Bigger, Safer, More Regulated

What the U.S. financial industry could learn from Chinese banks—and Chinese banking regulators.

By Howard Davies

Money being counted at the Industrial and Commercial Bank of China Limited. Click image to expand.Money being counted at the Industrial and Commercial Bank of China Limited

The Chinese financial system’s evolution in recent years has been extraordinary. In 2002, all of China’s major banks were awash in bad loans, which in some cases amounted to more than 10 percent of the total balance sheet. None of the major banks met international standards for capital adequacy. Few financiers in London or New York could have named any Chinese bank other than Bank of China, which was often wrongly thought to be the central bank. And to suggest that the United States Federal Reserve, or the United Kingdom’s Financial Services Authority, might have anything to learn from China’s financial authorities would have been thought absurd.

Less than a decade later, much has changed. The problem of nonperforming loans was resolved, primarily by establishing asset-management companies to take over doubtful assets and injecting new capital into the commercial banks. Now, reported NPLs amount to little more than 1 percent of assets. Foreign partners have been brought in to transfer skills, and minority shareholdings have been floated. Current valuations put four Chinese banks in the global top 10 by market capitalization. They are now expanding overseas, fortified by their strong capital backing.

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