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good morning my name is nicholas veron it's my pleasure on behalf of the peterson institute to start this new session of our financial statement series we start a bit earlier in the day than usual today because we want to reach out to the other side of the world from the peterson institute's perspective namely east asia and specifically china this session will be about the chinese banking system which in a matter of really a few years has grown into by far the largest in the world not only more than twice as large in total assets than the u.s banking system but also larger in the last few years and to entire eurozone banking system even if you take that as one in the context of the eurozone new and still unfinished banking union so china's banks are massive the largest banks in the world are chinese even so they have red comparatively limited international activity and many of us i think certainly in europe and the us know far too little about them so the aim of this session is to contribute to bridging that gap learn more about chinese banks about their role in china but also their role into international financial system and for that it's difficult to think of a better uh cast of uh speakers and the one we have today qian jun who goes by qj in english is one of the best experts in china uh independent experts i should say about the chinese banking system he has a lot of u.s background as well he was an undergrad at university of iowa stayed here to chinese leadership and had his phd at the university of pennsylvania he then taught that the carl school of management at boston college and then he came back to china in 2013 he was at chao tong university in shanghai he was at the chinese academy a financial research of which he was deputy director and for the last few years he's been professor of finance at um fudan university which is of course one of the leading universities in china and the world and he's there also the executive dean of the fan high international school of finance and uh and and his research as he will present goes quite granular into the way chinese banks operate and are governed and of course our guest second guest today is the pedestal institute's uh only nick clardy uh nick has been at the institute since 2003 before that he was at brookings for nearly a decade he has also taught at the yale school of management before that he was at the university of washington and he got his phd at the university of michigan he is one of the us leading uh specialist of the chinese economy he's not the leading specialist he has extraordinary insight about the chinese banking system and financial system more broadly and i'm very grateful to both qj and nick for having accepted to participate in this session so we'll start with you qj over to you you need to unmute yourself you're on mute qj sorry about to that you need to go back to zoom and then um and mute yourself click the zoom icon at the bottom of your screen we hear you now all right all right so um glad to be here uh to talk about the chinese uh banking system uh so specifically i'll have uh uh three uh topics as nick mentioned uh china now has a massive banking system uh so i'll go into uh the banking system a little bit uh in my view uh i think there's a three-tier system for the chinese banks i'll talk about the largest banks these are the largest banks in the world in terms of assets and market cap i'll also talk about the perhaps unique features of some of these banks and then there's a case study of a regional bank that actually failed last year another topic i'll go very very quickly is that in terms of lending there is this rise of fintech companies an example is ant financial which has just changed its name to and technology as it prepared to do a ipo in the uh chinese domestic asia market and also the hong kong market so i'll talk about that a little bit and then the other thing that's very important uh along with the fat grows of the banking sector in china is the shadow banking i've been doing work uh on the shadow banking sector that's related to banks in particular wealth management products so i'll talk about that briefly so here's a chart that starts in 2006 and ending in 2019 it has two parts the line which shows the gdp growth in china so we know that before the last global financial crisis china's gdp was growing very fast double digit and then uh fell below ten percent in 2008 and then actually it's keep going down uh at the end of 2019 it's been around six percent uh we'll see how this year uh it will do on the other hand when you see these bars uh these are um basically total what's called total social fundraising of all the entities in china government uh and companies uh i'm not going to go through all the uh components of this uh just pointing out that by far the largest component of society of firms of government raising funds in china is bank loans that's this orange color all right and then there are also other related uh debt products uh there is this gray bar called the trust loans these are non-bank financial institutions where they don't take deposit but they can also raise money from wealthy investors and institutions and they also make loans less regulated loans to real sectors there's bonds corporations and governments can sell bonds to raise money and also equity the deep blue part so so as you can see that uh basically this says in terms of fundraising the the the domestic a shared stock market is very small in terms of uh fundraising uh and in the u.s uh equity financing is not as much as debt financing but in china as this chart shows bank loans just dominate all other forms of financing uh and this chart as you can also see that the total fundraising level has been going up most of that is debt so corresponding to a drop in gdp growth and therefore that can also explain there has been a issue about the chinese financial system being a bit high on the on leverage too much debt all right as i was saying uh china has a three-tier banking sector uh the most important part is the uh the top tier uh the big four banks uh the fifth largest bank is bank communications and also there's this postal savings bank uh did ipo last year uh these are the largest banks in the world and their china also has a few what's called policy banks they're also very large the second here are what's called stockholding banks most of these banks are publicly listed i i serve as an independent board member on one of these stockholding banks a particularly interesting case here is china merchants bank it's in the stockholding banks group but it has a very diverse shareholding structure as i will show you in a minute the third tier are what i call regional small and medium-sized banks even smaller than them are these urban and rural credit cooperatives a very large number of them but they're much smaller in size and very importantly in terms of active activities they usually concentrate or limited in one or two cities or in one or two regions and there are a bunch of non-banking institutions as i was mentioning trust companies is one important type of them so so that's the structure uh so i've done some work with some of my co-authors uh franklin allen is a professor at uh imperial college now so in a lot of our work we've done together we argued that one of the most important reforms for these state-owned banks is that they've done ipo and in particular they've done ipo not only in the domestic asian market but also the ipo in hong kong which follows international rules and it's uh with a lot of global institution investors as i was saying uh banks activities both on balance sheet heavily regulated and off balance sheet that's what we call the shadow banking sector have been uh growing rapidly uh since the uh 2008 2008-2009 global financial crisis so here's here's a simple table uh at the end of uh uh last year by assets the largest four banks in the world are are the big four banks in china the industrial commercial bank of china that's the largest followed by the construction bank agricultural bank and bank of china and then the rest of the list the usual suspects we have banks from the us europe and japan here's another ranking in terms of market cap uh the the the two largest banks at the end of last year uh were the u.s big banks uh jp morgan chase and bank america what that means is that the big chinese banks their valuation is not very high uh so their assets are big but their total market cap is is not that big and then you see the other uh banks there's also royal bank of canada coming in at number 10. uh here's a very simple snapshot of roa of these largest nine banks here so you can see that the big four banks of china are doing okay in terms of roa and that seems to be the trend in the last few years so so for their own balance sheet activities they're doing okay banking is still one of the most profitable sectors in all of china financial services or all the real economies here's the chart that shows you the stock price movement this year so we started at the beginning of this year so we have more or less six months data as you can see relative to the european and large european and u.s banks the chinese big four banks more or less are very stable in terms of stock prices so they held up the negative shock of kobe 19 uh reasonably well uh as i was saying uh so that's good uh and then recently uh there is there's been a big spike in the chinese stock market so overall these large banks the largest banks they have performed reasonably well uh both unbalance sheet assets and off-balance sheet assets there's some risk but overall risk is under control this is to show you that the largest spend by assets icbc is a bank that's much it's a listed company that's majority owned by various agencies of the chinese government so huijin is a central government agency mof stands for ministry of finance uh ssf that's china's a massive social security fund so this is a a typical structure of the largest bank that they're listed in hong kong in china but they're in shanghai they're uh majority owned by the chinese government central government but as i was saying if you look at a a bank in a second tier a stock shareholding bank a china merchant's bank in fact as i was saying the valuation the pe for most of these large banks is pretty low china merchants bank valuation is among the highest uh they're doing very well they're very innovative so if you look at them uh the the the two large shareholders are these two central soes so the central government through the central so you also own stakes of merchants bank but the site ownership state and then you can see there are a host of other institutions financial institutions from china from hong kong and so forth so this this bank is act totally uh it's it's can be regarded as a widely held uh uh a listed firm which is very different from icbc so uh in in in my work uh with uh franklin and others we we've argued that uh you know government owning uh stakes in these largest financial institutions maybe it's not that a bad idea for for an emerging economy like china so the idea is that when the government owns majority owns this bank maybe they can tell the banks to pursue some important macro potential policies like keep lending to uh real sectors during a crisis like we've seen today uh and and our argument is that if if you have a private shareholders that's probably more difficult to achieve but at the same time listing listing these firms in hong kong was under the monitoring of global institution investors we know that when icbc did its ipo in 2005 a consortium that when goldman sachs owns something like five percent five percent and they have [Music] a seat on the board so that's also very important uh so so so we mix this argument we say that you know maybe what you see in china's large banks it's not so bad the largest banks are majority owned by the government for stability reasons and then if you look at the second tier and third tier banks at least as seen by china merchants bank the ownership structure is more diverse so with that structure you have banks are very much market oriented but the systemic risk of these very large institutions is under control by the government agencies uh so here's a here's the a a very uh well-known case last year uh this bank it's called baozhang bank headquarter in inner mongolia balto is the city uh so so so in may of last year uh the banking regulatory commission announced that it's going to take over uh uh take over this failing bank for a year in fact uh earlier this year on april 30th a new bank emerged it's called stands for inner mongolia so it's it's uh taken over uh the majority of parts of the activities which are in the region in the province of inner mongolia you know i actually taught this case in my in my class there are a number of reasons for the failure of baozhen bank one important thing is that it operated in a region where economic growth hasn't been that sterile recent years local government uh has a lot of debt uh its credit risk accumulated over the years that led to the failure of the of the institution in addition to this uh actually uh going back to 1998 there was this high nine development bank failed it was taken over by icbc same year last year there's another bank based in yao ning province again leonin province in the northeast region that's a region that economic growth wise it's not to it's not been doing that great uh there's also a migration of population outside of these provinces to the to other parts of china so bank of jinzo failed and it was uh also restructured uh so so in terms of financial risk what's important is that by design because these banks operating one or two regions focusing on several cities if you look at the if you look at the data information their activities and also capital flows typically concentrate in these regions so when they fail there isn't a whole lot of worry about contagion risk and the other thing is that they're not that big okay so so um these cases might pop up one or the other over as course of a year as of now it's been manageable risk this is uh comparing npls over loans uh for uh before big economies uh so we see that in india these npls are spiking china u.s and japan seems to be pretty uh steady in recent years if you look at mpl up to this year this is over gdp there is a spike the first six months of this year and not surprisingly uh but the but the uh level which is about about 1.4 this is for all listed banks of gdp so that's not a that's not a very high level all right uh very quickly uh fintech large fintech companies they all have a what's called an ecosystem so i am financial as we know that they're affiliated with alibaba alibaba has a payment on e-pay uh and they have platforms uh taobao selling stuff and then on top of that they have uh and financial which basically uses the data to process risks of small businesses and that's a very uh typical one that's one of the most successful fintech companies in china in terms of doing uh lending so this is this is what i've been already saying that uh uh they they have this sort of ecosystem and then another way to put it is is that uh uh and well as i said they changed their name to and technology uh so they have a lot of data on a lot of these online stores um they also have data on the on the owner's own consumption and credit history and they they they've been using that type of data big data to help them assess small business risk and they make loans accordingly my final point is on shadow banking so so this is from one of my working papers this shows that if you look at this uh principle floating wells management products uh principle floating this there's potential risk issued by the largest 25 banks you will see the size of this sector started to spike up uh around 2010 2011. so that's kind of interesting and we argue that there are two factors leading to the spike of this sector starting in 2010 one is shown by this graph that in the last crisis china institute a massive stimulus 4 trillion yen but about 3 trillion yuan stimulus was in the form of newly issued bank loans and hence the spike in terms of newly issued loans over gdp in 2009 and whenever ou have a massive credit stimulus that led to some problems down the road so that's one reason for banks to start doing a lot more off-balance sheet activities along with bank competition that makes banks especially the banks outside the big four what we call the small medium-sized banks to do even more uh off balance sheet activities so my final slide uh is that um you know the largest chinese banks are now uh important players in the entire chinese financial system they are doing they are doing well they are steady um so one important uh risk in the financial system is the growth of the shadow banking and to that the regulators have done a series of reforms uh including strictly telling banks to to shrink the size of the shadow banking sector especially the risky part there's been a set of new regulations on asset management and starting in last year and continuing this year all the major banks are now establishing a separate uh new asset management companies in which they bring some of those off balance sheet assets away from the bank and put them into this uh asset management companies and of course they do some other activities i'll stop here uh and then uh we'll we'll have the discussion later on thank you thank you thank you so much this was masterful and a bit longer than we usually do for the first presentation in this series but there was so much ground to cover that i for one believe it was well worth it so over to you nick you also need to unmute yeah thank you nicola i i'm going to focus primarily on the impact of the slowdown in china on the banking system i'm going to look at some positives and some negatives and i think the most important positive thing to start with which is consistent with q j's assessment that the banks are in reasonably good shape china is the first major economy to begin to recover it began to recover fairly strongly uh in the second quarter i think it will uh improve further in the third and fourth quarter and we'll be looking at growth that's in the neighborhood of uh two to three percent which is going to be much higher than any other uh major economy so i think this kind of v-shaped recovery is positive for the profits of uh of the economy even the uh the corporate sector and so i think the problem of npls will not explode i don't think we're going to have massive bankruptcies on the scale that we might have in some other advanced economies we saw in may for example we have the first year-over-year uh profit expansion uh in china since the kobe crisis uh profits up six percent on a year-over-year basis i think that will strengthen as we go through the balance of 2020. so i think that's a fundamental uh factor that will be positive for the financial system in china i think on the other hand there are some negatives that we need to look at and i would say one of them and perhaps the most important one is that i believe the authorities are in effect undermining the transition to commercially oriented banking some banks are further ahead on this than others but we have seen much more control of interest rates for example we have new programs on forbearance on npls reduce dividend payments special targets for lending to soes [Music] they actually have targets for for earnings growth and there's a big program to reduce interest rates and the authorities have said that the income of banks as a result of this program will be reduced by about 1.5 uh trillion rmb now some of that slower interest rates some of its lower fees and other than other factors so we have a lot of administrative intervention uh as the banking system is used to uh support the economy so i think it's a trade-off it's good that they're supporting the economy but there are some negatives for the banking system my second comment on the negative side uh is that i think we are still seeing a significant misallocation of resources primarily through the banking system which is as qj pointed out the major source of expansion of credit um in the second quarter the expansion of the economy was driven overwhelmingly by an expansion of investment consumption was actually a negative on a year-over-year basis net exports contributed a little bit to growth but most of the growth indeed five percentage points of the 3.2 percentage points of growth is being was contributed by an increase in investment but what happened in the second quarter is the share of investment by private companies actually shrank while the share of investment by state companies increased then we know from at least historically and very recent data that the return on assets in industry for state companies is about a third of the return on assets of private companies so this was i think a relatively inefficient way of supporting growth with a huge increase in investment by state companies and a decline in the share of investment undertaken by private firms i think this is also shown in i'll come to that later um the third thing i would point out is that i think qj was very good on pointing out that the bigger spanx are probably better managed than the smaller ones and i think the weakness in the chinese banking system really is in what is referred to as the city commercial banks which is part of that small and medium tier of banks just below the shareholding banks some of these are listed many of them are not and most of the failures in recent years have been of these commercial banks and in many city commercial banks and many of them have been mismanaged well what do they call it uh neglect related party transactions where the bank lends a lot of money to the owners and the shareholders and uh things go down from there so i think the big macro picture is positive um recovery has gone it has been strong and i think will continue to be strong i think profitability will be strong uh which will be good for the banking system but i do worry that there's too much administrative uh intervention and banks are being required to do a lot of things uh that may impede their transition to a more fully commercial banking system and i think there's still a lot of resource misallocation going on if i may i'd like to close with um one question for qj and one comment my question uh is uh qj you alluded to the fact that the price to book ratio of most of these chinese banks is extremely low many of them are around 0.6.55 and merchants as you pointed out is a big exception and um so my question is why is it given what you showed in terms of return on assets and relatively low npls etc you would think that the valuation of these banks would be comparable to other leading global banks but it's way way way below so the obvious question is you know what is the market what does the market know that we can't tell from the available data the other thing i would point out uh is that i believe the slide that you showed on npls is the stock of npls on it on an annual basis and i think when one looks carefully at the banks uh that a very large share of npls are resolved internally maybe as much as three quarters of npls are resolved within banks loans are written off they're sold off to asset management companies etc etc so the creation of npls is much much greater than the line on the stock of npls i know you had to do stock to make it comparable to other countries but i think it may overstate um the uh how china is dealing with npls on the one hand it's very good that they're resolving a lot of these npls internally rather than letting them accumulate which was what they did years ago but i think it ties back in to the support of state companies many of which are losing money and don't seem to go out of business and seem to be supported by continuous flow of bank loans many of which uh get written off so that that's my ques thank you so much nick and um uh i think we we have a great scene set uh we unfortunately only have half an hour uh remaining if we want to finish up time and and and i have tons of questions and i'm sure our audience will have many questions as well so qj i'll ask you to answer nick's uh questions especially the first one um but very quickly so that we can move on to uh the other um questions around sure thanks a lot to nick's very sharp observations i should i should mention that over the years especially when i was in the us uh every time i interacted with nick in different settings i always learn from how he sees things very sharply so this question of the valuation of banks is interesting one i should point out that a lot of these large banks they have dual listings so they're listed in a shares and the hong kong shares so the valuation are both low and i think there may be there's a common reason but there may be slightly different reasons so i think one reason why these uh uh especially if you compare icbc with china merchants back so the one reason that the china merchant's bank's evaluation is higher than icbs and other similar size banks is precisely because their ownership structure is not very concentrated especially the state holding of the banking stock is not over 50 so i think 50 is a very important threshold as you can see if you add up all the ownership stakes for icbc it's well over uh 50 it's like 70 or higher so so that that's an important issue uh um and that's true in both the asia and the hong kong share when you do these uh comparisons and also when you do this uh sort of event study when when a bank sells off a a state-owned stake to a non-state-owned institution investor you will see that yeah you know there is there is this reaction positive reaction from the market know another thing interesting about qj sorry to interrupt you mean when the state sells a stake to a non-state uh holder right so yes they they you know because now what they can do is as a listed firm they can do this refinancing where they can just raise money by by uh by issuing new shares so they also can do these sort of transfers uh china merchants bank many years ago it's also a a very concentrated illness a very constant ownership but over the years they they basically diversify away um so so that that that's uh important reason the other reason obvious is that you know investors i i would say more so perhaps in hong kong as nick pointed out um uh not necessarily challenging that the data that the numbers are not right but they they they ask questions about how fast these npls prop up uh how how how quickly they can resolve this so so basically there's an it's always this issue of uncertainty i think that's one and then finally in the asia market which is interesting is that the domestic chinese stock market which are also uh studying the the the asia market the trading 80 of the trading is done by individual investors and if you ask individual investors they'll tell you that they'll never they'll never ever play the big bank stocks because it's too big they like to play on these smaller stocks so the lack of trading and turnover i i would say is another reason uh that these big bank stocks basically stay stay there they don't move much that's very interesting and it also shows up here it it challenges the view which as you know is very widespread in the u.s in particular which is you know there's no such thing as a private sector chinese banks the governance comes from the communist party anyways they have all these banks have communist party cells but what you're what you're telling us is that the ownership structure actually matters for the governments and into governance and the risk management so can you can you i mean without entering into any you know uh difficult stuff but can you give us a sense of um the way technically private sector majority-owned uh banks can basically not be driven by guidance from the communist party or the central government in terms of their lending so so you know um you know again as i said i i i'm an independent board member on a shareholding bank it's actually majority owned by a central soe the bank is listed the bank is listed in shanghai and also in hong kong and by the regulation of the hong kong exchange on the board there must be a a a local expert so uh on the board so i was regarded as a technical whatever expert and uh the our local expert from hong kong he he was a partner of one of the big four uh auditing accounting firms so man you do see that you know he he will he will ask a lot of questions about a lot of accounting work about npls um that that's uh so so listing in a dual listing in hong kong i think uh does uh does uh does improve what we call market based uh governance i mean i i would say these uh government appointed officials some a lot of them are are quite capable but if if most of the time you only deal with soes and officials i mean your sense of how the market works is not as strong as compared to if you keep if you keep listening to global institution investors if you're listening to investors who is very familiar with how the global commercial banks operate so so definitely there's an aspect of that i've got a question from martial magnus uh on in the q a actually it's two questions so i'll start with the first question uh which is a factual one can you give us a sense of the three so there are three tiers right you you said the the the big four or six uh medium range like china merchants and the smaller banks in terms of say total assets in the system can you give us a sense of the respective shares of those three tiers sure uh i don't maybe nick's notes are better you know so one of the important thing is that the banking sector it has been getting more diversified so i know that if you look at maybe 20 years ago the big four banks assets assets wise would be something like three quarters of the entire banking sector maybe even higher i think today or the last few years i would say the big four should be below 50 exact number i'm not sure um so so that so so so so so certainly there's growth of of uh smaller banks but uh two two sides to the coin as we'll be discussing if i were to evaluate the safety of the banks i would say the top two tiers are over all in good shape it is smaller regional banks uh that are that are that are riskier some of that are some of that are due to the fact that they're limited to these regions which are not growing very fast but also for sure as nick pointed out it's also related to poor management of the banking assets and banking activities and precisely related to that can you give us a sense so tier two and tier three together are about fifty percent of the total but what how how do they compare respectively as is again that's a very good question i would say the second tier maybe another uh maybe 20 half of the half of the 50 and that would be my guess that would be my guess so again if you look at the third tier the number of institutions much larger but they're just much smaller and and and if we look at the banking piece of the fintech world so as you showed us very quickly alibaba uh tencent and others have now have banking arms like my bank and we bank uh and these are growing pretty fast but how big are they compared with the three-tier structure are they still completely negligible or are they becoming significant that that's a wonderful question uh i would say for the segment of the lending uh uh uh the lending market they they have become quite important so as you know uh and financial or and technology their their lending customers are small and tiny tiny companies a lot of them are these online shops okay so interestingly a lot of these uh a lot of their you know the numbers i've seen from and technology is that they have this number something like more than 90 percent of the tiny firms when they first get credit from uh from alibaba from and they have never got any money credit from the banking sector so basically they're the tail that was not served very well by the traditional banking sector and and that's sort of the clientele base uh for for 10 cents banks and and uh and but but because this tail in china was a large economy the overall size of this market is very big that and along with individual consumer lending that's also a very large so individual loan is very tiny but if you look at the overall size it's not it's not small so in terms of making loans to these tiny companies they re now very important numbers are always hard here but but uh because if you look at the big four banks they also have they're very the they out of themselves and also out of uh out of advice from the regulars they also try to lend to sme smes they all have this uh a department called me lending uh but usually the sme even the smes in their lending pool are funds uh larger than uh these tiny firms who got money from ants and tencent by the way i think that's pretty comparable with what you see in europe and the u.s whereas the very largest banks are generally not the one said 10 to smes so here china is not unique the other question that marcel asked is on bank failures uh and you mentioned bauschen bank and uh there have been a few others so the question is can you really take a hard stance on these sailors you know bail into creditors close the branches without creating at least at the local level some you know uh disruptions that would go beyond what can be tolerated so so so there's both the operational disruptions that because these banks are dominant locally if you close their branches people locally cannot find credit so that's a debate we have in europe we call that critical sanctions there was a lot of controversy in italy and things like that and and then there is a bailing contagion because i understand that uh at least some senior creditors if i'm correct correct me if i'm not of bao shang bank uh where hair could it lost money on their um credit on the bank maybe not with the other cases and you could imagine contagion effects right that there are plenty of other banks in which senior creditors would suddenly uh hike up the price of their lending so that that would create uh market access difficulties so can you give us a bit more um color on these uh bank failure uh management issue sure so so um uh in the case of baozheng bang i i think the regulators have uh were very careful um in fact if i remember correctly uh the the pboc the central bank and the cbrc they've jointly held quite a few uh uh info sessions to the public uh laying out the plan uh where obviously they're gonna guarantee the depositors to to to the large extent they're going to guarantee the short-term funding and liabilities and in the in the case of baoxian bank it was under the custody of icbc so it was cbrc taking over but basically uh icbc i remember if i remember the ipc bc had icbc's inner mongolia branch or one of these branches uh or they were the holding or the custody of custodian bank if you will for that year uh so this is all done to make sure that there there there wasn't too much disruption of local credit markets and liabilities in the case of jinjo bank again i i because it's not a it's not a listed company so the questions you ask about different classes of predators how they're doing i i haven't read a whole lot about it um in that case though uh it seems that the government the local government the provincial government is also involved if you look at the there's like a working group of regulators and the local government the provincial government are also part of that working group trying to again trying to make sure that the the transition is yeah my understanding is that there was actually harsher discipline on bao shanks and jinjo and that may be linked to the sequence so to more creditors lost money on bao shang than with jinjo where i think all the creditors were bailed out does that make sense uh you know baoshan actually it's it's uh it's a regional bank but it's it's i i think it's much bigger than jinjo so uh but the failure you look at the assets of baoshan it is uh so so i i i you know i think you're probably right but but you know if you look at the absolute size it's it's not a tiny bank by no means uh so you know uh during the restructuring some classes of creditors losing money uh you know i wasn't surprised to see that yeah uh on this uh i would note that you know even if we talk about chinese banks that are small uh they're not small by international standards and when you compare that to debates in the eurozone there are many of those banks that we call small that would be significant institutions from eurozone perspectives which have more than the current of 30 billion euros in total assets so as i as we said at the beginning chinese banks tend to be very big um i have a hand raised by michael borda but he's a phone call in listener and i don't know how to give him the floor so um i apologize to him uh it's that uh i have i'm technologically uh challenged here because i i i don't have a burden to unmute him uh i have questions by two questions but one by robert donor and one by helger berger which i think are related so so i'll i'll read that um robert's question is can you say something about the accuracy of an estimated observations that banks are writing off a lot of npls during each year suggests that the recognition of npls non-performing loans is reasonably good and therefore the npl data is pretty good is that correct yes or no and then helgenberger says um how quickly do you see measures like forbearance and directed lending being pulled back quite how to trade us for short and medium term growth so basically both on npr recognition narrowly and on four variants more generally could you give us a bit more uh of the big picture in where you think the chinese authorities are into trade-off between you know too much forbearance too little forbearance so so i think the the quality of this recognizing data on mpls certainly improved quite a lot over the last 10 15 years again i remember when i first started working on china's banking sector this maybe was like 10 15 years ago i i met nick in one of these uh china conferences uh he might not remember but he actually shared some numbers on how he actually calculated uh these npls they actually read uh articles in chinese and he did some of these uh back at the envelope calculations nevertheless uh again as i was serving on the board this is my third year the last few years certainly this uh practice of uh revealing recognizing npos is uh it's good uh and again in particular because a lot of these banks are also listed in hong kong uh uh they they so sticking to international rules in terms of recognizing npos is good uh so i i think the overall data especially out of these listed banks is accurate uh there is this issue that nick uh uh raised that uh china has its internal system right these asset management companies are massive uh they were set up in the early 2000s to specifically deal with these big four banks massive uh scale of npls uh they they did their job back then and they they continue to do that so these uh asset management companies uh now through more or less of a market behavior where they can they can transfer uh there's transfer of assets from banks books to these uh amc's so that process is it's ongoing so overall i would say that the the mpo data is accurate especially just for clarification uh at the end of your presentation you mentioned amc's so that was a reference to the four big a that's different i'm sorry that's different so when i say the the answer in chinese they're different but then uh in english these words are you know whether it's asset or at wealth management maybe the last bullet point on my side should be wealth management so the so the asset management companies were set up uh the big four amc's were set up to to take over npls bad assets uh from the big four banks right and they are they've been continuing doing that of the entire banking sector so every bank can have uh these kind of transfers to these amc's the the last point on my slide is that that's one of the that's one of the changing landscape of the banking sector where uh these banks now have these uh most of them are now holy subsidiary wholly owned subsidiaries but these are effectively wealth management companies uh uh the big four banks have all set up their wealth management companies uh the the civic bank the bank i was i'm an independent board member they set up one uh it's headquartered in uh shanghai if you look at these uh wealth management companies at as of now most of their products are fixed income uh and and and then a lot of these uh products are related to some of these off-balance sheet activities products including inter-bank products uh so so these products activities are going to be gradually moved from the bank banks to these uh wells management companies so the idea is that better separation of these unbalance sheet and off balance sheet this is operational separation so they're kind of internal bad banks as opposed to external bad banks like the big fours that were created for actually it it will it will be it will be complete separation uh but they get they have a transition period right so they're gonna they're gonna at the end you know maybe maybe by the end of one year or a year and a half there's going to be complete separation in terms of assets in terms of regulation in terms of personnel uh separation nick uh uh back to you on on all this issue of npls and forbearance um how do you look at it well i agree with qj that um the classification standards and enforcement have been tightened up dramatically and but the banks now are you know going on a 90-day uh you know if there's an interest or a principal repayment that hasn't been made uh it begins to get classified after 90 days however they did introduce a few years ago a new category of loans that was called overdue but not impaired and uh i don't know how lo i've never seen any reporting on the magnitude of those loans and it was a judgment thing if the bank felt that well this company hadn't paid interest or made a principal payment on time for more than 90 days but they felt the basic underlying business uh was still quite viable they could avoid classifying it i don't know how widespread that is so that that's at least to me a question mark um but in general i do think the classification has been tightened up and the fact that a lot of these loans are getting npls are getting resolved fairly quickly keeping the stock of npls much more stable i think is a good sign the other thing we should say is there's pretty good data on the so-called coverage ratio that is what is what what do banks have in terms of reserves relative to the size of the npls and i think for the banking system as a whole that is that's a very relatively high ratio there are some banks that that are not the average coverage ratio i think at the end of june was like 178 percent although there were some banks that fell short of the 100 percent minimum uh requirement so there's some banks that are more on the edge in terms of their coverage of their npos i i think there was a question that i could i could also shed some light on the second that question was you know can forbearance be quickly ended or when it is ended how much disruption will it cause i did read uh from the chinese official sources this deals with lending to smaller companies that lenders as of the end of may which is not the most recent data i've seen lenders have postponed taking principal payments on 1.4 trillion in loans to about 800 000 small businesses and they have postponed interest payments on 65 billion they rolled over 2.4 trillion loans so this is what they're doing uh to keep smaller businesses viable those numbers uh qj would know better but those numbers strike me as being relatively small they may be large for some specific firms but in the macro sense uh they don't really add up to that much thank you nick and and actually on the point that uh nick was making on uh overdue uh loans that are not classified as npl there is uh a similar question from mark zegel uh that you know um he calls that zombie assets but he asked how do you assess the size of the zombie asset population in prc bank balance sheets beyond the uh classified npls um so uh any views on that well the standard methodology is to look at the net you know that the lowest classification of performing which is special mention so the the hypothesis is that ones that are special mentioned are likely to migrate to npls so uh i don't know how accurate that methodology is but it's used fairly widely among people that are trying to follow developments in the banking system so they have the five-tier classification system uh and a special mention is the the weakest of the non-impaired non-nbl loans 2j on this so i agree so there is this 5 5 level classification i've seen people uh you know have a have a broader definition of mpl or poor performing assets loans is that you have the mpl and then you just lump in level four and five level five or level four and five uh i don't i don't have aggregate data on top of my mind uh so if you add up level five uh to mpl the numbers the percentage will go up but it shouldn't be a it shouldn't it shouldn't be like the the mpl over gdp or loan uh stock ratio like tripling or quadrupling it won't be something like a large number like that on this issue of overdue and impair i i try to remember what's the exactly the chinese name of that but uh there is this category uh the the information for listed bank is transparent they need to they need to tell people that and then i remember in some of these board discussions and when we hear um executives as nick was saying there is some discretion on when they're going to expose that and when they're going to change that so clearly market participants care about that that information but it's important that the classification system uh and the this different category of these assets for listed bank is uh is available uh everything has been audited so you can you can do this type of uh calculation my sense is that uh the last two years nick this impaired and overdue the majority of that have been exposed they either become mpl or somehow they they they if they uh they improve they they so i i think as of now that category is not very significant okay um i mean there are so many questions uh there's a million questions we have in the answer to quote alexander hamilton um and uh we had a question from lyon lee on uh what kind of collateral is you the question by tim closing on t-lac compliance by big chinese banks a question from our pie colleague mark control senpai on the you know the traders on syntax regulation number of questions about the amc's and both internal amcs the strong imc's the remaining liabilities of the bank to the big imc's from petrumen uh lessons um from the you know uh what uh one night indeed calls china's success in establishing amc's to move npls of balance sheets um the a question from jean mayer about why set up these internal bad banks wealth management uh subsidiaries that you told us about qj and last but not least questions about the international impact of the chinese banking system which we haven't touched up at all there's a question from michelle perez on international ending by chinese banks and i would have questions also on foreign banks in china because we didn't even mention them we know they're tiny by comparison with chinese banks but that doesn't mean they're completely uh insignificant so um we have to stop there because we want to stop in time but this is an invitation to continue the conversation i want to very we'll have other sessions in this series of financial statements at the peterson institute will have other sessions about china because china has become so central uh just by way of its sheer size into the global financial system and especially is the last point i mentioned international implications but in the meantime i want to very warmly uh thank both uh chan jun and uh nick clardy for uh what i found an extremely soul-provoking conversation today uh raising uh and that's good more questions than it answered but also very enlightening for those of us who particularly for those of us who are not in china and often don't know nearly enough about this very complex system so thanks again and see you in two weeks time for the next session of financial statements we'll talk about europe and especially capital markets development in europe and the transformation of the european financial system or not transformation me thanks very much have a great day