By Wang Gang

Research Report Vol.19 No.3, 2017

“Excessive financialization”, which means the excessive development of the financial industry, represented by the banking industry, deviating from the actual demand of the real economy, has caught extensive attention. Regarding this, Premier Li Keqiang said at the government work report that the financial industry should focus on its principal business, be more down-to-earth and more capable of serving the real economy, and refrain from deviating from the real economy to virtual economy. At the national banking industry regulatory meeting held in the beginning of this year, requests were made to “deepen the reform and opening up of the banking industry with the aim of focusing on its fundamental role and principal business”. Since 2016, the Research Institute of Finance of the Development Research Center of the State Council has conducted field surveys of the transformation and development of various types of banking financial institutions. This paper holds that we should adjust the direction of transformation in light of the demand of the real economy, work hard on key links, and adopt multiple measures in parallel to push the banking industry back to its fundamental role.

I. Prominent Problems in the Transformation and Development of Banking Industry

1.Capital moving from real economy to virtual economy and excessive financialization result in serious imbalance between finance and real economy

The movement of capital from the real economy to virtual economy is a prominent problem in the current economic operation. The main manifestations are as follows. (1) Individual housing loan has increased dramatically since last year. It was increased by RMB4.96 trillion in 2016, an increase of 88.6% from 2015 and accounting for 39.2% of the incremental loan in the same period, up 16.5 percentage points from 2015. Among that, housing loan at Ping An Bank and CITIC Bank increased by 85% and 63% respectively, a four-year and five-year new high for each bank. The housing loan balance at Bank of Jiangsu and China Merchants Bank took up over 50% and nearly 48% of their total loan respectively. (2) Capital keeps circulating in the financial system but doesn’t flow to the real economy. For instance, the scale and proportion of interbank wealth management has grown rapidly since 2015. At the end of June 2016, interbank wealth management reached the scale of RMB4.02 trillion, 8.2 times the amount at the end of 2014 and accounting for 18.06% of the total wealth management in the same period, 14.69 percentage points higher from the end of 2014 (Figure 1). (3) Enterprises use the capital from the banking system to invest in finance, so the capital doesn’t flow into the real economy.

Excessive financialization is reflected in the following ways. (1) The financial industry is too bloated. At the end of 2016, banking financial institutions in China had RMB226.3 trillion assets, beating the EU to be the largest in the worldand 3.63 times as much as at the end of 2008, while the GDP in 2016 was only 2.33 times as much as in 2008. (2) The proportion of financial value added rises rapidly. In 2016, financial value added accounted for 8.3% of GDP, the highest among main economies in the world, leaving developed countries like Britain and the U.S. behind (Figure 2). (3) The financial industry and the real economy are in serious profit imbalance. In 2015, the net profits of financial companies listed in the A-Share market made up nearly 60% of the net profits of all listed companies, and the ROE of all listed banks was 15.9%, about twice as high as non-banking listed companies^①.

Another phenomenon concurrent with the movement of capital from real economy to virtual economy and excessive financialization is that some reasonable financing needs of the real economy are not well satisfied, and a typical example is that high-tech startups, small and micro enterprises, and enterprises engaged in services for “agriculture, farmers and rural areas” are still troubled by “difficult and expensive financing” to varying degrees.

2. Transformation is homogeneous

(1) Development strategy is homogeneous. The development direction of different banks is very much similar, and Internet finance, transaction banking, retail banking, light banking and wealth management are the key areas that all banks compete in. (2) Market positioning is homogenous. As financial disintermediation becomes more common, banks are losing big clients in large quantities and deposit growth rate keeps falling. Many banks are making greater efforts to tap medium, small and micro enterprises, making this field highly competitive. (3) Business structure is homogeneous. With the deepening of interest rate liberalization, margin interests take an ever smaller proportion in operating income and income from intermediate businesses increase every year. But most banks have less than 30% non-interest income, falling behind the almost 50% in international banks. (4) Products and services are homogeneous. All banks are exploring a distinctive development path, but none of them is willing to give up any specific segment, which leads to a high level of homogeneity in China’s banking products and services.

3. Assets-liabilities structure sees substantial changes, and motive for regulatory arbitrage and potential risks deserve close attention

(1) Regarding asset structure, banks’ non-credit assets are growing at a highspeed. At the end of 2016Q1, banking financial institutions had the investment balance of RMB52.2 trillion, up nearly 50% year-on-year and 32.6 percentage points higher than the asset growth rate in the same period. For certain banks, their investment made up more than 50% of total assets, among which non-bond investment, mainly comprised of non-standardized creditor’s rights, took up 41.5%, a year-on-year increase of over 80%. (2) Regarding debt structure, since the reform of interest rate liberalization is accelerated, many banks have shifted from the mode of “determining loan based on deposit” to proactive debt mode. As a result, deposits and interbank debt are in a “see-saw” relation and debt becomes less stable. The non-standardized creditor’s rights business develops rapidly, and the term mismatch between assets and liabilities is more serious. From the end of 2006 to the end of 2015, the proportion of deposits in commercial banks’ liabilities fell from 87.2% to 75.4%, but the proportion of interbank debt rose from 15.3% to 17.0%. (3) New types of off-balance sheet (OBS) activities such as asset custody, finance management for clients and entrusted loan develop with great momentum, and certain banks’ OBS business is larger than their balance-sheet business.

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