Page 92 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

BANKING
“In fact, what is far more likely than uncanny Chinese e ciency, is simply that Chinese banks have not recorded provisions for the enormous debt overhang they’re failing to account for.”
In simple terms, this allows one a comparative ratio for nancial productivity – so to speak – of the US versus China. In the case of the US, the ratio between banking pro ts and GDP is 0.44 percent, whereas in China this ratio is 1.25 percent. at means that Chinese banks must be 2.9 times more e cient than US banks.
A couple of points spring to mind. Firstly, there is no possible way in which this could be true – US banks are older, wiser, more battle-weary and generally more visible worldwide than Chinese banks. Secondly, in running a large diversi ed bank, one has to have a certain minimum infrastructure in place, which is costly and requires highly educated skill- sets to administer. is would account for the relatively high cost-to- income ratios observed in US, UK and European banks. Usually one sees numbers between 50 percent and 65 percent for this metric.
In order for Chinese banks to be 2.9 times more e cient than their US counterparts, they would either have to have substantially better interest- rate margins or they would have to have far less costly infrastructure and far fewer educated sta . Both are possibilities but nowhere near the three times e ciency pick-up implied by the o cial numbers.
In fact, what is far more likely than uncanny Chinese e ciency, is simply that Chinese banks have not recorded provisions for the enormous debt overhang they’re failing to account for. e next nancial crisis is possibly imminent and is made poignantly obvious by a cursory analysis of Fortune magazine’s data.
e International Monetary Fund (IMF) estimated, as recently as June 2016, that potential losses for Chinese banks’ corporate loan portfolios could be equal to about 7 percent of GDP. at translates into USD 760 billion in actual losses. Recall that we used the same concept to estimate nancial e ciency for Chinese banks, and that the pro ts of the four largest Chinese banks came out as USD 136 billion. In other words, it would take ve and a half years of sustained Chinese banks’ pro ts to absorb only their corporate loan losses, never mind the consumer loan losses built into their system.
So, on the one hand we have the regular nancial press – Fortune magazine – awarding ranking honours to Chinese banks, and on the other hand we have the losses forecast by the IMF.
Even if one were to factor in the political leanings of the IMF, there still remain two unfortunate conclusions: the opacity in Chinese statistical
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