Is ICBC Chairman Correct About China’s Economy?

Includes: FXI, PGJ
by: William Gamble

Jiang Jianqing is the chairman of Industrial & Commercial Bank of China Ltd., ICBC (HKG 1398 SHA 601398) the largest bank in China. Of course ICBC is state owned. It is the world’s largest bank by capitalization. During a speech at a Credit Suisse investment conference in Hong Kong, he announce that ICBC has increased its profits last year by 36% and that Goldman Sachs (NYSE:GS) had agreed to keep 80% of its stake in the Chinese lender until April 2010.

Mr. Jiang agreed with the Chinese government forecasts that China’s economy would grow at 8% this year. Last November, in a quarterly report on the Chinese economy, the World Bank reduced its forecast from the 9.2 per cent growth that it predicted in July down to 7.5%. Its latest prediction is 6.5%.

Mr. Jiang was optimistic that spending by consumers in China was already supporting the economy. He thought that Chinese consumer spending will help offset damage done by the massive drop in global demand which is especially bad for China’s export dependent economy. A forecast of new spending by Chinese consumers does seem a bit puzzling though. Most consumers throughout the world, including the credit card mad US consumers are increasing their savings because of job worries.

Job worries are affecting Chinese consumers too. Xinhua reported that Shenzhen in the last quarter of 2008 48 company bosses had absconded without paying wages worth , involving a total of 30 million yuan (HK$34.07 million). In total, 370 firms had defaulted on paying 102 million yuan in wages to 39,200 workers. No doubt the situation in southern China is extreme and spending by Chinese consumers in other parts of China is much better.

Chinese officials have also said that it will take years for higher public spending on health care and a social safety net to reduce household saving and stimulate consumption. This has been made more difficult recently. Local governments bear much of the responsibility for health care in China. They also rely heavily on revenue from land sales. The World Bank predicts the property market will remain weak “for much of 2009”, which of course will limit the amount the local governments can spend on health care for consumers.

Mr. Jiang was not as pessimistic about China’s real estate market as the World Bank. He said that the Chinese property markets were rebounding and cited statistics that show sales volumes have picked up since the start of the year, which is great new since they have been falling precipitously since the beginning of 2008. According to the China’s National Development and Reform Commission there was a 1.2 percent decline in prices in 70 major cities, the most since the government started issuing the data in August 2005. New-home prices fell 1.8 percent. The Beijing Municipal Bureau of Statistics reported in February that housing sales in the city dropped 40% last year. Other Chinese economists have predicted that housing prices will drop 15% to 20% in Beijing this year. Shanghai has experienced a similar decline. But I guess was that Mr. Jiang’s comment were that in China like the US, the sales are up as prices come down.

Mr. Jiang also did not feel that Chinese banks would experience significant defaults from borrowers. He declined to disclose the latest quarter’s bad loan numbers, but said that his branch managers had told him that credit quality had not eroded despite global economic woes. Unlike almost every other bank in the world, he said that ICBC’s nonperforming loans have declined steadily since 2005. I assume that ICBC did not lend to any of those real estate projects.

Unlike many American banks, ICBC’s risk management must be great. Even as early as last summer, the Guangzhou-based 21st Century Business Herald reported that 20 percent of about 300,000 small firms in Wenzhou, one of the province's manufacturing hubs, stopped operation. At that time Hong Kong-based Yazhou Zhoukan (Asia Weekly) reported that, in another industrial hub Yiwu, about 5,000 out of its 18,000 factories were facing bankruptcy. Apparently ICBC did not lend to these smaller firms.

Many investors believe this year's surge in the Shanghai Composite Index is partly due to loan money going into stocks rather than business operations that might improve the country's economic prospects. Apparently ICBC did not lend to stock speculators either or they are not worried that the Shanghai Composite will go down.

The China Institute for Reform and Development an economic think tank in China feels worries that state-owned banks like ICBC will lend only to State-owned enterprises (SOEs) as part of the government mandated stimulus lending and that small and medium private enterprises will get nothing. According to the Institute’s report without further market-oriented reforms, the stimulus package will not only fail to achieve its goal but will also store up long-term problems like bad loans. But I am sure that Mr. Jiang has considered this problem and the non performing loans will not be a problem.

Disclosure: no positions