all floors

Better to compare banking system between China....

..and Asian Trade Route, then British Club states!

That way, at least we know who has the most advance practises!
American Regime has Foreign Reserve Quality MINT currency, quite different ball game!


Green DRagon
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note: India's got to export more, and conserve Forex by reducing non essential like massive gold imports, and use imported crude oil sparingly - maybe more coal, CTL process!

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