China moved its securities regulator Shang Fulin to head the nation’s banking watchdog, overseeing a 106 trillion-yuan ($17 trillion) industry that includes four of the world’s 10 largest lenders by market value.
Shang’s appointment as chairman of the China Banking Regulatory Commission to replace Liu Mingkang is part of the biggest reshuffle of financial officials in a decade. China Construction Bank Corp. Chairman Guo Shuqing will become head of the securities watchdog and Agricultural Bank of China Ltd. Chairman Xiang Junbo will take the top job at the insurance regulator, the government said on Oct. 29.
Shang, 59, takes over at the watchdog for an industry whose assets have more than tripled over the past eight years as China’s economy became the world’s second largest. After almost nine years as the securities regulator, Shang will be in charge of curbing a potential surge in bad loans following a record $2.7 trillion two-year credit boom that propelled China’s expansion after the global financial crisis.
“The biggest challenge facing Liu’s successor is the ability to prudently regulate the banks in light of the development of China’s capital markets,” Mike Werner, a senior analyst at Sanford C. Bernstein & Co. in Hong Kong, said in an e-mail. “With a growing number of products, such as wealth management products, and number of financial entities, such as trust firms, balancing the profitable development of the banking sector with the regulation will be difficult.”
Guo, 55, who resigned from Construction Bank on Oct. 28, will replace Shang at the China Securities Regulatory Commission. Xiang, 54, who quit Agricultural Bank the same day, will move to the China Insurance Regulatory Commission, replacing Wu Dingfu. The government’s announcement didn’t say whether Liu and Wu, both 65, are retiring.
“Guo’s appointment will be good for China’s capital markets as he respects rules and the rights of other people,” Chen Zhiwu, a finance professor at the New Haven, Connecticut-based Yale School of Management, said in an interview in New York.
The websites of the three regulators have been updated to reflect the changes.
Shang, who turns 60 in two weeks, was born in Jinan, the provincial capital of eastern Shandong province. He holds a doctorate degree in finance from France.
He was appointed head of the CSRC in December 2002, and served as president of Agricultural Bank starting in February 2000. He was also previously assistant and deputy governor of the People’s Bank of China, according to a profile on the CBRC website.
“The next two years is going to see a huge game of musical chairs,” Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing, said before the announcement. “We’re expecting that over the course of the next two years there will be a major reshuffling and basically a new generation of leaders taking over for the next 10 years.”
Shang will regulate lenders including Industrial & Commercial Bank of China Ltd. and Construction Bank, the world’s two largest lenders by market value. Shares of China’s biggest lenders have slumped this year on concern that an economic slowdown and drop in property prices may trigger defaults by local governments, small companies and developers.
Shang is unlikely to make big changes overnight, Chen said.
“He keeps a low profile at work,” Chen said. “He’s cautious in making decisions and takes different opinions into consideration.”
The outlook on China’s AA- long-term local-currency rating was lowered to “negative” from “stable” by Fitch Ratings on April 12 because of the risk the government will have to rescue its banks.
Local governments, barred from borrowing directly, have set up 6,576 financing vehicles through the end of 2010 to fund projects such as roads and airports, according to a report from the National Audit Office on June 27. They had 10.7 trillion yuan in outstanding liabilities at the end of last year, of which 8.5 trillion yuan was from bank loans, it said.
As much as 30 percent of outstanding debts held by local authorities’ financing vehicles may sour, and is likely to be the biggest source of nonperforming assets for the banks, according to Standard & Poor’s.
Liu was appointed as the first head of the watchdog after serving as chairman and president of Bank of China, where he cut staff and branches, introduced lending controls and took the bank’s Hong Kong unit public.
During his time at the CBRC, the nation’s four largest lenders raised a total $74 billion in first-time sales on the Shanghai and Hong Kong stock exchanges from 2005 to 2010. Agricultural Bank’s $22.1 billion share sale last year was the world’s largest initial public offering at that time. He also presided over capital injections and purchases of bad assets that brought the total value of bailouts over a decade-long overhaul of the state-run banks to $650 billion.
“The regulator’s biggest achievement has been the listing of the Chinese banks in the H- and A-share markets,” Werner wrote. “More importantly than the listings has been improvement in the banks’ corporate governance, risk management, disclosures, transparency and internal control measures that were required before their listings.”
The CBRC has this year drafted higher capital requirements, tightened oversight on banks’ asset management businesses and ordered faster collections from local governments on loans to curb risks. Lenders were also told to slow loan growth and pace lending more evenly throughout the year after the credit expansion in the past two years helped fuel inflation and an asset bubble.
Chinese banks’ risk level and ability to withstand shocks reached the “best in history” last year, the regulator said in its 2010 annual report released on March 29. Commercial lenders’ overall non-performing loan ratio fell 5 percentage points from the end of 2007 to 1.1 percent at Dec. 31, 2010, while their capital adequacy ratio rose to 12 percent last year.
The banks’ combined profits surged more than 14 times to 899.1 billion yuan last year from 61.6 billion yuan in 2002, enabling commercial lenders to boost their bad-loan provisions to almost 250 percent of their outstanding soured debts as of June 30, according to CBRC data.
Wu, the outgoing head of the CIRC, was appointed to the position in November 2002 after stints at the National Audit Office and the Communist Party’s Central Discipline Inspection Committee. The nation’s insurance market more than quadrupled during his tenure.
His successor, Xiang, is a former state auditor and deputy central bank governor. He joined Agricultural Bank in 2007 to lead its restructuring. He has a master’s degree in economics from Tianjin-based Nankai University and a Ph.D. from Beijing University.
New Provincial Chiefs
Guo was appointed chairman of Construction Bank in March 2005 after heading the country’s foreign-exchange regulator. He is also a former deputy central bank governor and was vice governor of Guizhou province from 1998 to 2001. A graduate of Nankai University, Guo is “outspoken, insightful and an advocate of systemic reform,” the Xinhua News Agency said.
China also appointed new Communist Party chiefs for the provinces of Henan, Jiangxi, and Anhui, Xinhua said on Oct. 30.
Lu Zhangong was named secretary of the Henan Provincial Committee of the Communist Party of China, Xinhua reported. Su Rong was named head of the Jiangxi committee and Zhang Baoshun was appointed head of the Anhui committee, according to Xinhua.