While the Chinese economy loses momentum, commercial banks of the country are defiantly glittering with handsome profits.
　　China’s commercial banks raked in net profits of 1.04 trillion yuan ($165.1 billion) in 2011, skyrocketing 36.3 percent from a year ago, according to data from the China Banking Regulatory Commission (CBRC). The country’s banking assets totaled 113.28 trillion yuan ($18 trillion), surging 18.9 percent year on year.
　　Unsurprisingly, major lenders, especially the “big-four” state-owned banks, are bursting with vitality. The China Construction Bank(CCB), the second largest lender in the country, raked in net profits of 169.44 billion yuan($26.9 billion) last year, soaring 25.5 percent from the previous year.
　　The bank said the growth was driven by widening net interest income. Meanwhile, its net fees and commission income from products and services such as credit cards, wealth management and insurance sales, went up 31.55 percent to reach 87 billion yuan ($13.8 billion), making up 21.9 percent of the total.
　　The performance of the Agricultural Bank of China was no less bright. It generated 122 billion yuan ($19.4 billion) in net profits last year, up 28.5 percent. The Industrial and Commercial Bank of China, the country’s largest lender by market value, raked in net profits of 208.4 billion yuan ($33.1 billion) last year, soaring 25.6 percent year on year. The Bank of China reported 124.2 billion yuan ($19.7 billion) in net profits for 2011, up 18.9 percent.
　　Given a marked slowdown in the macroeconomy and the financial difficulties facing many smaller enterprises, the banking boom has aroused simmering doubts.
　　The Chinese economy grew 8.9 percent in the fourth quarter of 2011, down from 9.7 percent, 9.5 percent and 9.1 percent in the first, second and third quarters. Newspapers were flooded with reports that east China’s Zhejiang Province, a cradle of private economy, was hit hard by massive factory closures and bankrupt entrepreneurs disappearing to avoid huge debts.
　　 Looming controversy
　　 Policymakers and industry insiders have tried to downplay the suspicions. Zhou Xiaochuan, Governor of the People’s Bank of China(PBOC), the central bank, said it is inappropriate to describe the banks as profiteering.
　　“Indeed, China’s banking system is on a solid financial footing, largely because of the cyclical macro-economic development,” he said.“But the euphoria may be short-lived and banks may face capital shortages this year.”
　　Xiao Suining, Chairman of the Shenzhen Development Bank, also dismissed the controversy, saying the return on assets of the banking sector is only around 1 percent, compared with 5 percent of the manufacturing industry.
　　Zhang Yun, President of the Agricultural Bank of China, said the profit scale of Chinese banks was truly gigantic. “But the growth momentum is in line with the real economy and the industrial sector,” he added.
　　Last year, industrial enterprises above designated size—sales revenue exceeding 20 million yuan ($3.2 million)—witnessed a 25.4-percent increase in profits.
　　“China engineered a remarkable lending spree three years ago to counter the ripple effect of the financial crisis and that provided a powerful catalyst for the banking sector to take off,”said Zhang. “Moreover, commercial banks have made obvious progress in efficiency and cost control, delivering a boost to profitability.”
　　The bankers may have reasons to defend themselves, but economists have raised worries over the windfall profits of banks. Chen Yongjie, Deputy Secretary General of the China Center for International Economic Exchanges, said banks’ profits have been much heavier than industries, and even than the monopolized oil and tobacco sectors.
　　“Major reasons for the banking prosperity are massive credit expansion in recent years, widening interest margins and increasing banking fees,” he said.
　　“The high yield of Chinese banks is not necessarily a good thing in the current environment where the real economy is slowing down sharply,” said Zuo Xiaolei, chief advisor to the president of the Beijing-based China’s Galaxy Securities Co. Ltd. “High profits usually carry high risks, and crisis will break out after risks accumulate and reach an unbearable level.”
　　Zuo’s concern is not unfounded. By the end of 2011, non-performing loans of Chinese banks had stood at 427.9 billion yuan ($68 billion), an increase of 20.1 billion yuan ($3.2 billion) from three months before, said the CBRC.
　　“Chinese banks could experience a slump in asset quality this year against a backdrop of a slowing economy, property-market correction and the challenge of refinancing sizable local government debt,” said the international credit rating agency Standard & Poor’s (S&P) in its latest report.
　　“Reasonable credit buffers, healthy interestrate spreads and sound liquidity mean the banking sector is likely to ride out the downturn for the next couple of years at least,” it said.
　　But a sharp economic slowdown and a jump in non-performing loans beyond their own projections could lead to rating downgrades, it warned.
　　The S&P projected a drop in China’s new loan growth to 12-14 percent in 2012 from 15.7 percent in 2011, because of moderate deposit growth and a stringently regulated loanto-deposit ratio of 75 percent for the lenders.
　　“Non-performing loans will not increase greatly in 2012,” said Liao Qiang, a Beijingbased researcher at S&P. “Instead, they will go up at a gradual pace. Loans made to exporters, especially small ones, are the most likely to turn sour since they have been battered the most by the European debt crisis. Slowing exports and increasing labor costs will hamper borrowers’ cash flow.”
　　 Interest worry
　　Soaring interest income, which reflects the difference in revenue from lending and the cost of deposits, is widely believed to be a major source of juicy profits of Chinese banks.
　　The interest margin is currently around 3 percent in the country, well above the average level of Western economies, said Chen with the China Center for International Economic Exchanges.
　　In 2011, the central bank raised the benchmark one-year deposit and lending rate three times in an effort to tame stubborn inflation, leaving the rate of demand deposits unchanged. This move reduced the banks’costs of funds as demand deposits account for nearly half of the total.
　　“Moreover, government protection has put banks in an advantageous position to negotiate with borrowers,” said Chen. “That has helped shore up bank balance sheets, but also produced negative impacts on the real economy as commercial banks consider smaller firms to be bigger risks.”
　　He Zhicheng, a senior analyst with the Agricultural Bank of China, said a strong bargaining power made the banks more able to bump up the lending rates and attach more strings to the loans.
　　“As they try to survive, many financially strained enterprises had to accept the stringent requirements,” he said.
　　Guo Tianyong, Director of the Research Center of China’s Banking Industry at the Central University of Finance and Economics, agreed.
　　The “big four” state-owned banks have controlled more than 70 percent of the market share, and a relatively high entry threshold has in fact reduced competition, he said.
　　Guo suggested China further reform the financial system and encourage more players to come in, as well as liberalize the interest rates to narrow the interest margins.
　　“But liberalizing the interest rates is a complicated long-term process and requires greater efforts to solidify the health of the financial markets and strengthen risk controls,”he added. “So a temporary and safer solution is to unilaterally raise the deposit rates or cut the loan rates.”
　　“Besides, it is also necessary to propel the capital markets, such as stock and bond markets, and wean off reliance on bank credit as the biggest source of financing,” added Guo.
　　In the United States, the interest margin is even bigger than that in China, but their banks are still operating on modest profits. “The reason is that banks only contribute one third to overall financing, well below the ratio in China.”
　　 Charging regulation
　　Although intermediary business remains a weak point for Chinese banks, the fast in- creasing items of fees and excessive charges have aroused severe criticism, with consumers complaining about being charged for everything from transferring funds to changing Internet banking passwords. The most common complaint is that customers of a bank in one city are charged a fee when using the ATMs of the same bank in a different city.
　　In July 2011, a report from the China Banking Association said there were a total of 1,076 service items in China’s banking sector, 79 percent of which were charged fees.
　　In 2011, Chinese commercial banks earned 514.9 billion yuan ($81.7 billion) in net fees and commission income, leaping 46.3 percent from the previous year, said the CBRC.
　　Wang Yunsheng, a 28-year-old private business owner in Shanghai, is one of the many bank customers upset by the unscrupulous charges. “I invested a large part of my savings in a variety of wealth management products of a state-owned commercial bank in a move to offset the impact of inflation,” he told Beijing Review. “But sometimes the gains of the investments were not even enough to pay the heavy charges, such as the asset management fees.”
　　The fee problem has also exacerbated financial burdens on enterprises. “When we extend loans to banks, the lending rate is around 7 percent. But the actual financing cost may exceed 12 percent if all kinds of commissions and consulting fees are factored in,” an anonymous manager of a commercial bank in Jiangsu Province told 21st Century Business Herald.
　　Yang Zaiping, Vice Chairman of the China Banking Association, said the unregulated fees, some of which are even illegal, have been one of the drivers for soaring profits at banks.
　　“Commercial banks are encouraged to promote the intermediary businesses and diversify away from interest income,” he said.“But that does not mean the banks are allowed to hurt the interests of consumers.”
　　“It is imperative for banks to make their charges more transparent and fulfill their social responsibility by providing more free services,” he added.
　　Government efforts to regulate banking fees are already underway. The CBRC, PBOC and the National Development and Reform Commission jointly released new rules in February to streamline the chaotic sector.
　　The banks must give a three-month advance notice to clients of an increase in service prices, according to the draft regulations. In addition, customers must be informed one month in advance if the banks want to charge them for a new item. The government will set or guide charges on some basic services such as fund transfers and payment collection.
　　The government is also launching a nationwide investigation to clear illegal banking fees. Zhao Xijun, Deputy Director of the Financial and Securities Institute at the Renmin University of China, pointed out that a root cause of the fees is a lack of competition. “So a more permanent countermeasure is to further open up the banking industry and encourage competition,” he said.