Fat Dragon has heard so much about banking reform in recent months – about capital adequacy ratios and Basel II (or was it III?), new managerial benchmarks and stringent standards for overseas investors and listings and so on – that he has decided to ignore it all for a while. For good reason, too, because the banking system cannot work properly for all the good policy intentions raining on the sector from on high unless the rest of the capital markets are working as well.
Banks provide up to 95% of the risk capital in China these days, a percentage which has increased substantially in recent years for the simple reason that the stock market not only remains dysfunctional but has become more so. The percentage is way out of whack with developed, and developing, countries. So bad are the local stock markets that China has effectively been forced to outsource its capital raisings to Hong Kong. The result is that the best Chinese companies list abroad and the worst list at home. This happens with the full imprimatur of a Chinese government that knows that the prize state enterprises cannot afford to proceed with sensitive listings at home.
The local market has all the hardware that goes with a modern market but none of the software, in the form of investors and institutions with the confidence to put their money into stocks and leave it there safe in the knowledge they can expect some return commensurate with the company's performance.
Same old promises
The new-year dawned with the same old promises about a slew of fresh laws designed to make the "protection of investors paramount." But in areas that needed genuine change, the same old pantomimes were still being played out.
In no area was this more starkly illustrated than in the brokerage sector.
Half of the country's 132-odd brokerages, by the government's own estimate, are under water, but the power of local shareholders is such that even some of the worst still remain resistant to takeover and new management.
The brokerages' debts have been largely generated by the fall in commission income as a result of sagging stock market turnover and the past practice of brokerages luring clients by offering them guaranteed returns.
Sure, the debt-heavy Southern Securities, once China's fifth biggest brokerage, was taken over last year, but instead of triggering the shakeout that everyone at the top supports, little else happened. Take Huaxia Securities, which is under the Beijing city government. Its two top executives were removed in May 2004, portending a makeover.
Nine months later, nothing has happened. Well, a lot has happened. First Cinda, the bad debt asset management company, was going to take it over and inject US$600m into it to pay out small investors who had lost money. At writing, Citic Securities was billed as the latest saviour.
We shall see, but Fat Dragon thinks that unless the Huaxia workout is followed by about 60 other similar exercises, the capital markets are going to have another dismal year.