Photographer: Tomohiro Ohsumi/Bloomberg

China's Banking System Won't Collapse, Former Bank Director Says

  • Mandarin-speaking Stent spent years working in Chinese banks
  • Acknowledges risks but says overall system remains robust

Foreigners predicting doom for China’s banks have got it all wrong, according to James Stent, who spent more than a decade serving on the boards of two Chinese lenders.

Instead of falling into a debt-fueled crisis, China’s banks are able to stave off trouble because of the willingness of the government to throw money at problems in order to ensure financial stability, Stent argues.

“As one Chinese banker who works for an American bank said to me: ‘In the West, money flees problems; in China, money flows to problems to solve them,’” said Stent, who wrote "China’s Banking Transformation: The Untold Story," a book of lessons gleaned from inside the nation’s banking system. His book is published by Oxford University Press.

Fluent in Mandarin, Stent spent more than 40 years working in commercial banking in Asia, including 13 years on the boards of China Minsheng Banking Corp. and China Everbright Bank Co., where he was on the audit committee.

While his view contrasts with those of doomsayers such as analyst Charlene Chu and hedge fund manager Kyle Bass, Stent doesn’t dismiss all the concerns around China’s lenders. He says there are worry spots that could cause disruptions, such as risks around lending to privately owned companies rather than state-owned ones. Yet any bank failures will be dealt with quietly and imperceptibly, such that the outside world won’t even know about them, he says.

S&P Global Ratings cut China’s sovereign credit rating for the first time since 1999 late Thursday, citing the risks from soaring debt. The rating was cut one level to A+ from AA-.

Interviewed in Hong Kong, here are excerpts of the conversation:

Question:

Why are you so confident about China’s banks?

Answer:

I saw from the inside this extraordinary change what was happening to banking, a transformation. It was really impressive and very exciting, the speed of the change and the hunger for Chinese to make the banking system work properly. But at the same time I was reading this unremittingly negative narrative about how Chinese banks are on the verge of collapse. Westerners don’t get China because they try to see it through a Western lens, and it doesn’t work because China’s whole system arises out of a totally different culture and set of beliefs. Thus far it has worked very well. How it will work in the future is an open question. The big question is: does China still have the political will power and does the Party have the flexibility to adapt to changing circumstances? I maintain it does.

Question:

How does that system differ from the West?

Answer:

If Xi Jinping were in charge of implementing Obamacare, he would not have done it nationwide, he would have done it in a remote county in Montana. If you understand how the banking sector works, you understand how anything works in China. It’s like a conductor conducting the orchestra -- let’s go a little faster now, a little slower. Constant modulation, which they can do. They have all these levers which they can control, unlike the U.S. The central bank in China is not independent. 

Question:

There’s a lot of skepticism when it comes to China’s banks. Some analysts say the system lacks transparency, covers up bad debt and is a crisis waiting to happen. How do you respond?

Answer:

These are real problems and we worry about them. They could bring the system down. If you don’t get it right, they might well bring the system down, hence the extraordinary caution with which the government approaches these things now. The increasing debt, the first question I think to ask, is: was it worth it to accomplish its objectives? I think the answer, in my opinion is, unequivocally yes.

Question:

What about the view that banks are essentially propping up zombie state-owned firms?

Answer:

State-owned enterprises are basically sovereign risk. Why do banks lend to them? Because it’s sovereign risk. Anybody working in banks knows that sovereign lending is considered the lowest risk in your own country. If a local government or a state-owned corporation goes belly up, it’s an intentional decision on the part of the government to have that happen. It rarely happens because the government has the money. The money is there. It’s a matter of how you move it around.

Question:

Are you expecting a significant decline in shadow-banking activity over the next year or so after the recent crackdown?

Answer:

Not over the next year. That’s not the time frame Chinese are thinking. I would say over the next five to 10 years. There are so many tools available to the government and they are gradually using them. Bit by bit, the problem almost imperceptibly will be brought under control. The question some people always ask me, what happens if one of the city banks goes belly up? My answer to that is it won’t happen. 

It may, in fact, go belly up but you’ll never notice. Very quietly it’ll be recapitalized, management will be replaced, and it may not make a Bloomberg News report. It’ll be done to avoid social disruption. Up there in Jilin and Heilongjiang they’ve got real economic and political problems. They don’t allow banks up there to go belly up. They know the problems up there. They are thinking they will get to it eventually but it’s going to take time. So, don’t look for quick solutions.


Question:

Are authorities doing enough to deal with the risks?

Answer:

All kinds of things are happening, but happening slowly. It’s not going to be suddenly putting on the brakes, because suddenly putting on the brakes would put the whole thing into a hole. They will not tolerate that. How to balance stability and reform? Both are moving ahead.

Question:

So what does worry you?

Answer:

I worry about private-sector lending. Chinese bankers have been lending to state-owned enterprises. It does not require any analysis because the management is provided by the organization department of the Party. It’s easy to lend to state-owned enterprises and it’s sovereign risk in your own country. 

The minute you start getting into private-sector lending, which they are doing a lot right now -- big companies, medium companies, small companies, micro companies -- then you have to use all the Western tools of cash flow analysis, market analysis, product analysis, the stability of the shareholders, the inter-related transactions of the shareholders, the character and capabilities of the managers, etc. -- none of which Chinese banks have experience in doing. I spent a week about three years ago going around. I went to Jinan, Changsha, Shenzhen, Beijing and Chengdu all in one week. I’d go into the branch, and I’d only tell them about midnight the night before which accounts I wanted to look at. I always looked at a few public sectors, a few private sectors, one or two bad-debt situations. So they had no time to prepare a sleek presentation. And I’d talk one-on-one with the account manager, and they would have a risk manager as well. They were wonderful people, the best and the brightest that China’s universities are producing, but they’ve never seen a downturn.  I had six months of credit training in Citibank. They got a few days. They have no gray hair. This is where Chinese banks will run into difficulty.

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