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Cover Stories Series 2012> Q1 Economic Growth Stable> Archive
UPDATED: March 31, 2012 NO. 14 APRIL 5, 2012
Profit Problem
Windfall profits of Chinese banks stir widespread suspicion
By Hu Yue

BANKING BOOM: Bank cards displayed at the 2011 Shanghai Financial Expo. China's financial institutions had issued a total of 2.95 billion bank cards by the end of 2011 (YAN DAMING)

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 macro-economy 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."

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