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Cablegate: Fast Chinese Loan Growth Buoys Provincial Bank's Ambitions

VZCZCXRO1828
RR RUEHCN RUEHGH
DE RUEHGH #0494/01 3551252
ZNR UUUUU ZZH
R 211252Z DEC 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8442
INFO RUEHBJ/AMEMBASSY BEIJING 3215
RUEHCN/AMCONSUL CHENGDU 2317
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0774
RUEHHK/AMCONSUL HONG KONG 2486
RUEHLO/AMEMBASSY LONDON 0053
RUEHML/AMEMBASSY MANILA 0141
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHFR/AMEMBASSY PARIS 0032
RUEHUL/AMEMBASSY SEOUL 0629
RUEHSH/AMCONSUL SHENYANG 2308
RUEHGP/AMEMBASSY SINGAPORE 0305
RUEHIN/AIT TAIPEI 2107
RUEHKO/AMEMBASSY TOKYO 0840
RUEHGH/AMCONSUL SHANGHAI 9106

UNCLAS SECTION 01 OF 04 SHANGHAI 000494

SENSITIVE
SIPDIS

DEPT FOR EAP/CM
NSC FOR MEDEIROS, LOI, SHRIER
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP
TREASURY FOR IMFP -- SOBEL/CUSHMAN
STATE PASS CEA FOR BLOCK
STATE PASS CFTC FOR OIA/GORLICK
MANILA FOR ADB USED
PARIS FOR US/OECD

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: FAST CHINESE LOAN GROWTH BUOYS PROVINCIAL BANK'S AMBITIONS

1. (SBU) Summary: Bank of Jiangsu (BOJS) -- a model for
government-led reform of China's municipal-level commercial
banks -- appears to be prospering from the current lending boom,
and has set its sights on becoming a trans-regional bank.
Within Jiangsu Province in East China, BOJS is building a
high-profile borrower base among pillar industries such as steel
and plate glass, and sees these borrowers poised to seize
greater market share as the Central Government attempts to scale
back production overcapacity. BOJS is tracking non-performing
loans (NPLs), but will not be able to fully determine if there
is a rise in its NPL ratio for several years. End Summary.

==========
Background
==========

2. (SBU) EconOff met on November 25 with Bank of Jiangsu Deputy
President Liu Changji. BOJS is a one of new breed of regional
banks Central Government authorities hope will mitigate the
risks found in single-city commercial banks -- such as
overdependence on a few local enterprises -- and bolster
services to small- and medium-size enterprises (SMEs). By value
of assets, BOJS is currently the 20th largest bank in China,
according to a 2009 KPMG study. Liu said that assets reached
RMB330 billion (approximately US$48 billion) at the end of the
third quarter this year.

3. (SBU) Regulators have facilitated the establishment of at
least a dozen regional banks over the past few years, generally
by merging several city commercial banks -- themselves the
successors to the urban credit cooperatives of an earlier era --
into a larger province-wide bank. These are known as regional
share-holding commercial banks (difangxing gufenzhi shangye
yinhang). BOJS is the largest of these banks not yet listed on
China's stock market -- Shanghai Pudong Development Bank and
Bank of Beijing are examples of city commercial banks that have
already listed. BOJS opened for business in January 2007,
formed from the merger of the city commercial banks of the
municipalities of Wuxi, Suzhou, Nantong, Changzhou, Huai'an,
Xuzhou, Yangzhou, Zhenjiang, Yancheng, and Lianyungang. The
Nanjing city commercial bank was not included, because this
became the separate Bank of Nanjing, which since has been listed.

==================================
A Local Bank Growing Quickly . . .
==================================

4. (SBU) Lending by BOJS surged in the first three quarters of
2009 by 40-50 percent, said Liu. This compares with average
loan growth of approximately 27 percent since the bank's
founding, based on figures from the bank's public accounts. The
rapid growth has compelled the bank to replenish its capital by
at least RMB5.5 billion (approximately US$806 million) to stay
above the China Banking Regulatory Commission's (CBRC's)
prudential capital adequacy ratio (CAR) of 10 percent -- once
with subordinated debt in August 2008 and twice in 2009,
including a private offering of additional equity in July and
another subordinated debt offering in October.

4. (SBU) Liu said that BOJS's ability to raise capital
repeatedly shows the market has faith in the bank's performance.
He also put a positive spin on the fast lending growth,
pointing out that at its founding the bank planned to double the
size of its assets within three years. BOJS passed this
milestone in July, he said, and the bank will reach its
three-year anniversary in January 2010. (Comment: Nonetheless,

SHANGHAI 00000494 002 OF 004


Chinese media reported that the bank fell below the CAR standard
in July this year before it went back to the markets, which
appeared to raise concerns among regulators and investors over
how BOJS is managing its growth. End comment.)

5. (SBU) BOJS is now focusing on growth beyond Jiangsu's
borders, as one of the first regional banks to be granted a
trans-regional banking license by the CBRC. BOJS has two
branches outside the province, said Liu, one opened in Shanghai
in January 2008 and the second in Shenzhen in May 2009. In
mid-2007, BOJS announced its intention to seek a foreign
strategic partner, which Chinese banks have traditionally used
to signal an improvement in corporate governance, risk control,
and competitiveness prior to a stock market listing.

===========================================
. . . Thanks to Ties to the Government . . .
===========================================

6. (SBU) BOJS maintains close ties with officials in the
municipalities that founded the bank, explained Liu, especially
with the comparatively wealthy Yangtze River delta cities of
Suzhou, Wuxi, and Nantong. The background of the three BOJS
vice presidents and of the board of directors illustrates these
connections. Liu himself was formerly the president and party
secretary of the Nantong City Commercial Bank, as well as having
served as a vice president of the Nantong Sub-Branch of the
People's Bank of China (PBOC); the two other BOJS vice
presidents have the same credentials from Suzhou and Wuxi,
respectively. All three also serve on the board of directors.
Other directors include an official concurrently serving in both
the Wuxi Finance Bureau and the Wuxi Construction and
Development Investment Corporation and officials from the Suzhou
International Development Group Corporation, the Nantong
Chemical and Light Industry Corporation, and the Lianyungang
Cotton and Hemp Corporation.

7. (SBU) Liu said the PBOC guided the merger process that
established BOJS, and that this was financially and
administratively supported by the Jiangsu provincial
authorities. The province has a continuing direct financial
connection to BOJS: according to a statement by the bank's
auditors, almost half of BOJS's start-up capital was injected by
the Jiangsu International Trust and Investment Corporation
(JSITIC), and JSITIC continues to hold a board seat. Other
board members include the former head of the Jiangsu Land Tax
Bureau and the former party secretary of the Jiangsu branch of
the Agricultural Bank of China. In addition, said Liu, BOJS
maintains strong ties with local governments because it serves
all 52 of Jiangsu's counties.

8. (SBU) However, Liu asserted that the large local government
presence on BOJ's board and among its shareholders did not
necessarily translate into undue influence over BOJS's lending
decisions. Even in a small bank, said Liu, the board is not
able to interfere too much, due to banks' regulatory
responsibilities for prudential lending processes; in a large
bank like BOJS, he continued, shareholders have even less
control. The bank interaction with shareholders is limited to
providing them with a good annual report, said Liu.

====================
. . . And Businesses
====================

9. (SBU) BOJS is increasing its strategic links with local

SHANGHAI 00000494 003 OF 004


businesses, said Liu, and Chinese media in recent months have
highlighted several deals clinched by BOJS. In April 2009, the
bank provided a two-year, RMB3 billion (approximately US$440
million) line of credit to Jiangsu's Shagang Group Company,
reportedly China's largest privately held steelmaker. Liu
mentioned that Shagang also is one of BOJS's key equity
stakeholders, implying that Shagang bought into the bank's July
2009 equity offering. Similarly, when BOJS opened its Shanghai
branch, it announced "strategic cooperation agreements" with the
major property developer Shanghai Greenland Group and Nanjing's
Yurun Group, China's largest meat supplier. Local firms also
play a leading role in management: Nanjing-based Huatai
Securities, for instance, holds a seat on the board of directors
and, according to a leaked report in Chinese media, controls
five percent of the bank's equity. Jiangsu Phoenix Publishing
House also holds a board seat and, according to the same leaked
report, controls another five percent of equity.

9. (SBU) Liu was not concerned that a Central Government
crackdown on industries with overcapacity would negatively
affect BOJS. It is true, said Liu, that many of BOJS's
borrowers are in sectors targeted for consolidation, but in the
coming shakeout "there will only be loser companies, not loser
industries." BOJS's borrowers are strongly competitive, he
asserted, citing Shagang, which he said has high profits and low
prices internationally, and Yonggang Steel, which he also said
is very efficient. (Note: Shagang and Yonggang are located
just north of Suzhou and Wuxi. According to press reports,
Shagang recently gained control of a significant percentage of
Yonggang's production capacity. End note.) Huarun Plate Glass,
with a 10 percent market share, is another borrower that will
survive the crackdown, said Liu.

10. (SBU) Forty to fifty percent of BOJS's equity is currently
held by private firms, Liu asserted. Chinese media reported in
August 2009 that the equity issued by BOJS to bolster its
capital adequacy was targeted at private firms, and noted that,
prior to the share issue, 30 percent of BOJS's equity was held
by private firms. (Comment: Liu did not specify how a firm is
determined to be private; in China this term frequently covers
spin-offs of former state-owned enterprises and nominally
private firms that, nevertheless, have deep ties to local
governments. End comment.) Liu said that 29 percent of BOJ's
lending goes to small- and medium-size enterprises, which
typically are privately owned.

===========================
NPL Risks May Be Increasing
===========================

11. (SBU) Liu reported that BOJS bad loans currently account
for 1.4 percent of BOJS's lending portfolio, but said he could
not be sure if this would trend higher following 2009's lending
surge. It will be difficult to know which loans are
non-performing for several years, Liu explained: if a loan has
not gone bad in three years, it's a good sign; if it is still
being repaid on time after five years, it will probably be okay;
however, only after eight years will it be clear if a loan will
perform as anticipated. To some extent, BOJS's larger size
helps provide greater resources to withstand losses from risky
lending by the city commercial banks that merged to form BOJS,
Liu asserted. Liu said that BOJS treats local government debt
as high quality, since in ten years he has not seen a local
government default.

12. (SBU) Information from BOJS's auditor statements suggests

SHANGHAI 00000494 004 OF 004


that the NPL problem could be partially obscured at present.
BOJS reports its loan quality according to the CBRC's five-part
categorization: normal loans, loans under observation, sub-prime
loans, doubtful loans, and NPLs. At the time it was founded,
BOJS could claim a two percent NPL ratio, according to an
auditor's report. That said, based on EconOff's calculations,
BOJS 's losses from NPLs are more likely seven percent and
perhaps as high as 25 percent. (Comment: Since Liu appeared to
be citing only most restrictive definition of NPLs, current
probable losses for BOJS are almost certainly also mounting.
End comment.)

13. (SBU) The accelerating pace of BOJS's lending in the third
quarter raise further concerns about the bank's NPLs: BOJS
reported lending growth of 37.5 percent in the first half, which
then accelerated to 40-50 percent rate for the first three
quarters. Liu admitted that BOJS was currently focused on
slowing the growth rate of lending through the end of the year.
In late October, CBRC Chairman Liu Mingkang reportedly called in
chairpersons of city commercial banks with lending growth above
40 percent to warn against rapid balance sheet expansion. CBRC
Chairman Liu at the same time publicly warned that city
commercial banks should "not strive for speed, not strive for
scale, and not strive for ranking."

=======
Comment
=======

14. (SBU) In many ways, BOJS shows how a financial institution
in this intermediate market niche between the five major Chinese
state-owned commercial banks and the smaller city commercial
banks can survive and even thrive. However, the BOJS model for
Chinese banking reform may be simply enlarging the scale of
excessive lending to local enterprises that led to the problems
in China's city commercial banks in the first place. BOJS
Deputy President Liu clearly emphasized the connections that
BOJS is building with Jiangsu's favored pillar industries,
appearing confident that Jiangsu firms will win market share
despite central edicts to cut back overcapacity. He thereby
sidestepped the bigger question of what China -- and the world
-- will do as bankers like Liu in each province finance the
expansion of manufacturing capacity so that their borrowers
become "too big to fail."

15. (SBU) Some limits on the BOJS model are also apparent. On
the one hand, Central Government regulators are more cautious
about new NPL risks building up. BOJS's expansion is also
limited by fallout from the global financial crisis, as foreign
financial institutions have a decreased appetite for investment
abroad and BOJS has not yet linked up with a foreign strategic
partner. In addition, the slow pace of initial public offerings
on the Shanghai Stock Exchange means BOJS could miss its target
of going public within three years. Not being able to access
this additional capital and managerial expertise will probably
set back BOJS's further expansion plans once the current lending
boom ends.
BEEDE

© Scoop Media

 
 
 
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