OPINION

Banks Face Transformation Pressure

Commensurate with the gloomy state of the A-share market, 10 out of the 16 listed banks have witnessed their share prices dropping below net asset values, including the big five in the banking sector—Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, and Bank of Communications.

For one thing, these big banks can rarely access financial support when in bad condition; for another, they have gradually lost favor with investors because of their focus on money encirclement rather than dividend distribution. In any case, the massive decline in the banking sector has, to some extent, mirrored public fears over a potential financial crisis in China.

Firstly, the impact of the cash crunch that occurred last June has not yet faded away. Since the end of 2013, China's monetary market has been plagued by a money shortage, which has intensified investors' anxiety regarding banks' inability to issue loans and their poor overall performance. Beyond that, there is a possibility that listed banks will bleed the stock market by launching huge refinancing projects. This is what investors fear.

In reality, most loopholes in the banking sector have their roots in the misallocation of credit and loans. Instead of bailing out the market by injecting liquidity, the central bank is supposed to attract more capital and liquidize existing capital.

Secondly, non-performing assets are overwhelmingly collapsing.

By the end of June 2013, local governments at all levels had owed 20.7 trillion yuan ($3.42 trillion) in direct debt, 2.9 trillion yuan ($479 billion) in debt for which local governments issued official guarantees, and 6.65 trillion yuan ($1.1 trillion) in debt for which local governments might shoulder some of the rescue burden.

Though local government debts are under control overall, concerns persist over repayment capacity. Most debts will expire in the following two years, indicating that a funding gap is on the cards after 2014. Even if local governments borrow new loans to repay old ones, the funding gap is inevitable after 2015.

In addition, industrial overcapacity will also contribute to bad loans. If "de-productivity" is promoted nationwide in 2014, numerous enterprises will have to undergo mergers and reorganizations, which is certain to increase the number of non-performing loans.

Thirdly, for China's banking sector, the era of explosive expansion has come to an end. On one hand, as interest rate liberalization keeps progressing, state-owned banks will stand to lose if they continue to live off the margins exploited from deposit and lending rates.

The China Banking Regulatory Commission has stepped up its oversight of shadow banking. More specifically, banks can no longer transform credit and loan into financial products, or invest them in the lucrative real estate market and government financing platforms. Banking performance is bound to take a blow.

Now, the alarm has been raised. If local government financing platforms default along with enterprises harassed by overcapacity, if real estate bubbles burst and shadow banking risks eventually break up, a financial crisis will probably surface. And then, investors will reappraise bank shares.

This is an edited excerpt of an article published in Economic Information Daily

THE MARKETS

Stake Purchase

Alibaba Group Holding, China's Internet giant, and Yunfeng Fund have invested 1.33 billion HK dollars ($171.23 million) to obtain 54.3 percent of shares in CITIC 21CN, an integrated information and content service provider.

Alibaba and Yunfeng, which will take 38.1-percent and 16.2-percent stakes respectively, plan to help fund a pharmaceutical information platform being developed by CITIC 21CN Co. The ratio of its current major shareholder CITIC Group will drop to 9.92 percent and its current executive directors will resign and be replaced by five new ones commissioned by Alibaba.

CITIC 21CN's statement filed to the Hong Kong Stock Exchange said the company would continue its current businesses and plans to expand its domestic pharmaceutical data platform. Alibaba will probably introduce new businesses or other forms of cooperation.

Taxi Call Apps

Heated competition in the mobile payment sector has spread to calling for taxis as two Chinese Internet giants offer incentives to passengers and taxi drivers to boost usage.

Alipay, the payment service of China's largest e-commerce company Alibaba Group, is providing 10 yuan ($1.6) cash coupons for taxi passengers and 15 yuan ($2.5) for drivers per ride through Kuaidi Taxi to boost its market position.

Since the partnership started in May 2013, Alibaba-backed Kuaidi Taxi's service now covers more than 400,000 cab drivers in 40 cities. In Shanghai, Kuaidi Taxi and Alipay are connected to over 60,000 cabs.

Tencent-backed and Beijing-based Didi Taxi, another popular mobile taxi-calling software, provides incentives of 10 yuan ($1.6) for both drivers and passengers for each successful order paid through Tencent's WeChat payment service. Didi Taxi plans to expand to 100 cities by the end of this year.

NUMBERS

13.6%

The growth rate of broad money supply (M2) in 2013

71.9 tln yuan

The balance of outstanding yuan-denominated loans at the end of 2013

17.29 tln yuan

The size of China's social financing in 2013

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