Chinese bank shares have been falling this week on reports that the Chinese banking regulators are going to step up the capital reserve ratio requirements to 15%. Yesterday, the share price of Agricultural Bank has slipped beneath its IPO level in Shanghai, although managed to stay just ahead of its inital price in Hong Kong.
Yesterday I was at the FT conference on Chinese finance and saw Wang Huaqing, the vice chairman of the banking regulator, deliver a pretty humdrum speech on Chinese banking. He gave no sign at all, however, that the authorities are looking at bumping up the capital ratio requirements.
He did mention that all Chinese banks have already complied with the new Basel III rules (which look extremely low when you think Chinese banks have an average of 11.5% of their capital on reserve and are still turning in enormous profits). He seemed relatively comfortable with that level and said it was, in fact, the Chinese government’s model to force banks to become more competitive in terms of raising the interest they paid out on deposits to a level that was more in line with the international markets.
The current Chinese banking model allows the big state-owned banks to profit handsomely by being able to attract savings from Chinese people, pay very little interest on those accounts, and then lend that money out again to big industry at a healthy margin. "But the present model cannot be continued," said Mr Wang. "Only 9pc of the capital of the top 1000 banks in the world is Chinese, but they make 25% of the profit," he noted.
That sounds like he wants Chinese banks to bring their margins down and perhaps advance slightly riskier loans to the private sector. Which is the opposite of the current consensus opinion.