Opportunities Face China Banking Industry in 2009

BEIJING, Jan. 2-- Chinese commercial banks face grim challenges in 2009, as external demand weakens, the growth of the domestic economy slows and corporate profitability slackens, warned a Chinese banker.

Ma Weihua, president of China Merchants Bank, a leading midsize commercial bank, made the remarks in an article carried by the latest annual issue of the well-known business magazine "Caijing".

According to Ma, great attention should be paid to lenders' exposure to risks made in boom times.

The risk exposures could turn nasty in an economic downturn, Ma noted.

He cited the following risks:

-- External-oriented enterprises took the blunt of the financial crisis since the third quarter of 2008, along with shrinking demand and fewer orders from abroad, leading to an exports slowdown. Still worse, some senior executives of struggling businesses had fled. This would threaten the safety of lenders' credit assets.

-- Some major industries, including steel, coal, cement, power, oil processing and coking, chemical fibers and textiles, and shipping sectors, performed unsatisfactorily, with corporate earnings declining.

-- Liquidity of smaller enterprises remained tight, with their repayment capabilities weakening.

-- The probability of default on home loans is mounting in the real estate sector, which has suffered from sluggish sales.

As Ma pointed out, between 2003 and 2007, the Chinese economy kept growing at an annual rate of 10.6 percent. And so the banking sector stayed on the fast development track.

In the first half of 2008, the 14 listed commercial banks on the Chinese mainland realized more than 230 billion yuan (33.6 billion U.S. dollars) in combined net profits, a growth of more than 60 percent on the same period of the previous year.

But the rosy picture has been blurred since the second half of last year. Ma predicted that growth in banks' net profits would continue to slow down substantially in 2009.

However, Ma noted, opportunities existed amid challenges.

The Chinese Government has adopted a slew of measures to boost the national economy, including active fiscal policy and moderately loose monetary policy and strong means to expand domestic demand. All these would translate into higher demand for bank loans.

Intermediate services would grow for banks as corporate demand for cash management, financial consulting and wealth management would soar.

Banks' awareness of the need for better management would increase.

According to Ma, it would be imperative for Chinese banks to make a shift from their traditional growth pattern, which focused on large corporate customers and interest differentials between lending and borrowing. They should pay much more attention to retail businesses, intermediate services and smaller corporate customers, Ma added.

At the end of his article, Ma stressed that the impact from the financial crisis on Chinese banks would be short lived and limited, as the support factors behind the Chinese economy and its financial industry would remain strong.

According to Ma, investment in China will maintain its path towards funding urbanization and industrialization.

As long as the process does not come to an end, the cost of "made-in-China" will continue to be lower than the world average. This will help keep China as an important target of foreign direct investment, he said.

The consumer mentality was being changed in China and consumption would grow rapidly as a result, Ma believed.