ifc's role in china's financial sector transformation
TRANSCRIPT
IFC’s Role in China’s Financial Sector Transformation
November 2012
"#$%&!!
Contents
'()*+,-./0.1.*23!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!5!6732!+8!'99:.;7<27+*3!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!&!=>.(?27;.!@?11<:A!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!B!CD<E2.:!$!F*2:+/?(27+*!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444$%!
'4!G9H.(27;.I!3(+E.!<*/!1.2D+/+-+0A!4444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!$$!
J4!@2:?(2?:.!+8!2D.!:.E+:2!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!$5!
!4444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444$&!
!E<32I!E:.3.*2I!<*/!:.8+:1!.88+:23!44444444444444444444444444444444444444444!$&!
!4444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!$K!
CD<E2.:!L!C:.<27*0!<*!=*<9-7*0!=*;7:+*1.*2!8+:!M7*<*(7<-!@.:;7(.3!444444444444444444444444444444444444444444444444444444444444"%!
'4!@?EE+:27*0!@.(?:./!N:<*3<(27+*3!O.8+:1!444444444444444444444444444444444444444444444444444444444444444444444444444444444444!"%!
J4!@?EE+:27*0!2D.!C:./72!O.E+:27*[email protected]!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444!"B!
C4!J?7-/7*0!C<E<(72A!8+:!M7*<*(7<-!<*/!P+*QM7*<*(7<-!F*3272?27+*3!4444444444444444444444444444444444444444444444444444!"R!
S4!@?EE+:27*0!T+-7(A!S.;.-+E1.*2!+8!T:7+:72A!F33?.3!44444444444444444444444444444444444444444444444444444444444444444444444!L"!
=4! !4444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!LL!
M4!@?11<:A!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!LK!
CD<E2.:!5!@?EE+:27*0!2D.!S.;.-+E1.*2!+8!C+11.:(7<-!J<*)3!44444444444444444444444444444444444444444444444444444444444444444444LU!
!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!LU!
Q@2+()!<*/!O?:<-!C+11.:(7<-!J<*)3!444444444444444444444444444444444444444444444444444!5$!
C4!G?2(+1.3!<*/!':.<3!F/.*2787./!8+:!F1E:+;.1.*2!444444444444444444444444444444444444444444444444444444444444444444444444!&&!
CD<E2.:!&!@?EE+:27*0!V7(:+87*<*(.!<*/!P+*QJ<*)!M7*<*(7<-!F*3272?27+*3!444444444444444444444444444444444444444444444444444B%!
'4!V7(:+87*<*(.!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!B%!
W$X! !4444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!B%!
W"X!FMC!F*2.:;.*27+*3!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!B"!
WLX!C<3.!32?/AY!CMT'!V7(:+87*<*(.!C+4!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!B&!
W5X!6++)7*0!<D.</!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!BK!
J4!P+*QJ<*)!M7*<*(7<-!F*3272?27+*3!4444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!BR!
!44444444444444444444444444444444444444444444444444444444444444K5!
'4!O.*17*97Q/.*+17*<2./!9+*/3!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!K5!
J4!O.*17*97!@,<E!M<(7-72A!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!U%!
C4!@?11<:A!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!U$!
CD<E2.:!K!C+*(-?37+*!<*/!6.33+*3!6.<:*./44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444U"!
L#$%&!!
'**.>.3!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444R$!
'**.>!$Y!N.:13!+8!O.8.:.*(.!444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!R"!
'**.>!"Y!S.;.-+E1.*2!O.3?-23!O<27*0!+8!FMC!GE.:<27+*3!44444444444444444444444444444444444444444444444444444444444444444!R&!
<4!SGN@!WS.;.-+E1.*2!G?2(+1.!
CD7*<!M7*<*(7<-!V<:).23!F*;.321.*2!GE.:<27+*3!444444444444444444444444444444444444444444444444444444444444444444444444444444!R&!
94!SGN@!S.;.-+E1.*2!G?2(+1.!O<27*0!+8!CD7*<!T<*/<!J+*/!T:+H.(23!4444444444444444444444444444444444444444444!R&!
(4!S.;.-+E1.*2!=88.(27;.*.33!O<27*0!+8!'((.33Q2+QM7*<*(.!'/;73+:A!@.:;7(.3!T:+H.(23!444444444444444444!RB!
'**.>!LY!Z.A!T-<A.:3!@?EE+:27*0!M7*<*(7<-!@.(2+:!O.8+:1!7*!CD7*<!4444444444444444444444444444444444444444444444444!RK!
'**.>!5<Y!6732!+8!F*2.:;7.,..3!4444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!RU!
'**.>!59Y!F*2.:;7.,
5#$%&!!
Acknowledgements
This report was prepared by CHEN Yanni and LIU Chaoying, under the overall guidance of Nigel Twose, director, IFC Development Impact Department. We would like to thank this review, in particular IFC Asia Pacific Region Vice President Karin Finkelston and China and Mongolia Country Manager Hyun-Chan Cho. This review would not have been possible without the collaboration and help of IFC China Investment and Advisory Services teams based in Beijing and Chengdu: YAN Meng, XU Weichuan, XU Yuan, LI Zaiheng, ZHANG Rong, YUAN Wei, LAI Jinchang, HUANG Lin, Will Beloe, ZHOU Ying, Shannon Atkeson, CHEN Qing, and GU Yanwen. We are very thankful for the time and help of the teams in sharing their insights, memories, and stories as well as providing relevant materials and facilitation visits with clients. We thank all other IFC colleagues who kindly accepted our requests for interviews and/or gave us their comments on drafts - Matt Gamser, Bill Haworth, John Law, Tania Lozansky, Sérgio Pimenta, REN Li, Peer Stein, Jerry Wu, YU Jing, ZHANG Jun, ZHU Wenqin, Philippe Ahoua, John Borthwick, Keshav Gaur, Monish Mahurkar and, in particular, IFC Vice President for Treasury and IT HUA Jingdong. We also thank the support, guidance, and feedback throughout the study from Roland Michelitsch, Claudio Volonte, and Alexis Diamond of the Development Impact Department. Special thanks go to Mike Ipson, former IFC country manager for China, for his strategic advice, detailed comments, and valuable suggestions to the team. We thank the team of LeaseOne Consulting, Beijing, for their assistance in conducting interviews, collecting, and compiling numerous materials, and drafting the background papers. We also thank YANG Ziming and XIANG Chunhua for their research assistance. Last but not least, we extend our great appreciation to the IFC clients who graciously accepted our visits and interviews.
&#$%&!!
L ist of Abbreviations
ADB Asian Development Bank A2F Access to finance CAGR Compound annual growth rate CBA China Banking Association CBRC China Banking Regulatory Commission CCB City Commercial Bank CG Corporate governance CHUEE China Utility-Based Energy Efficiency Finance Program CISB Credit Information System Bureau CRC Credit Registry Center EHS Environment, health, and safety FI Financial institutions GOC Government of China IAS International Accounting Standards IFC International Finance Corp. MCC Micro credit company MF Microfinance MEP Ministry of Environmental Protection MOF Ministry of Finance MSMEs Micro, small and medium-sized enterprises NBFIs No-banking financial institutions NDTL Non-deposit-taking lending NDRC National Development and Reform Commission NPC PBOC OECD Organization for Economic Co-operation and Development PEP Private enterprise partnership PSD Private sector development RCC Rural credit cooperative RMB Renminbi RMS Rural, micro, and small sector RSF Risk-sharing facility SAR Special Administrative Region SEZ Special Economic Zone SME Small- and medium-sized enterprises SOE State-owned enterprise TA Technical assistance WBG World Bank Group WTO World Trade Organization !! !
B#$%&!!
Executive Summary
Over the past thirty transformation, evolving from a mono-bank system into a multi-player sector with some of
the member of the World Bank Group that promotes private sector development in developing countries, has since 1995 provided a range of services in China, including advisory, equity investments, loans, and risk management products, to support the development of the financial sector. Empirical research has demonstrated a strong positive link between the functioning of the financial system and long-term economic growth. It also has shown that financial development disproportionately boosts incomes of the poor and reduces income inequality, and therefore has an impact on poverty reduction. The primary objective of this study is to systematically assess and summarize the development results of key IFC activities in supporting financial sector reforms in China over the past twenty years. Unlike an impact evaluation, a review is not an attempt to measure the attribution of IFC s intervention. Rather, it is intended to consolidate, validate, and elaborate on a wide range of evidence recorded in project documents by hearing from clients and partners future work in China and other countries. The scope of the review focuses on three IFC operations areas: Investment Operations, Advisory Services, and local-currency financing, and covers four broad topics:
policy, regulation, and financial infrastructure, including secured transactions, the credit reporting system, and green credit policy;
commercial banks; microfinance and non-bank financial institutions; and capital market development, focusing on local-currency financing.
results
Since1995, for financial sector reform in China has advanced through three phases: exploration, expansion, and frontier focus. The operations in each phase were designed and implemented in response to the changing challenges faced by the sector and were guided by a dynamic IFC strategy that evolved as the Chinese economy evolved. By adopting this market and to regulatory objectives continued.
I F C helped
financial services:
Advisory Services projects related to China (PBOC) to draft the relevant articles of the 2007 Property Law and
K#$%&!!
contributed to the establishment of a single, centralized accounts receivables registry the Credit Registry Center (CRC). IFC also helped PBOC issue ministry-level regulation shaping the Consumer Credit Information Database in 2005 and then used the regulation to help establish a nationwide consumer credit database the next year. IFC also has worked closely with a number of governmental and non-governmental organizations to provide sectorwide capacity-building activities for financial and non-financial institutions in China, with the objective of addressing their weaknesses, while improving their efficiency and competitiveness. Other policy and regulatory areas that IFC has supported include housing finance and a green
e Standards and the Equator Principles are being used as
are now well-established within key Chinese banks. The IFC-China Green Credit partnership model has been expanded to other countries in the EAP region including Vietnam, the Philippines, Malaysia, and Indonesia.
Between 1999 and 2009, IFC made equity investments in eight Chinese commercial banks totaling $471.7 million, starting with Bank of Shanghai in 1999 at a time when the Chinese banking sector was plagued with a heavy load of non-performing loans and was considered highly risky. Through its investments and advisory services, IFC helped introduce international best practices in banking management to these banks, established and strengthened risk management capabilities, improved corporate governance, and sharpened the focus on serving small and medium-sized enterprises (SMEs). IFC also pioneered the China Utility-Based Energy Efficiency Finance Program (CHUEE) with Chinese commercial banks, which combines a risk-sharing facility with an advisory program to directly stimulate energy efficiency financing. The types of commercial banks that IFC invested in together account for only a small share of
assets in 1999 and remaining below 25 percent in 2010. However, by building the capacity and enhancing the competitiveness and sustainability of best-IFC contributed significantly to the overall development of the banking sector. Client banks that the research team visited said that strengthened competitiveness of the smaller-bank segment has helped increase competition for the entire banking sector, which has improved services to the underserved sectors of the economy such as SMEs.
I F C supported the development of the microfinance industry:
Following its model for
advisory and investment activities and intervening at the policy, sector, and institutional levels simultaneously. At the policy level, IFC helped the government formulate the
U#$%&!!
regulatory framework. At the sector level, IFC worked with several market players to educate the market and disseminate best practices on microfinance operations. At the institutional level, IFC made equity investments in and provided advisory services to eleven Chinese institutions offering microfinance. Two more such investments are in the pipeline. IFC helped the firms develop strategy, conduct market studies, formulate business plans, develop information management systems, train staff, and introduce international operational knowledge on microfinance into China.
I F C supported the development
From 2005 to 2011, IFC carried out three RMB bond issues in Chinese mainland and Hong Kong SAR markets, with total proceeds of RMB2.15 billion. In 2012, IFC became the first multilateral institution authorized to conduct transactions with Chinese banks in the domestic currency swap market. With these local-currency products, IFC has been able to support high-quality domestic companies that needed long-term local-currency financing. Most of these companies were not able to access the bond market directly for financing, and short-term funding from banks was inappropriate for their capital-intensive operations such as business expansion or research and development. Conclusion and lessons learned China has made impressive achievements in financial sector reform over the past twenty years. The main conclusion of this review is that while the Chinese government has led the primary effort behind the achievements, IFC has made significant positive contributions as an active investor, technical advisor, facilitator, and knowledge broker. A key goal for the review is collecting and synthesizing from IFC projects documents and management and staff, government, clients, and beneficiaries many of the valuable lessons
- offers for future operations, in China and elsewhere. Coordinating reform efforts with the Chinese government, and working with competent and committed clients from both government and banks success in this country. Intervening at all levels at once: regulatory and policy, sectoral, and institutional proved important, along with other success factors such as:
R ; Having a dynamic strategy that addressed major issues as they emerged; Maintaining a close working relationship with the government as a trusted partner; Taking calculated risks when warranted; Combining a strong local team and top-notch international expertise; and Co-investing and collaborating closely with other strategic investors.
All of these approaches enabled IFC to have a significant impact. In addition, IFC multicultural environment and organizational matrix worked to its advantage. Finally, remaining true to its values and mission also was critical.
R#$%&!!
The review also identified several issues that hinderefollowing lessons:
Being supply-driven is a recipe for failure; Better allocation of resources and a better funding instrument for advisory services
could have improved results and efficiency, in some cases. Timing and mode of entry in less-developed areas needs to be carefully planned out;
and Taking small stakes can result in limited influence for IFC.
Clients interviewed by the research team expected IFC to be faster, more efficient, and more flexible, to offer more customization, and to maintain greater continuity in relationship management. Looking ahead, China faces tremendous development challenges that create opportunities for IFC to continue its partnership and support, especially with respect to climate change and other environmental greater financial access for micro, small and medium-sized enterprises (MSMEs), particularly in the rural and microfinance sectors, and for promoting South-South cooperation. !
$%#$%&!!
Chapter 1 Introduction
driving forces for this growth is private sector development (PSD) in the country. It is widely acknowledged that the private sector critical for development. According to data released by the State Administration of Industry and Commerce, China's registered private enterprises soared from 4.3 million in the early period of the 11th Five-Year Plan (2006-2010) to more than 8.4 million at the end of 2010, with an average annual growth rate of 14.3 percent and an aggregate growth of a staggering 95 percent during those five years. Private companies now account for 74 percent of China's enterprises. The most important impact of this growth comes in job creation. The total number of people employed in China's private sector exceeded 180 million by the end of 2010, 60 million more than at the end of 2005.1 This is particularly significant as China attempts to make a transition from reliance on fixed-asset investment and exports to domestic consumption to drive its economic growth. Consumption requires rising discretionary income, which in turn results from new sources of employment. Beyond offering new jobs, private enterprises supply important goods and services and generate tax revenues at the local level. Overall, private sector enterprises have
A critical constraint on the growth of private sector enterprises, and in particular MSMEs, has been the difficulty they have faced in getting financing from banks. Inexperience at assessing
risk and smaller transactions has discouraged banks from making loans to the private sector. The protection from criticism that comes with lending to SOEs, a perceived lower level of risk, and the ease of processing large transactions have kept the disproportionate share of bank loans flowing to SOEs. IFC, a member of the World Bank Group, promotes private sector development in developing countries, including China. Since 1995, IFC has provided a range of services, including advisory, equity investments, loans, and risk management products, to support the development of the financial sector in China. A fair amount of empirical analysis, including firm-level, industry-level and individual country-level studies, as well as broad cross-country comparisons demonstrate a strong positive link between a functioning financial system and long-term economic growth. 2 !! Research also has shown that financial development disproportionately boosts incomes of the poorest quintile, reduces income inequality, and is associated with reduction in poverty.3
sound financial sector, and represents a drop in the bucket in terms of dollar amounts spent or invested. However, in this transformation IFC helped move things in the right direction.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1 Xiao, February 12, 2011. 2 Levine, 1997. 3 Beck, Demirguc-Kunt and Levine, 2007.!
$$#$%&!!
Consistent with the World Bank/IFC Country Assistance Strategy, strategy for its financial markets operations in China is to support sustainable development and a sound
- . These emphasize risk management and sound corporate governance, and introduce market discipline according to international standards, while encouraging innovative sustainable finance products. Ultimately, these efforts help expand access to finance for MSMEs.
A . Objective, scope and methodology
The full Term of Reference of this review is attached as Annex 1. The review has two primary objectives. First, it systematically summarizes the development results of key activities implemented by IFC over the past twenty years in supporting financial sector reform in China. As China is a huge country, any ripple effect as a result of could have major consequences for global poverty reduction. Second, the review aims to learn useful lessons fr China is one of the top countries in which IFC has made significant investments and provided comprehensive advisory services, experiences and lessons learned from the review ccould lead to replication in other countries. The central question of the review is: To what extent, and in what ways, has I F C
contributed to financial sector reform in China? In seeking answers to this question, the review also addressees several related topics, namely strategic relevance, additionality, sustainability, and lessons learned. The scope of the review spans three IFC operational areas: Investment Operations, Advisory Services and Capital Markets, and covers four broad topics:
Policy, regulation and financial infrastructure, including secured transactions, credit reporting systems, and a green credit policy;
Commercial banks; Microfinance and non-bank financial institutions; and Capital markets development, focusing on local-currency financing.
Unlike impact evaluation, this review is not an attempt to measure attribution intervention; rather, it is intended to consolidate, validate, and elaborate on numerous pieces of evidence and ratings (See Annex 2) recorded in project documents through the testimony
partners. They have shared directly their thoughts about the assistance and benefits they have received from IFC. The review also aims to gather new information, materials, and stories directly from the beneficiaries to enrich existing evidence and
As acknowledged earlier, IFC has not been the only development institution providing financing and technical advice to the Chinese government and other client institutions there. Many other players, notably the World Bank and Asian Development Bank (ADB), have been actively supporting the Chinese government to implement reform in the financial sector (See
$"#$%&!!
Annex 3 for their focus areas). Their efforts may have contributed positively to the reform process. But this review will not try to isolate and compare the contributions of IFC with others . Rather it mainly focuses on the role that IFC has played and the results that may be directly contributable to IFC interventions. This review was conducted by a research team from the Development Impact Department, with the assistance of an independent Chinese consulting firm that helped conduct interviews, desk reviews, and prepare a draft of background papers. This approach ensures a level of independence for the review, while at the same time maximizing the opportunity to gain access to Chinese stakeholders. The review comprises four main activities: Desk review The desk review includes IFC project/program documents (project supervision and project completion reports), board papers, presentations and reviews, as well as evaluation reports relating to background, context, and results of Investment Operations and Advisory Services projects. It also reviews other documents available in the public domain, such as government
Interviews A series of unstructured interviews with more than 40 key stakeholders were conducted, primarily face-to-face in Beijing, Shanghai, Hangzhou, Nanjing, Fuzhou, and Chengdu. Interview subjects included IFC staff, IFC clients (sponsors and investors), partners, government officials, policy researchers, and beneficiaries. Telephone interviews with Regional and Headquarters-based IFC staff also were conducted. All interviews were guided by a set of open-ended questions that is attached as Annex 4, together with the list of key stakeholders interviewed. Site visits The research team conducted site visits and in-depth interviews with a number of beneficiaries of IFC clients. These site visits allowed us to hear about and to witness the real changes brought about
$L#$%&!!
Table 1-1: L ist of Beneficiar ies Interviewed
Intervention Beneficiary IS, SME Nanjing Dongdian Inspection & Measuring Equipment Co. Ltd
AS+IS MF China Foundation for Poverty Alleviation Microfinance Management Co. Ltd CHUEE Fujian Sanxinlong Co. Ltd. Panda Bond Aier Eye Hospital Dim Sum Bond Shenwu Environment & Energy Technology Corp.
Analysis and synthesis The review takes a holistic and systematic approach to the analysis and synthesis of information and data collected from various sources. As illustrated in Figure 1-1, it analyzes
al, institutional, and individual perspectives.
At the sector level, s have contributed to creating an enabling environment in terms of strengthening financial sector infrastructure; improving the policy, legal, and institutional framework for financial services; and creating a demonstration effect by building institutional capacity that benefits the financial institution and larger numbers of businesses.
At the institutional level, the focus is on establishing evidence of the changes brought to the financial institutions (FIs) by IFC additionality, both in practices and financial performance.
At the individual level, the focus is on understanding how various IFC interventions collectively have improved access to finance for businesses and individuals, especially SMEs, thereby contributing to the economic development of China. This review does not attempt to estimate the number of people who have benefited directly and indirectly from obtaining financing and resulting improvements to their income and living standards.
It should be noted that IFC worked closely with the relevant regulatory institutions in all of these efforts, both in response to their requests for assistance and because IFC identified key issues that should be addressed in the reform process and brought those to the attention of regulators. This represented an important contribution to the enabling environment, as well as a model of regulator-financial institution collaboration that has accelerated the advancement of lending institutions. The CBRC and its predecessor bureau in the PBOC have been core
(MEP) and its predecessor commission have been invaluable partners in promoting sustainable lending policies. IFC also would like to express appreciation to the Ministry of Finance for providing guidance, support, and encouragement in these efforts over the past twenty years.
$5#$%&!!
F igure 1-1: Analytic F ramework and K ey Storylines
B . Structure of the report
The report is structured in six chapters after this introduction: Chapter II presents an overview the
intervention across the sector during the same period. Together these illustrate the with the reform needs of the sector and
country. Chapters III to VI present a summary of development results observed at the sector, institutional, and individual levels. Chapter VII provides conclusions and lessons drawn from the review, as well as the outlook for new challenges in ese financial sector.
!
!"#$%&'! ()*$+$,$+%)'! -")".+#+/&0!
!1+)/)#+/2'+).&/*$&,#$,&"!!3+#&%.+)/)#"!!4/5/#+$0'6,+27+)8'!!9%2+#0:'2/;*'&"8,2/$+%)'!
!4%<<"&#+/2'6/)=*'!!31(*!!>)"&80'>..+#+")#0!
!9,62+#'?;/&")"**'!4/<5/+8)'!
(14''!+)$"&@")$+%)!
A"*,2$'#B/+)'!
!C%;'(14'!#%)$&+6,$"7'$%'!#&"/$+)8'/)'")/62+)8'!")@+&%)<")$'!
!C%;'(14'!#%)$&+6,$"7'$%'!6,+27+)8'+)*$+$,$+%)/2'!#/5/#+$0'!
!C%;'(14'!+)$"&@")$+%)'B"25"7'!+<5&%@"'/##"**'$%'!.+)/)#"!
!$%&02+)"!
$&#$%&!!
Chapter 2 Context and I F C Footprint
A . Context: past, present, and reform efforts
ed dramatically over the past thirty years. In the pre-reform era before 1978, the entire financial system consisted of a single bank Bank of China (PBOC), which served as both a central bank and a commercial bank. From 1979 until the end of the1980s, commercial bank functions were separated from the central
Four - China (PCBC), Agriculture Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC), each with an emphasis on a particular economic sector as reflected in their names. This period also brought fast growth of regional banks: rural credit cooperatives and urban credit cooperatives, which later transformed into rural and city commercial banks. The banking sector was marked by high non-performing loans (NPLs) and low profitability because banking staff lacked experience in making credit decisions and there was little accountability. In the 1990s, financial sector reform started and focused on state-owned banks, emphasizing the resolution of NPLs. Four state-owned asset management companies were set up in 1999 to dispose of the huge volume of NPLs carried by Four.vast majority of these NPLs! to new asset management companies, the enhancement of credit underwriting and the introduction of basic corporate governance principles, the four banks listed on the Hong Kong and Shanghai stock exchanges between 2005 and 2010. While the Big Four were being restructured, joint stock banks with smaller geographic footprints were established, benefiting from the absence of historical NPL burdens but still facing the same underwriting issues and need to develop a viable business strategy. In the late 1990s, urban credit cooperatives were merged to form city commercial banks. Their NPLs, higher as a percentage of total loans than the Big Four, were not resolved through the newly created asset management companies but through ad hoc arrangements with municipal governments or by write-offs funded through earnings over several years. Beginning in 2005, rural credit cooperatives began to amalgamate and address their NPL and business-process issues. The Big Four continued to control approximately 50 percent of market share in Chinese banking, and state-owned entities held significant stakes in the joint stock banks and city commercial banks. SMEs continued to struggle to obtain formal bank financing, and relied to a great extent on underground banks and informal lending. This issue came to a head in the aftermath of the global financial crisis, with bank lending under the government stimulus program being solely channeled to SOEs, and efforts to rein in inflation through credit restraints further limiting funds available to the private sector. In response to the threatened collapse of large numbers of private companies, the Chinese government designated the city of Wenzhou, Zhejiang Province, as a pilot area for registering,
$B#$%&!!
monitoring, and regulating informal financing. In May 2012, the China Banking Regulatory Commission announced that domestic private sector investment is encouraged for the banking sector. Against the background of overall banking-sector reform, the entry of foreign strategic partners for Chinese banks is of particular interest. A 1994 regulation promulgated by the PBOC clearly established that no foreign investment was allowed in Chinese banks. In reality, no foreign bank sought to invest in Chinese banks, given the dismal state of their balance sheets and uncertainty about for ability to influence lending practices. Foreign banks lobbied to obtain branch licenses, never mentioning investment in Chinese institutions. The Asian Development Bank became the first international financial institution to invest in the Chinese banking sector (China Everbright Bank, a joint-stock bank whose largest shareholder was a financial conglomerate directly owned by the State Council) in
Bank of Shanghai (1999) and Bank of Nanjing (2001) were all approved on a case-by-case basis as exceptions by Premier Zhu Rongji. In December 2001, China joined the World Trade Organization. At the end of 2003, regulation by the newly established China Banking Regulatory Commission (CBRC) set out formal rules for foreign investment in Chinese financial institutions. In November 2005, the Deputy Chairman of CBRC, TANG Shuangning, set forth the expectations for foreign strategic investors in a speech. The expectations included: equity shares of at least 5 percent; shareholding to be maintained for no less than three years; appointment of experienced individuals as board directors; investment in no more than two Chinese financial institutions of the same category (e.g., nationwide joint-stock bank, city commercial bank, rural commercial bank); and technical support. (By then, IFC already had equity stakes in six Chinese banks.) In addition to banking-sector reforms, China also launched extensive legal framework, regulation, Between 1995 and 2007, a series of laws specifically relevant to the financial sector were adopted, including the Commercial Bank Law in 1995, Banking Regulation and Supervision Law in 2003, and the Property Law in 2007. Common to the pattern of economic reforms in China, small-scale testing of new concepts and ad hoc arrangements were followed by rollouts of the reforms across the entire country, and establishment of formal regulatory bodies. With the growth of the stock markets in Shanghai and Shenzhen, the China Securities Regulatory Commission was established in 1992. In 2003, the CBRC was set up, assuming supervision responsibilities .
After twenty years of reform efforts, substantial progress has been made in improving underwriting standards, increasing profitability, extending the range of banking services, and
The Four ten banks in terms of market capitalization and in the top twenty in terms of asset size. The banking regulator, CBRC, also has become much
$K#$%&!!
more sophisticated and capable. One can say that the banking system responded to the initial
with overall economic development in China, weaknesses and unfinished reforms remain.
by five large banks: the Big Four plus the Bank of Communications, which is 26 percent-owned by the central government. Banks accounted for 88 percent of total assets in the
financial sector as of 2011.4 The fixed-income market has been slower to develop, and is heavily concentrated in public- sector securities. Equity markets have been volatile, going long periods without initial public offerings (IPOs), and generally serving the needs of large corporations. Trusts, financial leasing, and finance companies all remain small relative to banks. Insurance company assets comprise less than 5 percent of total financial sector assets.5 A flourishing informal financial sector exists, important for providing funding to SMEs and small retail investors. Bank loans remain the most important source of funding for firms. However, a large share of the banking sector is state-owned, as are many of the continues to have an important role in credit allocation at the central and provincial levels. Access to finance remains very difficult for private companies and SMEs: SMEs generate about 65 percent gross domestic product (GDP) and 80 percent of its jobs but receive only a fifth of bank loans. 6 Banks lack sufficient incentives to improve risk management and pricing due to incomplete interest-rate deregulation and limited exchange- rate flexibility. Controls on interest rates and lending volume also mean that policy makers cannot rely on market prices to assess macroeconomic and liquidity conditions.
B .
As summarized in Figure 2-1 support to financial sector reform in China has gone through three phases: exploring, expansion, and frontier focus. The operations in each phase were designed and implemented in response to the challenges faced by the sector and guided
Exploring Phase: prior to 2002
IFC started engaging the financial sector in the mid-1990s with technical assistance, followed by the first investment in a Chinese bank, Bank of Shanghai, in 1999. This investment was
private institutions, such as commercial banks and the cooperative banks, through making equity investments and providing technical assistance,Strategy in China developed in 1995.7 IFC conducted a detailed assessment of the needs of the sector and its ability to achieve genuine impact, and identified financial institutions that had the potential to absorb the necessary technical assistance and the culture to welcome the !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!5!IMF, 2011. 5 IMF, 2011. 6 Rabinovitch, May 22, 2012. 7 IFC IFC's Operations and Strategy in China., May 1995
$U#$%&!!
change that accompanies such assistance. IFC also made the decision to invest in two more Chinese banks following Bank of Shanghai. Expansion Phase: 2002-2006
Consistent with the World Bank and IFC country strategy for China,8 IFC operations in financial sector reform expanded between 2002 and 2006. On the one hand, IFC took small stakes in joint-stock and city commercial banks, and played a key role in attracting strategic partners to these institutions, bringing in commercial banks that provided capital, assigning experienced managers, and carrying out training programs to complement its technical assistance. A conscious decision was made not to invest in the Big Four because there was less additionality and a belief that the culture of these much larger banks was less open to change. In addition to continualsegments of the financial sector, in 2002 IFC, in Partnership with Australia, Finland, Norway, United Kingdom, established the China Project Development Facility (CPDF, later renamed IFC Advisory Services in China IFC AS China in its second operations phase), in Chengdu, Sichuan Province. With this facility, IFC became the only international development institution with an office in Western China. IFC AS China has focused on strengthening the capacity of financial institutions to work with SMEs, training entrepreneurs, and addressing business-climate issues for private sector development in the western regions of China. The establishment of IFC AS China enabled IFC to embark on the most important and systemic Advisory Services projects needed there, including creating a legal basis for loans secured by inventory and accounts receivable, key to enabling SMEs to borrow, and the establishment of a nationwide credit bureau. IFC also created a breakthrough in capital markets by being the first non-Chinese issuer of a domestic bond, the so-called Panda Bond. This provided IFC with the local currency renminbi (RMB) that was immediately lent onward to corporate clients in China,
.S.-dollar lending. Also by providing local-currency financing products, IFC has been able to meet the needs of its private sector clients as they address the lack of long-term bank funding for domestic companies. F rontier Focus Phase: 2007-
IFC developed its first standalone financial sector strategy for China in 2007. After playing a key role in developing sound risk management policies and good corporate governance in banks while making progress in creating a favorable business environment for MSMEs, IFC refocused its efforts on geographic and conceptual frontiers. Western and northeastern China have not progressed so rapidly as the eastern Chinese region, and restructuring of banks there has lagged. Having gained credibility through successes in its banking portfolio, and !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8 The World Bank/IFC, 2002, China Country Assistance Strategy. World Bank, IRIS.
$R#$%&!!
following important lessons about effecting change in Chinese banks, IFC took steps to replicate these efforts in frontier regions, and in smaller institutions, including microfinance lenders. IFC also took tentative steps in the insurance and distressed-asset industries, although these proved to be less open to the fundamental changes already in progress in the banking sector. IFC also introduced an innovative program of sustainable finance and environmental standards, extending its outreach beyond banks and financial regulators by becoming a partner of the MEP. These programs marked an even greater collaborative effort between
transformed the corporate strategy and brand image of Industrial Bank. IFC also introduced the Global Trade Finance Program (GTFP), other short-term finance products, and a Renminbi Swap Facility after the 2008 global financial crisis to provide risk-sharing and credit enhancement to a dozen Chinese banks. F igure 2-1: K ey Milestones of F inancial Sector Reform in China and I F C Footprint (number and value of the projects)
I F C operation and strategy for C hina 1995 World Bank-I F C C AS 2003 C I C F inanc ial M arket C hina Strategy 2007
!
"%#$%&!!
Chapter 3 C reating an Enabling Environment for F inancial Services
Improving MSMEs to finance is one of the core objectives of IFC AS China operations. 9 Established in 2002, IFC AS China Access to Finance (A2F) program has focused mainly on the development and improvement of secured transactions; credit reporting systems; capacity-building for financial and non-financial institutions; and policy work such as microfinance, housing finance, and leasing. More recently, IFC has embarked on a new initiative promoting Green Credit Policy.
A . Supporting Secured T ransactions Reform
A baseline survey conducted in 2005-06 by the National Development and Reform Commission (NDRC) and IFC Private Enterprise Partnership China showed that 71percent of
faced by SMEs during the course of development.obstacle to accessing finance was a lack of loan collateral acceptable to financial institutions 73 percent of SMEs surveyed identified the absence of acceptable collateral as a key
perceived reason for their lack of access to financing. Most banks in China are comfortable lending to SOEs, given their implied government guarantee, and to big corporations that have large capital bases or substantial fixed assets to pledge, but these forms of collateral are rarely available to SMEs. Approximately half of SME assets take the form of inventory and receivables (compared with 30 percent at large firms). These are highly liquid assets but difficult for lenders to control in the absence of a legal framework like those in developed countries. Less than 15 percent of all business credit in China was secured by movable assets, only 4 percent of China s commercial loans were financed by movable assets.$% A separate survey in 2004 of 25 FIs regarding their commercial lending portfolios and practices came to a similar conclusion. The survey revealed that 83 percent of outstanding loans using collateral were overwhelmingly secured with real estate and third-party guarantees.11 The lack of a functioning credit infrastructure, such as a unified security interest registry, was a major challenge reported by the FIs operating in this environment. The FIs identified the scope of movable-assets financing at the time as well as the need and their desire to prioritize legal and institutional reform of this banking activity. Advisory Services China Secured Transaction project was an effort of IFC and the World Bank Investment Climate team to advise the PBOC on the development and rollout of a modern secured transactions system in China.
The goal of enabling and promoting the use of movable assets as collateral was highly relevant from both the demand perspective (SMEs and F Is in China) and the supply !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!R!IFC, 2006, Proposed IFC Participation in and Contribution to the Private Enterprise Partne
- 10 Lin, 2007, Secured Transactions Law Reform in China. 11 -
"$#$%&!!
perspective (IF C and donors), said LIU Ping, director general, Senior Advisors Office, PBOC.
support for secured transactions reform aimed to establish a comprehensive and healthy Eco-System of Movables Financing that addressed needed legal/regulatory framework, registration, and awareness-raising and dissemination of knowledge among the FIs, regulators, and the public. F igure 3-1: Eco-System of Movable Assets F inancing
Source: Power Point Presentation by LAI Jinchang, 2012
According to an independent evaluation conducted in 2011 by Dalberg, an international development consulting firm, 12 I F C effectively advised PB O C on the drafting and promulgation of the relevant articles of the 2007 Property Law.!!!
The Property Law - The Economist, !" was passed on March 16, 2007, and came into effect on Oct. 1 of that year. The law incorporates accounts receivable and inventories into the definition of assets that can be legally pledged to support bank lending. Before its enactment, the 2005 World Bank Doing Business Report ranked China in the bottom 20 percent of all countries in terms of their credit market laws and institutions4
Civil Law Department of the Legislative Affairs Commission (NPCLAC), IFC was in supporting work in drafting and passing the relevant articles of the 2007 Property Law.
have been a chapter on secured transactions in the law, it would likely not be up to international standards. 12
practices, as well as information on the national context. The responses met the legislative
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$"!Dalberg, 2011, Evaluation of IFC Secured Transactions Advisory Project in China.!$L!The Economist, March 8, 2007.
""#$%&!!
deadlines, avoiding delays that could have undermined legislative momentum. Moreover, the project contributed to the drafting of other pieces of legislation required for proper implementation of the Property Law. These included PBOC's regulations on accounts receivable security interest registration and leasing regulations.
related to using movable assets as security. Most important, the law expanded the scope of movable collateral that can be used in a secured transaction. A single unitary security interest now applies to movable property of all kinds, tangible and intangible, present and future, eliminating the positive list. Furthermore, FIs can accept accounts receivable in bulk, rather than one at a time, as security. Finally, the law created a more transparent priority system by incorporating specific rules. F igure 3-2 Scoring on E ight K ey F eatures of Modern Secured T ransactions Laws12
The project contributed to the establishment of a single, centralized accounts receivable registry under the umbrella of the Credit Reference Center (CRC). The registry is located in Shanghai, and was launched in October 2007 following the enactment of the Property Law. It incorporates the key features of a modern registry of security interests in movable collateral. It simplifies the formalities required for creating a security interest and improves the efficiency, flexibility, and transparency of the system by allowing notice registration, eliminating the need to register the security agreement and allowing any person, natural or legal, to register a security interest.
I F C has introduced the international best practices of a movable property registration system into China. It provided great help after we set up the registration system. I F C advocated for the Supreme People's Court to support the legal framework. Also IF C played an important role in helping us during the process of the system establishment. They provided technical advice on international standards, data sampling, data requirements that helped us establish personal credit, and enterprise credit reporting system, commented WANG Lu, deputy director, CRC. ! IFC was considered by the PBOC to be
$4 \.*.:<-!/.3(:7E27+*!+8!<33.23!E.:1722./
"4 \.*.:<-!/.3(:7E27+*!+8!/.92!E.:1722./
L4 '*A!-.0<-!+:!*<2?:<-!E.:3+*!1<A!2<).!3.(?:72A!,72D+?2!:.32:7(27+*
54 C+--<2.:<-!:.0732:A!(<*!9.!<((.33./!+*-7*.
&4 @.(?:./!(:./72+:!D<3!E:7+:72A
B4 '!?*787./!:.0732:A!7*(-?/7*0!(D<:0.3!+;.:!1+;<9-.!E:+E.:2A!+E.:<2.3
K4 T<:27.3!1<A!<0:..!+*!.*8+:(.1.*2!E:+(./?:.3!9A!(+*2:<(2
U4 @.(?:./!(:./72+:!1<A!3.7].!<*/!3.--!(+--<2.:<-!+?2!+8!(+?:2
8
7
55
0
GermanyChina (2008)
China (2004-2007)
SlovakiaUnited States
Source: Adopted from Reforming Collateral Laws and Registries: International best Practices and the Case of China (March 2007), P.V. Variables in the index are broadly consistent with principles of good practice in secured transactions laws that are promoted by international agencies ranging f rom the EBRD, OAS, UNCITRAL and the ADB; World Bank/IFC, Doing Business study, 2008; Dalberg analysis
"L#$%&!!
receivable registry. Without consultation provided by the project, the design of the registry might have been similar to paper-based and sub-national registries hosted in other (Chinese) agencies, said CRC staff.
setting-up of the registry. It also created a knowledge platform for market participants, regulators, and the public.
movable assets financing market (movable assets financing industry) and the change of credit culture movable assets security-taking is an information said LAI Jinchang, head, IFC Chengdu Office. The project targeted both public and private sector stakeholders, in other words, FIs, NBFIs, firms, and regulators, for awareness-raising and capacity-building efforts. Over the life of the project, IFC has played the role of a knowledge broker, producing 13 specific reports and publications and organizing or supporting PBOC-CRC in more than 62 training workshops reaching over 5,000 individuals. These publications, workshops, product or service ideas related to movable assets and FIs interviewed in the independent project evaluation in 2011. The role of education and dissemination of knowledge about movable assets financing has been seen to be as important as the legal reform and registry in promoting the change in China. Working in China, it is not just about changing the law, or changing the regulation.
we communicate to the wider market, so more people can be aware of what has happened. just do one little thing and wait for it to naturally disseminate. A proactive communication approach is needed. We thought very carefully about what channels to involve, which Chinese institutions to involve, and how we could leverage the much greater re said Matthew Gamser, A2F program EAP regional manager. The secured transactions reforms have had great impact on the financial sector , F Is, and SM Es. The project has resulted in strong growth of movable assets financing in China. There has been remarkable growth in the use of accounts receivable as collateral since 2006. The period of 2008-10 was one of significant financial sector expansion in China, as indicated by the strong overall growth of loan volumes.
By the end of June 2011, the registry had recorded cumulative value of accounts receivable financing of about $3.5 trillion since October 2007. In total, about 385,000 transactions involving accounts receivable have been registered from the fourth quarter of 2007 to the end of the second quarter of 2011.
The rate of increase in movable assets financing from 2008-10 is notable. The value of commercial loans secured exclusively by movable assets grew by 82 percent per year in those years versus a growth rate of 19 percent during the 2006-08 period, according to the FI survey.
"5#$%&!!
The number of loans secured by movable assets grew from 34 percent to comprise 40 percent of the total loans in China during 2008-10. This growth of market share is remarkable when compared with share of lending secured exclusively by movable assets then was estimated to be only 4 percent.
F igure 3-3: G rowth in the Number of Registrations of Accounts Receivable Transactions$"!!
Source: CRC
The rapid adoption of accounts receivable lending is also evidenced by the number of financial institutions using the CRC accounts receivable registry.
100 percent of the 20 nationwide banks in China, including the Big Five, are now registered and active users of the accounts receivable registry, according to CRC reports.
90 percent of the 50 financial institutions surveyed have engaged in movable assets financing for their clients. They indicated that the 2007 Property Law and the accounts receivable registry were among key drivers for their increasing portfolio of loans secured by movable collateral, in addition to their business imperative to improve their service to the SME market.
Commercial banks have launched movable assets financing products or services such as supply-chain financing; sales-order financing; confirmed warehouse receipt financing; and insurance policy-secured financing. PBOC and t(Chinese edition) have compiled many case studies of financial institutions engaging in movable financing and creating a number of innovative products related to it.
publications received very good response on the market. Because many banks, and sometimes the leadership, were not confident to do this, after they saw these cases, they felt reassured and become more willing to adopt, indicated by HUANG Lin, Operations officer, IFC Chengdu office.
14 lending. Banks significantly
increased the size of their SME lending portfolio: Four of the Big Five banks reported, on !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!14 An SME hires fewer than 300 employees. It is worth mentioning that the evaluation survey of 126 enterprises is based on loan size. When a surveyed firm's loan size is less than $2 million, there is a 90- percent chance that it is an SME (i.e., it hired fewer than 300 employees in 2011).
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
2010200920082007 20122011
SearchesRegistrations
Cumulative Number of Registrations and Searches (2007Q4-2011Q2)
384,429
9,445
Total2011 Q1-Q2
96,444
2010
159,718
2009
85,020
2008
33,802
2007 Q4
Tot al Number of Registrations (A/R and factoring) in the Movables Financing Registry
"&#$%&!!
average, 25-percent compound annual growth rate (CAGR) in this type of lending in terms of value in 2008-10, up from 2 percent growth in 2006-08, according to the survey of financial institutions. Seven large commercial banks also reported 45-percent growth in SME lending in 2008-10 versus 20-percent growth in the two prior years. While there were several contributing factors to this growth in SME financing, most financial institutions said in the evaluation survey that the increase in access to finance for SMEs, particularly those that were new customers for the institutions, came about mainly because of the passage of the 2007 Property Law. The introduction of movable assets financing in some cases triggered an overall improvement in the risk management practices of the financial institutions. Some of the larger institutions interviewed reported that they used movable assets financing as a way of mitigating the risks of lending to SMEs because of increased access to business performance data that came from lending on the basis of accounts receivable. a borrower gained from the security-taking/monitoring process are much more important than a legal cover. SMEs are less risky if financing can be structured along value chains linked by A/R and inventory. It is such confidence and information that enables capable lenders to go down the market, explained by LAI Jinchang, head, IFC Chengdu Office. The project has contributed to improvement of access to finance for SM Es and individuals. Again, according to the independent evaluation:
CRC reported that 68,575 SMEs (excluding the unincorporated SME borrowers) have received financing secured by accounts receivable totaling $1.09 trillion.
A major barrier to SME access to finance has been substantially reduced: SMEs that have obtained accounts receivable financing with what was once considered "unacceptable collateral" report that this was far and away the No. 1 reason for their being denied a loan previously.
Implementation of an enabling environment for financing based on movable assets has been particularly important during the after-effects of the global financial crisis and during those periods when banks have been forced to reduce new lending as part of inflation-fighting measures. Without their current access to accounts receivable financing, close to 60 percent of the surveyed SMEs said they believed that their business development would be severely affected, and in some cases, the businesses' very survival would be threatened.
Movable assets financing can benefit female business owners who are less likely to own property that can serve as collateral. Eight-eight percent of SMEs surveyed in the evaluation said that their business growth resulted from obtaining accounts receivable financing. The SME case studies also revealed that SMEs had been able to expand their operations with working capital obtained through movable assets financing. Surveyed SMEs that have accounts receivable financing reported growth in their workforce in 2011 at a median rate of 7 percent and an average rate of 36 percent.
"B#$%&!!
Box 1: Access to movable assets financing helped T ianyue grow In 2009 Sichuan Tianyue Industry Co. Ltd, a construction materials company operating in the Chengdu area, had an opportunity to take up RMB80 million worth of contracts on top of ongoing projects worth approximately RMB400 million. Accounts receivables are the key collateral of the company, because it does not own real property and its equipment and inventories are also limited. These new contracts would raise the amount of accounts receivable to an unprecedented level. Needing an additional RMB10 million in working capital, the company faced challenges to win contracts and continue its growth. The new regulatory framework allowed Tianyue to develop a three-party agreement with a warehouse and a local bank, the Chengdu Rural Commercial Bank. The bank was able to issue a commercial bill to allow Tianyue to purchase raw materials and the warehouse receipt is directly pledged to the bank. The opportunity to obtain a loan based on movable assets enabled the company to win bigger contracts, including an agreement to service the western area of the Chengdu Shuangliu Airport Economic Development Zone.
capital to accept large contracts. Now that we can use movable assets, such as accounts receivable, for collateral, we have been able to take on additional business. Also, we can invest more resources and time in product development, said the financial manager of Tianyue.
B . Supporting the C redit Reporting System
Credit reporting is essential to the success of credit markets. It serves as an indispensable tool for financial institutions to reduce information imbalance and support their lending business. By using credit bureau services, financial institutions can gain a clearer picture of the creditworthiness of a potential client, reduce loan processing time and cost, cut defaults, and improve the quality of loan portfolios. In 2003, no consumer credit reporting system existed in China. Improvements to the lending infrastructure, and in particular the development of an effective credit reporting system, were seen as key to the development of the banking sector and were a high priority on the Chinese financial sector reform agenda. Beginning in 2003, I F C provided advisory services to the Chinese government to help it establish a modern credit information system. IFC helped PBOC and the banking industry understand the concept of credit reporting and brought international experience with setting up and running credit bureaus.
In 2003-04, PBOC established the Credit Information System Bureau (PBOC-CISB) as the regulator of the credit reporting industry. IFC provided technical training to PBOC-CISB, and most important, helped draft a Strategic Plan on Credit Reporting System Development in China.
IFC brought international best practices, which were reflected in the Regulation on Consumer Credit Information Database issued by PBOC in 2005.
"K#$%&!!
In 2006, CRC was spun off from PBOC-CISB as a semi-commercial public service unit responsible for the operations of the basic credit reporting system.
IFC has translated the Credit Bureau Knowledge Guide and many other technical materials into Chinese, and these have been widely used in workshops/training and conferences.
IFC and PBOC jointly sponsored a symposium on Credit Reporting and Retail and SME Banking in Tianjin on June 2007, to teach commercial banks how to use the bureau products. This conference attracted more than 200 bankers from across the country; almost every bank in China was represented in the meeting. In his opening remarks, former PBOC Deputy Gov. SU Ning highly commended IFC for its role in assisting the development of the credit reporting system in China.
IFC organized a diagnostic review for CRC in 2007. The report provided detailed assessments of the strengths, weaknesses, opportunities, and threats to CRC, as well as a range of suggestions to sharpen its business focus and improve its data quality. The report was commended by PBOC senior leadership and widely read by affected officials and operators. Tony Lythgoe, global leader of the financial infrastructure program, and the experts from Australia provided a very detailed diagnostic report for us and pointed out the challenges that our CRS [credit reporting system] faced and the bottlenecks in our development. This was very valuable to us, recalled LI Liansan of CRC.
The project assisted PB O C in issuing a ministry-level regulation, the Regulation on Consumer C redit Information Database, in 2005 and in establishing a nationwide consumer credit database in 2006.
IFC provided comprehensive comments, participated in the discussions, and contributed information to form the regulation.
Administrative Rules No. 3 Order approved by the China Banking Regulatory Commission (CBRC) required all financial institutions to report credit information to the credit information database.
A credit file is established for any enterprise and consumer with credit activities. By the end of 2010, the Credit Registry Center (CRC) covered more than 777 million
individuals, of which 221 million had an established a credit relationship with a bank or other financial institution, and 16.76 million corporate entities, of which 2.3 million have borrower history.
The average number of daily inquiries to the consumer database reached 1.036 million in 2010. The cumulative number of inquiries to the consumer database is 812 million; the cumulative number of inquiries to the commercial database is 152 million.
China was recognized as one of the top 10 reformers in the World Bank Group and IFC joint annual report Doing Business 2007Doing Business improved significantly (from 108 in Doing Business 2006 to 93 in Doing Business 2007).
"U#$%&!!
F inancial institutions have greatly benefited from the establishment of the credit reporting system. As reported by WANG Xiaolei, deputy director general, CRC, in 201015:
The credit reporting system helps banks progress from qualitative credit decision-making to quantitative credit decision-making. Inquiries to the credit information
supplementing their risk management and controls. It also provides early-warning signs about high-risk customers. According to a CRC
survey, in the first three quarters of 2009, with the help of the consumer credit information database, seven banks declined 97,000 high-risk loans and credit card business accounts with a total value of RMB905 million. The enterprise credit information database helped these banks prevent 2,320 high-risk loans valued at RMB104.1 billion.
It supports banks in their efforts to collect non-performing loans. The personal credit information system helped seven banks collect on 25,000 non-performing loans and credit card accounts with total value of RMB139 million. The enterprise credit information system helped seven banks in their collection of 570 non-performing loans, with total value of RMB2.29 billion.
The system helps banks manage group credit risks. Since 2007, CRB has helped financial institutions to investigate 222 group companies (including 11,706 enterprises) using the credit information system. They have discovered non-performing loans worth RMB78.83 billion, interest arrears of RMB15.442 billion, and, subject to court proceedings, loans worth RMB8.347 billion.
The credit reporting system plays an important role in increasing access to finance for enterprises and individuals. CRC is able to collect data from financial institutions, as well as from a wider range of data sources such as utilities and telecoms. This helps enterprises and individuals who have no bank credit to build up their credit history, and facilitates loans to the lower end of the market. From 2006 to 2009, the number of enterprises with bank loans increased by 50 percent and the number of individuals with bank loans soared by 145 percent. Though such an increase may not be fully attributable to the establishment of the credit reporting system, all the institutions we have interviewed, including the microfinance company (CFPD), indicated that they have been using the credit reporting system in their daily operations. Moreover, awareness of credit has improved gradually among the general public. The number of individuals who requested their own credit report from CRC leaped to 1.28 million in 2010 from 97 in 2006. During a TV interview, the former PBOC Deputy Gov. SU Ning said credit record to determine whether his credit is good or bad. The People's Bank established a consumer credit reporting system, in which everyone could build his personal credit history. With this record, each individual's credit report can reveal the quality of his credit. Credit is a
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$&!Wang, 2010, Development of Credit Information Database in China, presentation at the Financial Infrastructure Conference in Beijing.
"R#$%&!!
very important factor for SME financing and development. We made a survey and found that the reason why many SMEs cannot get loans is because they lack the awareness of the importance of their own credit history. After such a survey, the People's Bank began to establish the SME credit reporting system, and now we have collected credit histories for more than 500,000 SMEs, among which more than 30,000 SMEs got bank loans. The banks
history is good, then the banks are willing to support these SMEs development and provide
In the development of China's credit reporting system, IFC was seen by the relevant agencies, especially CRC, as a neutral party and a valuable resource that they could consult when faced with issues and problems. additionality of I F C is its ability to not only rely on its own resources, but also to gather the best in the industry from around the world and bring them to one table to share their ideas. This gave China the opportunity to hear many different views on t said Matthew Gamser, A2F program East Asia Pacific Regional Manager.
Why did the People's Bank like to work with us? Because I F C is an independent third party, they trust us. F rankly, cooperation is built upon the I F C s reputation in the market. Even though telling the truth and building credibility in the market in China was still quite difficult. We [I F C] have worked very hard. The I F C global credit bureau program that houses a lot of international experts, coupled with our local team, enabled us to establish trust relationships that were said HUANG Lin, operations officer, IFC Chengdu Office.
C . Building Capacity for F inancial and Non-F inancial Institutions
IFC has worked closely with a number of non-governmental organizations and the World Bank to provide many sectorwide capacity-building activities to financial and non-financial institutions. These have been offered on a range of topics including human resources management, operations, management information systems (MIS) and technology, corporate governance, internal audit, risk management procedures, and microfinance (See Table 3-1). The objective was to address weak areas at these institutions, to improve their efficiency and competitiveness. Among other things, IFC partnered with CBRC and the China Banking Association to organize a number of symposiums and workshops such as the International Symposium on Risk Pricing and Operational Risk Management in 2005, Credit Analysis Training in 2006, and the International Symposium on Microfinance in 2007. Thousands of participants from hundreds of financial institutions took part in the symposiums and workshops. IFC, in collaboration with international consulting firm McKinsey, delivered many workshops on
client banks. These activities have been well-received by participating organizations, as they have disseminated modern banking concepts and methodologies and helped to improve the institutions. Documents and manuals prepared for these events, such as the Guidelines for
L%#$%&!!
Risk Pricing and Evaluation Guide on SME Operations of Commercial Banks, have been widely distributed throughout the industry in China. Table 3-1: Capacity-Building Outreach
Box 2: Certification of China Banking Professionals (C C BP) CCBP was a major initiative of China Banking Regulatory Commission (CBRC) and the China Banking
practices. IFC supported the CBA-CCBP program in several ways from its beginnings in 2005, including: (1) helping to develop the first set of standards for Financial Planning and Risk Management certifications; (2) mobilizing $300,000 of grant funding for the program; (3) assisting with general promotion of the program through conferences and workshops; and (4) providing materials for the development of course textbooks. A
banking specialist was appointed as a member of the Committee, nominated by IFC Advisory Services China. In total, five certifications for China banking professionals were developed: Financial Planning, Risk Management, Banking Fundamentals, Corporate Lending, and Personal Lending. With the support of IFC Advisory Services, CBA engaged the Shanghai International Banking & Finance Institute (SIBFI) to assist in developing the first two certifications, with participation from industry representatives and academics. Four review meetings were held to develop the banking certifications. The syllabi of the two most recent certifications (Corporate Lending and Personal Lending) drew heavily from
introduced by IFC. The CBA-CCBP program has received industrywide acceptance, and has established itself as a primary certification for Chinese bankers. Around 3.2 million people took the exams (including people who sat for more than one certification). The high enrollment demonstrates that banking competency certification is widely
Institutions Training Topic
Number of workshops/training
Number of participants
Number of women participants
China Banking AssociationBank Certification and CCB (City Commercial Banks) Capacity 33 2654 356
China Banking Regulatory Commission
1. Reviewing drafts of leasing law;2. Low and Moderate Income Housing, Mortgage Lending, Mortgage Insurance, etc. 43 2868 290
People's Bank of China
1. NDTL(Non-Deposit-Taking Lending Institutions) Regulation, Microfinance Development and Mobile Banking2. Best Practice in Credit Registry, Credit Reporing, Legistration on Credit Information Services in China3. Legislation and Practice of Secured Transactions Law in China4. International Best Practices in Secured Transactions, Rural Collateral System Reform;5. Mobile Banking Market 91 11352 1463
Shanghai International Banking & Finance Institute
1. "Credit Analysis and Commercial Lending" Workbook 2. General capacity building topcis for banks 154
National Development and Reform Commission
1. International Experience on Promotion of SME2. Drafting the report of CSR (Corporate Social Responsibilities) in China3. Drafting the report of external financing regime in China 25 1228
Total 192 18256 2109
L$#$%&!!
supported by the banking community. Some banks now mandate that all new recruits pass the test. The
willingness to improve their skills. The self-knowledge of fundamental banking and finance principles.16
Many institutions interviewed by the research team valued highly the relevance, quality, and
the trainees have applied what they have learned at the IFC symposiums and workshops to their work. In China, especially in the western region, international exchange is limited. We have a good understanding of traditional financial sector development. We are also very concerned that after all these years, there are some issues and weakness in the financial sector in the developed countries. We are very eager to work with a number of international institutions to exchange views and experience at various levels. We hoped to learn advanced concepts and practices. At the same time, we hoped to learn about the experiences that will help us avoid repeating these problems. I F C was able to collect and analyze the international best practices, experiences, and lessons learned and then communicate them to us, providing what can be seen as a common platform for everyone. To me, this was very valuable. The ability to introduce world-class experience into a very big country, thus assisting in our continued development, .
WANG Lili, director of capital markets, Chengdu Financial Affairs Office The training that I F C provided on SME banking was greatly helpful. I think the training helped us develop a concrete understanding of SMEs, from both the macro and micro levels. We deeply appreciated the significance of helping SMEs. In terms of our SME lending, initially the purpose of lending to SMEs was to diversify the risk of the loan portfolio. Later, we realized that this could help improve the relationship with the local government. Moreover, the profit of SME loans is about 10 percent higher than from large enterprises and government loans. At the technical level, our front-line staff greatly benefited from this
and if documentation of a contract or accounts receivable is ready, we have the green channel to process the loan. Nowadays, in most cases, we are able to approve a loan within two days, a tremendous advantage because timing is most critical for the business.
LIU Ye, manager for small business, Ji Ming Si Branch of Bank of Nanjing In 2003, China set up a Credit Information System Bureau, but even after the bureau was
.hoping to learn from the West. I F C has played a large role in making connections and recommended a number of international credit organizations to us. Working with IF C closely on research, we were able to obtain a lot of information from developed countries. After the establishment of the credit reporting system, we had a series of cooperations with IF C , mainly in technical exchanges. The most prominent was in 2007 I F C helped conduct a !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!16 CCBs Capacity Building Project - Project Completion Report
L"#$%&!!
comprehensive diagnostic study of our business and personal credit information systems. The diagnostic report provided detailed analysis, pointing out the problems faced by our system, and bottlenecks encountered in the development.
WANG Lu, deputy director, CRC
D . Supporting Policy Development of Priority Issues
During ten years of providing IFC advisory services, in addition to supporting financial sector reform through strengthening financial infrastructure, IFC has actively engaged with government, policymakers, and think tanks/research institutions to help review, revise, draft, and formulate regulations and policies in response to the needs of the country and its financial sector reform (See Table 3-2). In many cases, IFC was the only international agency providing direct technical advice. From reviewing project documents and interviews with project stakeholders, it seems clear that many policies and regulations advised by IFC proved critical to the reform process. Some already have generated positive impact, and additional impact is expected to be realized in coming years. Table 3-2 Main Policy Work and Regulatory Reform Support
Year Policy, Laws, Regulation Drafted or Enacted 2005 Regulation on Customer Credit Information Database in China 2007 Rule of Leasing Registration 2007 China Property Law 2007 Judicial Interpretation of the Law 2007 Regulation on Accounts Receivable Financing Registration 2007 Regulation on Non-Deposit-Taking Lenders 2007 China Financial Leasing Law 2007 China Bank Leasing Regulation
2007/8 Regulation on Credit Reporting in China 2008 Low-income housing policy
2007-Present Green Credit Policy Box 3: Supporting China to develop the low- and middle-income housing market With rapid urbanization, affordable housing has been a great challenge for China. IFC aimed to help develop the housing finance market in China to address problems of availability and affordability of housing for low- and middle-income families in urban areas. The project was launched in May 2007, prior to the start of the financial crisis, which was triggered by the subprime mortgage problems in the United States. The project has three components: (i) advising the government on low- and middle-income housing policy; (ii) raising the housing finance standards of lenders; and (iii) developing the mortgage insurance industry (this component was dropped at the request of the government due to the financial crisis).
LL#$%&!!
Through a series of workshops and symposiums with policymakers essentially CBRC, the Development Research Center of the State Council (or DRC, effectively , and banks the project helped the Chinese State Council (or Cabinet) to establish a low- and middle-income policy in 2007 that was considered historically significant. Following the International Symposium on Stress Testing of Housing and Real Estate Loans in 2009, all commercial banks in China conducted stress testing for their mortgage portfolios. These were the first bank stress tests in China and they were seen to be a very important project outcome by the CBRC. Following the announcement of the low- and middle-income housing policy, the central government allocated $11.8 billion for developing low-cost rental housing in China in 2010, about 16 times the 2007 figure for this type of rental housing; local government also allocated $6.8 billion, about five allocation for this housing. The increasing urbanization of Chinese society has made low- and middle-income housing a priority on the
development of a landmark housing policy in China. Previously, central and local government officials had assumed that housing should be provided by the market. The five international experts that I F C brought to the workshop explained the structure of a sustainable housing finance market and the critical role of government in it. In developed markets, governments play a major role in the housing market, which is necessary for social and financial stability. This workshop helped clear up several issues and bring consensus among the key players, especially the central and local governments. The outcome of this workshop was summarized in three internal reports, which were submitted to the senior leadership of the government. Subsequently, the State Council issued a low-income housing policy for urban residents. This policy established "support to low- and moderate-income housing" as a function of central and local governments. Importantly, this policy is considered a landmark one in China. have taken longer to develop and implement.
WANG Wei, deputy director, Development Research Center of the State Council
!
E .
IFC has been a standard-setter and global leader in bringing sustainability to the forefront of
evolved into a global environmental and social (E&S) risk management framework for development and private financial institutions. The Performance Standards and the World Bank Group Environment, Health, and Safety Guidelines (EHS) are the basis of the Equator Principles, which have been adopted by 77 financial institutions worldwide. Thirty-two Organization for Economic Co-operation and Development (OECD) export credit agencies and 16 European development financial institutions use IFC s Performance Standards as the benchmark for their private sector investments in emerging markets. Being both a development agency and an investor in private sector projects, IFC is well-positioned to engage both government and private industry players in regulatory reforms and knowledge-sharing based on experiences and expertise gained from developing and applying
L5#$%&!!
the Performance Standards and EHS Guidelines. !
IFC and the Chinese government have collaborated on the Green Credit Policy initiative since 2007. The initiative has been and unsustainable energy use that it saw as potentially threatening to and social development, as well as its global reputation. The policy aims to direct commercial bank financing away from polluting and energy-intensive projects and toward energy-efficient and emissions-reducing projects. It also is designed to build E&S risk management systems into the financial sector by requiring financial institutions to integrate E&S considerations into credit decision-making and management. In 2007, the MEP, CBRC, and PBOC jointl Opinions on Implementing Environmental Protection Policies and Rules and Preventing Credit Risks,
Since then, IFC has worked closely with the government on developing guidelines and technical resources in this area, and has helped Chinese banks implement the current Green Credit Policy through training events and advisory services.
contributions include:
Providing policy advice
In 2007, Granting for Energy Conservation and Emissions Reduction,consulted IFC. As a result, Performance Standards and the Equator Principles were reflected in these guidelines.
In February 2012, CBRC launched the Green Credit Guidelines, which specified how to integrate energy-efficient financing practices into lending, and recommended that banks apply them to both domestic and overseas operations. IFC provided very detailed comments
were a big help to us, according to LI Xiaowen, director of the Analysis Division, Statistics Department of CBRC, the department responsible for developing and supervising the implementation of the Green Credit Policy. The guidelines
assisted with the draft of the guidelines from the very beginning and provided a lot of said Li.
IFC also worked with MEP to translate the IFC Performance Standards and the World Bank EHS Guidelines into Chinese, and published them as a handbook titled International Experience in Promoting Green Credit: The Equator Principles and the IFC Performance Standards and Guidelines. This handbook became the official international reference during implementation of Green Credit Policy. Following the collaboration with IFC, MEP also worked with the World Wildlife Fund (WWF) on green credit financing guidelines for the paper and pulp industry, and with the British Strategic Programme Fund on guidelines for the iron and steel industry. IFC also helped MEP with the 2010 Annual Report on Green Credit by providing numerous reference materials.
L&#$%&!!
said ZHANG Rong, the I F C program mpartners questions or challenges on certain topics, as I F C has a large team of experts on a variety of
said Li of CBRC. said YANG Shuying, of the Department of Research on Environmental Policy and Management, Policy and Research Center, MEP.
Providing capacity-building to both regulators and banks IFC shared its global expertise in E&S Performance Standards, the Equator Principles, and the EHS Guidelines through a series of training events and study tours. In 2007, IFC cooperated with PBOC on a seminar titled the
In 2008, CBRC organized a large-scale training session on the Equator Principles and government policies. IFC sent staff to provide training on different topics and received very good feedback, said Yang of MEP. In 2010, IFC provided one-week training on sustainable finance in its Hong Kong office to CBRC officials from the headquarters and all of its 36 local banking regulatory bureaus.
said Li of CBRC. To deepen interagency collaboration and assist the implementation of the Green Credit Policy, IFC facilitated two study tours to the United States for officials of CBRC, MEP, PBOC, and major Chinese banks, to views and recommendations from experts in the World Bank Group, think tanks, consulting firms,
$K Promoting South-South cooperation
China has become in recent years a leader in developing green banking policies across the
-South knowledge exchanges. IFC introduced to the Vietnamese government the way in which China developed its Green Credit Policy. In August 2008, a delegation of Vietnamese government officials from seven ministries and top five commercial banks visited China and met with CBRC, MEP, the National Development and Reform Commission, and some banks, including, IFC client Industrial Bank, to learn from their experiences. In May 2012, IFC and CBRC jointly hosted the first International Green Credit Forum in Beijing, which brought together high-level representatives of banking regulators from ten emerging markets and commercial banks from nearly twenty countries to discuss sustainable finance and how to advance the sustainability agenda in the banking industry. The forum attracted 300 participants. As a result of the forum, knowledge products on sustainable !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!17 Aizawa and Yang, 2010.
LB#$%&!!
banking are being developed; IFC and CBRC will partner to support the creation of a banking regulator knowledge network and will support a second forum in Dhaka in collaboration with the Bangladeshi central bank. Tangible results have been achieved as a result of the collaboration between IFC and the Chinese government:
In addition to being used as benchmarks and guiding standards in the implementation
Principles are now well-established at key Chinese banks. China EXIM Bank is using a Performance Standards-based internal E&S risk review process; ICBC is applying the Equator Principles in its overseas investment activities; and Industrial Bank formally adopted the Equator Principles in 2008, becoming the first bank to do so in China and Asian emerging markets. positive influence on businesses' awareness of energy savings, emissions reductions
YE Yanfei, deputy director of the Statistics Department of CBRC, told China Daily.18
The Green Credit Guidelines, formally launched by CBRC in February 2012, are a
address environmental challenges. They also Performance Standards. The new guidelines are considered a step forward in putting Green Credit Policy requirements into practice, and are expected to make lending by Chinese banks more resource-efficient and environmentally sustainable.
Since the launch of the first green credit policy in 2007, results have been achieved in sector, said
Li of CBRC. when (I) discussed with the banks about green credit, most of them could not understand why they should take environmental issues into consideration. They thought it was a huge burden for them. However, after 2008,
them to comply with the policy anymore. They understand clearly what benefits this program can generate
of banks This is mmercial
profitability. Demonstration effect: The IFC-China Green Credit partnership model has been
expanded to other countries in the East Asia and Pacific region and beyond, including Vietnam, Thailand, Indonesia, and Nigeria, where building awareness of E&S issues is a growing concern.
From 2007 to 2012, the Chinese government, led by CBRC, invested efforts to transform the Green Credit Policy from a high-level policy into implementable guidelines that can be integrated into the existing lending processes of individual banks. IFC is continuing its partnership with the Chinese government to ensure effective implementation at the bank level through introducing a robust monitoring and evaluation system, including the development of
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!18 Wang, February 25, 2012.
LK#$%&!!
key performance indicators.
F . Summary
Chinese regulator and governmental efforts, helping guide the regulators and supporting the creation of important elements of financial services architecture. The creation of the secured transaction mechanism and the credit reporting system stimulated banks to expand their pool of potential borrowers, directly increasing access to finance for SMEs. By helping bring this architecture into beingcapacity contributed to more-sophisticated standards within the banking system.
benefited from international experts to share knowledge, and its ability to convene necessary parties to bring about reform. Meanwhile, Advisory Services worked with IFC clients in China who eventually would become demonstration cases by offering them intensive training in fundamental elements of banking including risk underwriting, corporate governance, and information systems. As banking reform accelerated, IFC took a leadership position in dealing with two high priorities related to the financial sector, climate change and closing the gap between the developed Eastern seaboard and the rest of China. Both of these challenges can be addressed by establishing frameworks principles and microfinance. The most critical part banking sector and the Chinese government. Using a dynamic strategy, Advisory Services delivered ongoing additionality and value in Chinese financial sector reform.
!
LU#$%&!!
Chapter 4 Supporting the Development of Commercial Banks
A . Background and
IFC has served as an important catalyst and indispensable advisor in helping China develop its financial infrastructure by providing access-to-finance advisory services at the
banking sector by creating best-practice examples and introducing international best practices through both investment and advisory services. Being an advisor to the government on policies and regulations at the same time an active participant in the market with its own investments enabled IFC to make systemic impact.19 However, it is important to acknowledge that many factors were at play in this transformation, including the strong commitment of the Chinese government to proceed with the reforms, fast economic growth, and contributions by other institutions including the World Bank. IFC has
efforts to build a modern and sound financial sector, and represents only a drop in the bucket in terms of dollar amounts spent or invested in China. However, in this transformation process IFC helped move things in the right direction. The work of the Wo
financial sector development in the 1990s took a multipronged approach. It consisted of ongoing policy dialogue with authorities on fiscal, financial, and SOE reforms, conducted through formal economic and sector work and policy/strategy notes on specific issues, as well as dissemination of findings through various workshops and seminars. It also supported the development of appropriate banking-sector infrastructure: legal, prudential, accounting, and clearance and payments systems under a large comprehensive Financial Sector Technical Assistance Project, with the first project approved in 1992 and a follow-up project approved in 1999. The Bank also sponsored other technical assistance projects, focusing on strengthening smaller banks, resolving bad debts, introducing deposit insurance, and establishing asset management companies.20 It was alrea
to in the restructuring of state-
pioneering private intermediaries that will provide a variety of much-needed financial 21
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!19 Matt Gamser, in interview with the research team. "%!IFC Bank of Shanghai Investment Project Board Paper, 1999; The World Bank Implementation Completion Report for a Financial Sector Technical Assistance Project, 2003.!21 IFC Bank of Shanghai Investment Project Board Paper, 1999.!
LR#$%&!!
achieving public good through commercially sustainable enterprises,
assisting domestic sponsors and management teams to recognize that best practices result in sound financial performance, and eschewing efforts to gain control of the financial institutions in which it invests sector. These qualities enabled IFC to achieve several things within the sector:
To serve as a trusted partner for regulators, promoting an agenda fully aligned with theirs;
To win the trust of bank management and thus stimulate their willingness to consider new solutions;
To bridge the gap between bank management and the foreign commercial banks serving as strategic partners; and
To launch initiatives in sustainable finance, SME banking, corporate governance, and risk management.
Between 1999 and 2009, IFC made equity investments in eight Chinese commercial banks (plus another still pending government approval) and two loan investments (one combined with equity in the same bank), for a total investment of $471.7 million (not including any CHUEE facilities, see Section B(3) in this chapter for more information). Table 4-1 below lists details of IFC investments in commercial banks. IFC appointed
one. These investments also were accompanied by technical assistance, both pre- and post-investment, on business planning and strategy, risk management, credit training, corporate governance, SME banking diagnostics, and information systems, among other services. Table 4-2 lists the main advisory services that IFC provided to each of the banks. Although there was not a grand plan by IFC in the 1990s to invest in equity stakes in eight banks, Karin Finkelston, IFC Vice President for East Asia-Pacific, told the research team. an enormous opportunity to help China think about how to bring their private sector into the
The banks in which IFC invested were two joint-stock (national) commercial banks, four city commercial banks, and two rural commercial banks. These types of commercial banks together account only
f Shanghai,22 and still less than 25 percent by 2010.23 (In comparison, the biggest five state-owned commercial
r, client banks the research team visited said that strengthened competitiveness of the smaller-bank segment has helped increase competition for the entire banking sector, which helped improve services to the underserved
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!22 IFC Bank of Shanghai Investment Project Board Paper, 1999. 23 IMF, 2011.
5%#$%&!!
sectors of the economy, in other words giving access to finance to SMEs.24 IFC made a conscious decision not to pursue investments in the biggest banks, despite being approached by some of them, concluding that they would be able to attract equity investment and technical assistance from foreign commercial banks without the intervention of IFC, whereas the joint-stock banks and city commercial banks would find it much more difficult to do this. Foreign commercial banks were not convinced that it would be possible to establish effective partnerships, overcome portfolio quality, and related-party and risk management
The research team visited five of the eight commercial banks with IFC equity investments (three of the four city commercial banks, one of the two joint-stock commercial banks, and one of the two rural commercial banks). Due to time constraints, limited availability of clients, and lack of current contact information (in the case of closed projects), the team was not able to visit the other three. We have, however, conducted an extensive review of documents of those projects and also covered them in relevant interviews with IFC staff. Table 4- ector (excluding C H U E E facilities)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!24 YANG Shujian, board secretary, Bank of Beijing; ZHANG Weinian, head of Executive Office, Bank of Nanjing, in interviews with the research team.
"#$%&'()*+"!+,(-$!.'#(/!011('2#3!4%#(
5'$#3!*+"!*62%-$7%6$!07'86$!9:; *+"!<=8,$)!>?#(%
*+"!011',6$%/!@,(%A$'(B
C#$%-$!@D5>!@%2%3'17%6$!D8$A'7%!E#$,6&
J<*)!+8!@D<*0D<7 C72A!(+11.:(7<-!J<*) $RRR UUI&%%I%%% &^!7*(:.<3./!2+!K^ _.3 @?((.338?-
J<*)!+8!P<*H7*0 C72A!(+11.:(7<-!J<*) "%%$ "BIB%%I%%% $&^ _.3 @?((.338?-
J<*)!+8!P<*H7*0 C72A!(+11.:(7<-!J<*) "%%B 5KIB%%I%%% 6+<* Q Q
V7*3D.*0!J<*) `+7*2!32+()!(+11.:(7<-!9<*) "%%$ "KI%%%I%%% %4R"^!7*(:.<3./!2+!$4$^ P+17*<2./aa @<2738<(2+:Aaaa
F*/?32:7<-!J<*) `+7*2!32+()!(+11.:(7<-!9<*) "%%5 &"I"%%I%%% 5^ _.3 b70D-A!3?((.338?-
c7d<*!C+11.:(7<-!J<*) C72A!(+11.:(7<-!J<*) "%%5 LI"&%I%%% "4&^ _.3 V+32-A!@?((.338?-
J<*)!+8!J.7H7*0 C72A!(+11.:(7<-!J<*) "%%& &RI%%%I%%% &^ _.3 b70D-A!3?((.338?-
b<*0]D+?!eOCJ O?:<-!(+11.:(7<-!9<*) "%%B "KIBL%I%%% &^ _.3 @?((.338?-
N7<*H7*!J7*D<7!OCJ O?:<-!(+11.:(7<-!9<*) "%%K BLIRL%I%%% $%^ _.3 @?((.338?-
eCJ!CD7*<M+:.70*!7*;.32./!(+11.:(7<-!9<*) "%%U 5&I%%%I%%% 6+<* Q Q
S.A<*0!CCJa C72A!(+11.:(7<-!J<*) "%%R L$I%%%I%%% $&^ Q Q5'$#3 FGHIGHJIJJJ
S<2<!3+?:(.Y! FMC!E:+H.(2!/+(?1.*23S<2<!*+2.3Y! aY!E.*/7*0!CD7*.3.!0+;.:*1.*2!<EE:+;<-
aaY!FMC!*+17*<2./!<*!7*/.E.*/.*2!/7:.(2+:aaaY!F=\!cT@O!"%%B!:<27*04!SGN@!:<27*0!*+2!<;<7-<9-.4
5$#$%&!!
Table 4-2: I F C Advisory Services to Chinese Commercial Banks (excluding any C H U E E-related programs)
B . -Stock and Rural Commercial Banks
(1) City and Joint-Stock Commercial Banks As part a program to merge the more than 5,000 existing urban credit cooperatives into city-level shareholding commercial banks. At the time, a major source of vulnerability of the Chinese domestic banking system was the high level of non-performing loans. According to official
-owned bank loans were non-performing.!25 !!
IFC made its first equity investment in Chinese commercial banks in 1999 in Bank of Shanghai, and in the next six years followed with investments in another three city commercial banks and two joint-stock commercial banks. The feedback the research team received from the four of these banks it visited was overwhelmingly consistent biggest contributions were recognized as demonstration effect, corporate governance, risk management, and strategic focus on serving SMEs.
Demonstration E ffect At the tibanking sector was plagued with non-performing loans and considered by many foreign observers to be technically insolvent. The timing also directly followed the Asian financial criinvestments in Chinese banks provided critical capital needed at a time of restructuring, and
to the regulators and the market that it was possible to create a profitable, cooperative partnership between foreign investors and Chinese management and owners, and that foreign investors can play a positive role in helping build a sound banking system.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!25 IFC Bank of Shanghai Investment Project Board Paper, 1999. !
"#$%&'()
*+"!0/2,-'()!>%(2,A%-!
07'86$!9:;
0>!K!>$(#$%&,A!L3#66,6&
0>!K!E,-M!N&7$
0>!K!"(%/,$!5(#,6,6&
*+"!>$(%--!5%-$!,6!OJJP
0>!K!"'(1'(#$%!Q'2%(6#6A
%
0>!K!*6$R3!0AA'86$,6&!>$#6/#(/-
0>!K!>N<!.#6M,6&
J<*)!+8!@D<*0D<7 C72A!(+11.:(7<-!J<*) $I%%%I%%% _.3 _.3 _.3 _.3 _.3 _.3 _.3
J<*)!+8!P<*H7*0 C72A!(+11.:(7<-!J<*) 5UKI&%% _.3 _.3 _.3 _.3 _.3 _.3
V7*3D.*0!J<*) `+7*2!32+()!(+11.:(7<-!9<*) K%%I%%% _.3 _.3 _.3 _.3
F*/?32:7<-!J<*) `+7*2!32+()!(+11.:(7<-!9<*) Q _.3 _.3 _.3
c7d<*!C+11.:(7<-!J<*) C72A!(+11.:(7<-!J<*) Q _.3 _.3 _.3
J<*)!+8!J.7H7*0 C72A!(+11.:(7<-!J<*) K%%I%%% _.3 _.3 _.3 _.3 _.3 _.3
b<*0]D+?!eOCJ O?:<-!(+11.:(7<-!9<*) $I"%%I%%% _.3 _.3 _.3
N7<*H7*!J7*D<7!OCJ O?:<-!(+11.:(7<-!9<*) Q _.3 _.3 _.35'$#3 FIJSGIPJJ P P F P G F P
S<2<!3+?:(.Y! FMC!E:+H.(2!/+(?1.*23
S<2<!*+2.3Y! ND73!2<9-.!,<3!(+1E7-./!?37*0!7*8+:1<27+*!8:+1!;<:7+?3!FMC!E:+H.(23!/+(?1.*234!F2!73!E+3379-.!2D<2!*+2!<--!FMC!</;73+:A!3.:;7(.3!2+!2D.3.!9<*)3!D<;.!9..*!/+(?1.*2./!7*!2D.!1<2.:7<-3!:.;7.,./!8+:!2D73!32?/A4
5"#$%&!!
the model of consolidating a large number of underperforming banks (city credit cooperatives in this case) into one bigger regional bank, then making that consolidated bank successful and
Chinese banking regulator on exploring such a model. In 2001, IFC increased its stake in BOS to 7 percent and two other foreign investors also participated in the capital increase HSBC and Shanghai Commercial Bank. After IFC invested in a second Chinese commercial bank in the same year, Bank of Nanjing, the Chinese government shared with IFC a draft regulation that went into effect in 2003 officially allowing foreign investment in Chinese banks. (See boxes on next page for more details.)
ZHOU Xiaochuan, then-governor of PBOC was quoted as saying at a Euromoney conference in 2006. "B! event, which he attended. they were only looking to open new branches in China; no one was thinking about investing in the Chinese banks. Clearly by 2006 that had changed, and some of that is related to work
By the end of 2006, 29 foreign financial institutions had equity investments in 21 Chinese commercial banks, totaling $19 billion.27 IFC had equity in six of them.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!26 Bank of Beijing Investment Project 23943 Expanded Project Supervision Report, 2010. 27 LOU Wenlong, et al, 2007.!
5L#$%&!!
Box 4: I F C Investment in Bank of Shanghai
Bank of Shanghai (BOS) was established in 1995 as one of five banking pilots by the Chinese government, through a merger of 99 existing urban credit cooperatives in Shanghai. IFC made an investment of $22 million in 1999 for a 5-percent equity stake in the bank. IFC started working with BOS in early 1995 by initiating a comprehensive technical assistance program, before the bank was formally established and when the Chinese government was preparing for the merger of the urban credit cooperatives into city-level joint-stock commercial banks. With total committed funding of $1.3 million, it was one of the largest technical assistance undertakings by IFC at that time. In providing the technical
In 2001, IFC increased its stake in BOS to 7 percent. Two other foreign investors also participated in the capital increase, with Hong Kong & Shanghai Banking Corp., in the United Kingdom, taking an 8-percent equity stake and Shanghai Commercial Bank, a commercial bank in Hong Kong, taking a 3-percent stake. The decision to invest cleadership decision by IFC to take the risk after extensive groundwork conducted by the investment team. The deputy governor of PBOC, ZHU Xiaohua, who was also heading the leadership team on the establishment of city commercial banks under PBOC, was of the mind that introduction of equity investment by a foreign
industry. The chairman of Bank of Shanghai, FU Jianhua, also was keen on going ahead with an investment, according to HAN Wenliang, director of the Board Supervisory Office, Bank of Shanghai. The IFC team did a detailed mapping of the sector, and went around the country reviewing over 20 commercial banks.
said Finkelston. we However,
when it came time to make the decision to invest in the Chinese banking sector, there was hesitation within IFC, due to the extreme riskiness of the Chinese system at the time, and the fact that the government selects senior
team on the project to get the decision passed.
55#$%&!!
Box 6: I F C Investment in Bank of Bei j ing Bank of Beijing (BOB), formerly called Beijing City Commercial Bank, was established in 1996 as a city-level joint-stock commercial bank through the consolidation of the 90 urban credit cooperatives in the Beijing Municipality. Bank of Beijing was the second largest, in terms of total assets, among 111 city commercial banks in 2005 when IFC made a $59 million equity investment in the bank for a 5-percent stake. ING Bank NV of the Netherlands took a 19.9 percent stake, just under the 20-percent-stake ceiling that a single foreign investor was permitted in a Chinese bank. The combined investment by IFC and ING reached the maximum 25-percent limit
significant legacy NPL problem. From 1997 to 1998, IFC successfully implemented a technical assistance program of $700,000 to assist the bank in improving credit risk management and formulating overall business strategies. IFC has remained actively engaged with Bank of Beijing on multiple fronts. Bank of Beijing and IFC partnered on energy efficiency financing, with IFC providing training and risk-sharing under the CHUEE program. IFC also provided a credit line to the bank to support its trade finance program. Discussions were held on other new lines of business. IFC also arranged meetings with Bank of Beijing for senior World Bank officials, including President Robert Zoellick, to provide the World Bank with insight into private sector developments in the banking industry in China.
YANG Shujian, board secretary, BOB, said. promoting private sector development and market economy was very noble. We had a very good impression of
Box 5: I F C Investment in Bank of Nanjing
Bank of Nanjing (then called Nanjing City Commercial Bank) was established in 1996 through a merger of 39 existing urban credit cooperatives in the city of Nanjing, the capital city of Jiangsu Province. In 2001 the IFC Board approved a $26.6 million equity investment in the bank for a 15-percent stake. (In 2006, IFC made another investment in the bank, a $47.6 million local-currency loan specifically for SME lending, building on
e team.) Mr. ZHANG Weinian, head of the Executive Office, Bank of Nanjing, told the research team: period of the mid-1990s, the Big Four banks of China were technically insolvent. Foreign financial
cial industry was mostly negative, so they did not want to be
gulation that was
going to allow foreigners to invest in Chinese banks. That was exactly the kind of thing that we were hoping for. They would see us as a go-to group for feedback on regulations of this kind and it would have a systemic
said Finkelston. At the end of 2003, a new regulation by CBRC officially allowed foreign investment in Chinese financial institutions.
5&#$%&!!
Business Strategy and Risk Management IFC engagement with these banks usually started well before investments took place. IFC provided training on business and strategic planning and risk management to six of these banks, and helped them understand that balance sheet growth is not so important as profitability, good underwriting practices, and sound credit management. very fundamental commercial banking knowledge to our Chinese partners. Although it may sound simple these days, those support efforts really made an impact with banks and results
said Ipson.
IFC also introduced stress testing as a risk-management tool to Chinese banks and the banking regulator. In 2004-05, IFC conducted stress tests on five of these banks, and presented the results to each bank, as well as to CBRC at the aggregate level. IFC banking specialists for the East Asia-Pacific Region gave a two-hour presentation to CBRC at the
they produce.
In a visit to Bank of Nanjing in July 2004, IFC introduced the rationale and models of stress testing to Bank of Nanjing. The following year, IFC and the bank collaborated on designing a customized stress- -year cooperation with IFC on data collection, data analysis, designing key parameters, building up the model, and using the model to analyze our businesses, we finally completed the stress test on our lending business and recommended responses based on the results of the test. (Through this exercise,) we
in 2009.28 the bank said in the letter, referring to the overall influence of IFC on the
activities in the following years. Had these banks not changed, I have no doubt that they would have run into severe problems. I also think this work really helped CBRC understand
said Bill Haworth,
I think it has helped the banks a great deal in monitoring th said Ipson.
Corporate Governance IFC appointed directors to seven of the eight banks where IFC had an equity stake and nominated an independent director to the eighth. When IFC director John Langlois was appointed to the board of Bank of Shanghai, he was the first foreign director on the board of a !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!28 Letter from Bank of Nanjing to IFC, dated Aug. 24, 2009.
5B#$%&!!
Chinese bank. Chinese banking industry, let alone some of the new concepts said Jerry Wu, IFC principal investment officer. All five banks the team visited spoke very highly of the experience, dedication, and contribution of IFC-appointed directors, and recognized this as one of the most important impacts IFC has had. Key IFC contributions at the board level included:
IFC directors serving as the bridge between Chinese management and other foreign strategic investors, bringing their Chinese language skills and understanding of the culture and system. Bank of Beijing had high praise for its IFC-nominated director, who it said played an important role in coordinating bank management and ING.
IFC directors bringing positive changes to the functioning of the boards by collaborating with local board directors and demonstrating how the boards could exercise decision-making and supervisory roles, and by asking management tough yet necessary questions that resulted in better quality of materials being prepared for the board.
IFC directors contributing to the sustainability of the banks by serving on their board Risk Committees, Related-Party Transactions Committees, and Audit Committees, and vetoing proposals that could be detrimental balancing tradeoffs between long-term and short-term benefits for the banks and their shareholders.
Related-Party Transaction Committee, relying on the committee to reject some transactions in which management faced enormous pressure to approve the loans. As another example, IFC directors insisted that no dividends be paid out before the capital adequacy ratio, also a new concwanted to get returns as fast as possible. In addition, IFC also provided corporate governance training, together with consulting firm McKinsey, to the boards of five investee banks, and also to the regulator CBRC. IFC also conducted a full corporate governance assessment in 2010 for Deyang City Commercial Bank.
/or other programs, IFC helped all the investee banks to adopt International Accounting Standards, which increased transparency and disclosure.
Strategic Focus on Serving SM Es
The regional commercial banks, in other words, the city commercial banks, were designed to focus more on SMEs. They emerged in the second half of the 1990s as a result of the restructuring and consolidation of urban credit cooperatives. Through partnerships with IFC, the focus was sharpened, and new tools were developed. IFC provided SME banking diagnostic advisory services to five of the investee banks and helped develop SME scoring tools for Bank of Nanjing and Hangzhou United Rural Commercial Bank.
assisted the banks in developing good underwriting standards, and gave them
!
5K#$%&!!
management tools to become strong SME lenders said Ipson. Although all banks in China talk about making SME loans, most of them are still focused on the larger corporations. Lending to smaller and weaker companies is still considered very labor-intensive and very difficult to assess in terms of enterprise risk management when they don t have strong audited financials. I F C has done a good job of helping management understand how to approach this segment and in helping them with the underwriting tools
In February 2012 when Ipson was in Nanjing for a meeting, two managers of the business department of BON came to him and thanked him for IFC s contribution in SME credit underwriting and assessment. his was a real demonstration of genuine gratitude for what I F C has done said Ipson.
Yang of Bank of Beijing commented: had on job creation and corporate social responsibility. I F C strengthened our focus on supporting SMEs and as a result, we have made significant achievements. For example, all of the Beijing companies in the first wave of IPOs in the Growth Enterprise Market section were cus SME loans now account for 45 percent of their outstanding portfolio, up from 33 percent in 2007.
Bank of Nanjing has made lending to SMEs its competitive advantage and has experienced rapid expansion in SME loan portfolio and at the same time improvement in SME (and overall) portfolio quality. See box below for more information. !
!
!
!
!
!
!
!
!
!
!
!
!
!
5U#$%&!!
!
Box 7: SM E Lending Bank of Nanjing
Following its equity investment in 2001, IFC conducted an SME diagnostic in 2005 that provided the bank
nking. In 2006, IFC made another investment, a seven-year, $47.6 million local-currency loan from the proceeds of its Panda Bond offering to Bank of Nanjing, specifically for SME lending. The long-term funding provided the bank with a new instrument to manage its asset-liability mismatch and narrow the maturity gap. A three-year technical assistance program also was launched covering business planning, market segment analysis, credit scoring, portfolio management, and staff training. By mid-2010, Bank of Nanjing has set up an independent small-business line with dedicated small-business lending teams in eight larger branches. It established over 30 specialized small-business lending sub-branches. During the business expansion, the number of small-business loan officers grew from 80 in 2006 to approximately 200 in 2010, and the support staff for small-business lending grew from 20 to 80 in the same period. (Source: NCCB SME Loan Project XPSR, 2010.) The small-business credit scoring system, assisted by IFC Advisory Services, went live in 2010 and 50
-business loans were automatically processed by the system. us get rid of the limitations of manual credit approval. With the increased use of the system and
Zhang of Bank of Nanjing told the research team. As of the end of 2010, the outstanding loan balance to small businesses amounted to RMB17.7 billion (approximately $2.8 billion), which was a 515.9 percent increase from the end of 2006, representing a CAGR of 43.8 percent. The expansion was much faster than the total loan growth of 26.9 percent during the same period. Also, small-business loans as a percentage of total loans increased from 11 percent in 2006 to 21 percent in 2010. The number of active small-enterprise clients increased from 805 in 2006 to 2,049 in 2010. (According to BON's definition, its small-business lending is limited to a single credit exposure of RMB30 million, or approximately $4.8 million.) At the end of 2010, the NPL ratio of small-business lending of the bank was 0.69 percent, which was lower than Bank of Nanjing's overall NPL ratio of 0.97 percent. It was also a significant improvement from five years ago when the NPL ratio of small-business loans was about 4.6 percent. !
5R#$%&!!
(2) Rural F inance Following investments in six city and joint-stock commercial banks, IFC started moving into the frontier sector of rural finance in China, with a $27.6 million equity investment in 2006 in the United Rural Cooperative Bank of Hangzhou for a 5-percent stake. The bank was later transformed into a rural commercial bank, and is now called United Bank of Hangzhou. This was the first foreign invest
sector strategy in China. Rural finance was considered a frontier sector within the Chinese banking industry because of the difficulties in attracting private investors to it. Historically, rural financial institutions had high non-performing loans, a relatively poor customer base, and the challenges in consolidating ownership structure. It was particularly difficult for such institutions to attract strategic investors that could bring in best practices. Domestic financial institutions were not allowed to invest in rural commercial or cooperative banks, and other domestic investors did not have enough banking expertise to be effective in this sector.
-
Box 8: Nanjing Dongdian Inspection & M easuring Equipment Co.
SM E C lient of Bank of Nanjing
The research team visited Bank of Nanjing borrower Nanjing Dongdian Inspection & Measuring Equipment
digital magnetic detection machines, large forging products, and other inspection and measuring equipment for the railway industry. The company was established in 1996. The company started borrowing from Bank of Nanjing in 2004 with a RMB500,000 loan ($79,365). Today, the company has an outstanding loan of RMB35 million ($5.5 million). It turned to Bank of Nanjing when it needed funding for expansion and was not able to obtain a large-enough loan from the local credit cooperative from which it had borrowed before.
uare meters, and is seven times larger than before. The number of employees over the past few years increased from 30 to 150 people. Sales rose from RMB10 million ($1.6 million) in 2006 to RMB90 million ($14 million) in 2011. The average salary paid to its employees is RMB3, 000 ($476) per month, with full pension and medical insurance, as required by the government. The company holds more than 20 patents and is a technologically advanced and well-known enterprise in Jiangsu Province. given us lots of support and our business has grown bigger and
said Chairman ZEN Dewen. !
!
!
!
&%#$%&!!
services needs were met mainly through about 30,000 rural credit cooperatives (RCCs), 35,000 rural postal saving offices (which did not engage in lending), rural branches of Agriculture Bank of China (ABC), and about 300 NGO-type microfinance institutions, as
Among these, RCCs were the most important because of their broad reach and dominance in providing both lending and deposit services to the rural population. At that time, assets of RCCs accounted for 11 percent of the entire banking system assets in China. RCCs dated back to the 1950s and were usually owned by hundreds or thousands of local farmers or residents, each with a negligible amount of investment. According to official statistics, RCCs as a whole posted losses each year for ten consecutive years, from 1994 to 2003, and carried high NPLs on their balance sheets. In August 2003, the government selected eight provinces to participate in a pilot program for reforming RCCs. One key aspect of the program was to restructure and merge RCCs in each county into a single legal entity, closely resembling the restructuring of urban credit cooperatives begun in the previous decade. In 2007, IFC made a second investment in this sector with $32 million for a 10-percent equity stake in Binhai Rural Commercial Bank (BRCB). BRCB was to become a new rural commercial bank through the consolidation of two rural cooperative banks and one rural credit cooperative union in the Binhai New District of Tianjin. It was the first time that IFC acted as a founding shareholder of a Chinese bank.29
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!29 IFC was the first international investor to become a founding shareholder in the rural finance sector. Others might have become such investors in other types of Chinese financial institutions, but the research team was not able to find readily available data on this. A China Daily article on Sept. 7, 2005, reported that British bank Standard Chartered bought for $123 million a 19.99 percent interest in Bohai Bank, a national joint-stock bank being set up. !
&$#$%&!!
(3) Energy E fficiency F inancing
rapid economic growth has depended on a resource-heavy model that has resulted in severe environmental problems and costs. Chinese leaders are now incorporating emissions reduction targets in Five-Year plans and are experimenting with market-based mechanisms to supplement their traditional command-and-control mechanisms for environmental protection.
addressing climate change. IFC pioneered the China Utility-Based Energy Efficiency Finance Program (CHUEE), which combines a risk-sharing facility and an advisory program to directly stimulate energy efficiency financing in a self-sustaining manner. CHUEE was launched in 2006 and supports marketing, engineering, project development,
Box 9: I F C Investment in United Bank of Hangzhou
United Bank of Hangzhou is located in Hangzhou, the capital city of Zhejiang Province in southeast China, in the vicinity of Shanghai. It gradually shifted its main client base from farmers to SMEs, micro enterprises, and individuals with family businesses in light of the increasing urbanization of the Hangzhou area. IFC took a 5-percent stake in the United Rural Cooperative Bank of Hangzhou (URCB) in 2006 (which later was transformed into a rural commercial bank). Coöperatieve Centrale Raiffeisen-
-percent
Joined by Rabobank, IFC visited several RCCs in provinces selected by the government for a pilot reform program. LONG Yun, director of the Office of the Board, URCB, told the research team: investment agreement with IF C and Rabobank in 2006, we had two objectives. On the surface , one was to bring in more funds to increase our capital base. Actually, at that time, many institutions were willing to invest in banks. So we were more interested in bringing in a system to help us improve our corporate governance and to transform our operating practices to increase our competitiveness in the market. I F C has a wealth of experience in helping medium and small-sized financial institutions in developing countries.
. We had the most branches in the Hangzhou area. In certain areas, we were the only one. F inancing was still a scarce resource whether they liked it or not, clients had no choice but to come to us. We were not client-focused, nor market- oriented. Sometimes we were self-centered, actually. But the entire banking sector was becoming more and
said Long. -business scoring skills, and our transformation. With the $1.2 million technical assistance I F C provided, we were able to hire a consulting company, which designed a transformation strategy for us. It outlined how we could better revise some of our procedures and shift our mentality to better adjust to the development and competition of t Director Long said,
&"#$%&!!
and equipment financing services to energy users in the commercial, industrial, institutional, and multi-family residential sectors that implement energy efficiency projects in China. As of the end of 2011, CHUEE partner banks had provided almost $700 million in loans, supporting more than 160 energy efficiency and renewable energy projects that reduced GHG emissions by 17.8 million tons.30 Two IFC clients, Industrial Bank and Bank of Beijing, and a non-IFC investee, Shanghai Pudong Development Bank, participated in the program. Industrial Bank has made energy efficiency financing a brand-differentiation strategy. It carried that commitment further to become the first bank in China and in emerging Asian nations to adopt the Equator Principles, a landmark in sustainable banking. Big Four banks in China also sought to partner with IFC, but the program had to operate within its capacity constraints, so interaction with these large banks has been limited to teaching seminars. At the energy management company level, an evaluation of the CHUEE program conducted
(IEG) in 2010 found that the program facilitated access to financing for such companies, which are the key market players in their sector, through technical assistance for capacity-building and by brokering new relationships with banks. Companies that participated in the program had a 31-percent higher probability of obtaining bank loans than those that did not participate in CHUEE, and also had a higher growth rate.31 At the end-user level, 68 percent of borrowers surveyed by IEG indicated that without the program they still would have implemented their energy efficiency projects, but on a smaller scale or over a longer time frame. It is also with the smaller companies that the CHUEE program had the most impact. The evaluation estimated that about 9 percent of the companies that had benefited from the program would not have implemented their energy efficiency investments without the loans that CHUEE guaranteed. Those respondents were mostly small companies facing constraints in access to finance due to their inability to meet collateral requirements. The research team visited such a client of Industrial Bank, Fujian Sanxinlong Co. (See box on next page for more information.) The IEG evaluation found that overall impact of the CHUEE program consisted of GHG reduction and business benefits to partner banks, energy management companies, and end-users that would not have occurred without the program. It also was found to bring non-quantifiable benefits related to demonstration and spillover effects. The survey conducted as part of the evaluation showed that the program was well-known in China, and there was interest on the part of banks and end-users in learning from the program. The CHUEE model is now being replicated in a new CHUEE-SME project, which is designed specifically to serve SMEs. Two of IFC client banks Tianjin Binhai Rural Commercial Bank and Industrial Bank have signed risk-sharing facility agreements. It is
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!30 CHUEE Program Brochure. 31 World Bank, 2010.!
&L#$%&!!
also being replicated in another new project beyond energy CHUEE Water. And significant breakthrough has been achieved in a new project, CHUEE Jiangsu. In this instance, the
-sharing facility to a local financial institution, which will provide loans for energy efficiency and renewable energy projects in Jiangsu, the heartland of SMEs in China. The Chinese Ministry of Finance and China Clean Development Mechanism (CDM) Fund are also supportive of this initiative and joined Jiangsu province in providing first-loss protection to IFC. This is clear evidence of how important ways that IFC can act as a catalyst to stimulate commercial adoption of leading energy financing, and how efforts with MEP and CBRC can be put into practice.
I F C demonstrated how energy efficiency financing can be a commercially sound product, which at the same time also creates great benefits to the community said Ipson. It not only encouraged Chinese banks to engage in energy efficiency financing but also gave them a new perspective on corporate social responsibility on how you can link good business with good corporate social responsibility. A core value of I F C around the world is that we put into action things that generate social benefits and we do it in a commercially sustainable way, so that these programs can continue and not just rely on subsidies from the government. Projects such as CHUEE Jiangsu (SME) have a great demonstration effect that SMEs are both profitable business segments and also able to generate good social impact
-sha said Wu. Since 2005, the most welcoming agenda for introducing foreign investment (for China) was
new product and new concept. So that was the selling point of this product and it was well- received It is important to recognize that the success of the program was inseparable from the Chinese
efforts of other players. As mentioned in the beginning of this section, the Chinese government has demonstrated a strong commitment in this to local energy management companies had helped establish an entire energy industry in the country. guarantees, built on these efforts, 32 said the IEG report.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!32 The World Bank, 2010.
&5#$%&!!
Box 10: C H U E E Industr ial Bank IFC and Industrial bank signed the first CHUEE risk-sharing facility in May 2006. Under the program, IB provided lending to 50 energy-saving/emissions reduction projects with a total of RMB890 million ($141 milmillion) as a result of repayment. The program has achieved visible economic and environmental effects, according to TANG Bin, director of Board Secretariat of IB. Industrial Bank established a dedicated department for energy efficiency lending in 2008 and developed special procedures and guidelines for processing such loans. In February 2008, CHUEE II was signed. The scope of financing expanded to include energy efficiency, renewable energy, and the China Clean Development Mechanism (CDM). IB provided loans to 71 projects under CHUEE II, for a total of RMB3.08 billion ($489 million) in financing. As of the end of 2011, outstanding loans were RMB1.14 billion ($181 million). There had not been any claims against the risk-sharing as of the end of June 2012, which indicates outstanding loan quality. IB signed up for CHUEE III (CHUEE-SME) in November 2011, which targets SMEs in non-coastal areas. LI
future. The branch has an outstanding green credit loan balance of RMB1.6 billion ($254 million), with 20
in the CHUEE risk-sharing facility with IFC. !
Box 11: Fuj ian Sanxinlong Co. L td. A C H U E E C lient of Industr ial Bank The research team visited Fujian Sanxinlong Co. Ltd., a client of Industrial Bank under the CHUEE program located in Fuzhou, the capital city of Fujian Province. This is a company with 160 employees that designs and manufactures manhole covers. The company was able to get a three-year, RMB3.8 million (U603,000) energy efficiency loan from the Fuzhou Branch of Industrial Bank in 2010 for a RMB6 million ($952,000) investment in equipment upgrades that would result in energy savings and emissions reductions. With the help of the loan, the company was able to go ahead with the project, which yielded cost savings of RMB100,000 ($15,870) per month, or RMB1.2 million ($190,000) a year.
said CHEN Shouqing, manager of the Finance Department of the company.
&&#$%&!!
CHUEE loans have an immediate impact on GHG reduction because the upgrades are made quickly and this is reflected in the rapid repayment of the loans, which also reflects the cost savings the borrowers enjoy. The training in credit risk assessment of energy efficiency loans also led one partner bank to revise its overall risk assessment process because the cash-flow analysis that is part of CHUEE risk assessment is such a powerful tool in assessing all credit risk. (4) Summary of I F C Interventions IFC began to work with Chinese joint-stock banks and city commercial banks in the second half of the 1990s, providing tools for new management teams to lay the groundwork for true commercial banking. These tools covered management practices, risk underwriting, corporate governance, and business development. When the regulators were ready for the first experimental investments in Chinese banks, IFC took a significant but well-evaluated risk by putting equity into Chinese banks, entering a sector that other financial institutions were not yet ready to test. The combination of capital, technical assistance, and taking a strong role on bank boards established a relationship of trust with sponsors and managers eager to learn and
laboration with regulators also provided a model for bank-
Operations moved into frontier areas, promoting energy efficiency finance, as well as rural and microfinance lending. Central demonstrating the commercial value of SME lending.
C . Outcomes and A reas Identified for Improvement
Overall, IFC-invested banks have achieved impressive business performance. Data the research team collected shows considerable expansion in assets, reduction in NPLs, and improvement in profitability. See Figure 4-1 below for comparisons of assets and NPLs for five of the banks where historic data was available. In 2007, of the 120 Chinese city commercial banks, three made initial public offerings (IPOs), and two of them were IFC clients: Bank of Nanjing and Bank of Beijing. By 2010, Bank of Beijing was among the top three banks of the fifteen listed Chinese banks (of all types including the Big Four) in terms of capital adequacy, asset quality, and profitability ratios. (Equity bases increased substantially with the IPOs that contributed to lower return on equity [ROE] after 2007 compared with that of 2005 when IFC first invested, as shown in Figure 4-1.) Among city commercial banks, the top competitor to Bank of Beijing in terms of size at that time was Bank of Shanghai; the closest competitors in terms of focus on SMEs were Bank of Nanjing and Industrial Bank, all three being IFC-invested banks.33 Bank of Nanjing said Zhang, Bank of Nanjing. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!33 Bank of Beijing Investment Project 23943 Expanded Project Supervision Report, 2010.
&B#$%&!!
F igure 4-1: Business Performance of I F C-Invested Banks
Data source: Annual reports of invested banks when available, IFC project documents.
5U4&^
5%4L^
5K4%^
B"45^&K4U^
&$4%^
LB4&^
&54$^
5%4U^5L4B^ 5"45^
J<*)!+8!@D<*0D<7
J<*)!+8!P<*H7*0
V7*3D.*0!J<*)
F*/?32:7<-!J<*)
c7d<*!C+11.:(7<-!
J<*)
J<*)!+8!J.7H7*0
C%2%(#&%!E#$,'!9C'#6T0--%$-;"%%K "%$$
%45%^
%4BR^
%4LR^ %4L"^
%4K"^%4R&^
$4"%^
%4KK^
$4$K^
%4"K^
%4R&^%4R&^
$4"R^$45%^
$4"%^ $4"$^$4%B^
J<*)!+8!@D<*0D<7
J<*)!+8!P<*H7*0
V7*3D.*0!J<*)
F*/?32:7<-!J<*)
c7d<*!C+11.:(7<-!
J<*)
J<*)!+8!J.7H7*0
E%$8(6!'6!0--%$-_.<:!FMC!F*;.32./!+:!*.<:.32!<;<7-<9-. "%%K "%$$
$$4$^$L4B^ $54B^
$%4&^B4&^
L54%^
$R4R^$B4%^
$U4"^
"&4L^
&4U^
"L4%^
$U4%^$&4R^
"54%^ "54K^ ""4U^$R4L^
J<*)!+8!@D<*0D<7
J<*)!+8!P<*H7*0
V7*3D.*0!J<*)
F*/?32:7<-!J<*)
c7d<*!C+11.:(7<-!
J<*)
J<*)!+8!J.7H7*0
E%$8(6!'6!<=8,$)_.<:!FMC!F*;.32./!+:!*.<:.32!<;<7-<9-. "%%K "%$$
L4%^ "4&^ "4B^
""4"^
&4R^
$4L^"45$^ $4KR^ $4$&^
54RB^"4%B^
%4KR^%4RU^ %4KU^ %4LU^ %4RU^ %4&L^ %4R$^
J<*)!+8!@D<*0D<7
J<*)!+8!P<*H7*0
F*/?32:7<-!J<*)
c7d<*!C+11.:(7<-!
J<*)
J<*)!+8!J.7H7*0
b<*0]D+?!eOCJ
U'6KL%(V'(7,6&!C'#6-_.<:!FMC!F*;.32./!+:!*.<:.32!<;<7-<9-. "%%K "%$$
KL! "5!LB$! L5$!
"&!"LL!L%R!
KB!
R"%! U&$!
5$!L&5!
B&B!
"U"!
"I""R!"I5%R!
$%"!
R&B!
J<*)!+8!@D<*0D<7
J<*)!+8!P<*H7*0
V7*3D.*0!J<*)
F*/?32:7<-!J<*)
c7d<*!C+11.:(7<-!
J<*)
J<*)!+8!J.7H7*0
0--%$-!9EN.!.,33,'6;_.<:!FMC!F*;.32./!+:!*.<:.32!<;<7-<9-. "%%K "%$$
"BK! $BB! $ILR$! $I$%$! $IBUB!"IRL5!R%R!
BILL&!UI&UB!
$$"!LIL5U!
&IU%K!LI"L&!
"UI%B$!"&I&RK!
$I$%K!
UIR5B!
J<*)!+8!@D<*0D<7
J<*)!+8!P<*H7*0
V7*3D.*0!J<*)
F*/?32:7<-!J<*)
c7d<*!C+11.:(7<-!
J<*)
J<*)!+8!J.7H7*0
L('V,$-!9EN.!N,33,'6;_.<:!FMC!F*;.32./!+:!*.<:.32!<;<7-<9-. "%%K "%$$
&K#$%&!!
and IFC was able to play a significant role, there were also cases where it was not so successful or unable to play as big a role. Some of the corporate governance technical assistance (TA) training was not well-received by client banks because it In the case of Industrial Bank, initially, the client was dissatisfied with the quality of the Irish consulting company engaged for the training, saying it had no idea about the Chinese environment. IFC identified the problem and suspended the contract and sent in its own corporate governance officer to continue the work. The client was satisfied with IFC's efforts to remedy the situation, and gave positive comments on the TA project!overall.34 In 2004, IFC Board approved a 12.4-percent Commercial Bank (XACB), to be acquired in stages as the bank made progress in improving its performance. Bank of Nova Scotia (BNS) of Canada also was going to take an equity stake of 12.5 percent,
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!34 TA to Industrial Bank Project 522549 Advisory Services Project Completion Report.
Box 12: What the C lients Say philosophy of i
Han of Bank of Shanghai
Zhang of Bank of Nanjing
aspects including corporate governance, risk management, business performance, and corporate social
Yang of Bank of Beijing
Tang of Industrial Bank
We have seen relatively big improvement in our business development and marketing philosophy and practice, as well as risk management, and SME scoring
Long of Hangzhou United Bank
&U#$%&!!
established in May 1997 through consolidation of 42 existing urban credit cooperatives in n, the capital city of Shaanxi Province. Along with this investment, IFC appointed a
board director at the bank and also provided much technical assistance to the management. IFC appointed a director in December 2005, who also became a member of the Related Party Committee under the board. The bank had a legacy of related-party transactions, with several shareholders obtaining loans far in excess of their equity contribution and falling seriously delinquent in repayment. IFC appointed director took strong stands in board meetings and board committee meetings with regard to credit and related-party transactions, and played a critical role in collaborating with the local CBRC bureau, CBRC headquarters, and the strategic investor, to strengthen the foreign shareholders' influence in the bank.35 However, the bank experienced various issues in corporate governance, credit processes, and risk management.36 The chairman, said to be an open-minded and experienced banker, was forced to resign in 2005 following protests of his reform efforts by laid-off employees. A new chairman was appointed the same year, but the protests were a major distraction for him during his first year. As strategic investors, BNS and IFC each held a very small stake in XACB IFC had an initial stake of just 2.5 percent because the conditions for further investment up to the limit were not met, and that eventually was diluted to less than 1 percent as other investors contributed additional capital. The manager sent temporarily to XACB from BNS had little influence over key decision-making and the operations of the bank. larger stake from the beginning, as in Bank of Nanjing, for, say 15 percent, we would have
said Jerry Wu, IFC principal investment officer. Ultimately, BNS raised its shareholding to the maximum level of 25 percent at the same time that China Hua Rong Asset Management took a slightly larger stake, and IFC is considering exiting shareholding in this bank because it no longer has a unique role to play. IFC also had limited influence over Minsheng Bank with its 1 percent stake, according to the Expanded Project Supervision Report of the project. At the time of IFC Board approval of an equity investment in Minsheng, in 2001, the bank already was listed, making IFC the first foreign investor in a listed Chinese bank. IFC was not able to secure a board seat and appoint a director, as it had expected to do at the bank, due to its small stake. Instead, in June 2003, IFC recommended an experienced Western banker as an independent director. He was the first foreign director at Minsheng Bank and played a critical role in introducing international best practices and helping improve the corporate governance of the bank.37 Lack of receptiveness by government also were important factors that sometimes constrained
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!35 905 Project Supervision Report, 2008. 36 37 Minsheng Bank Investment Project 10693 Expanded Project Supervision Report, 2006.
&R#$%&!!
successful despite its being sector, IFC was not able to play as big a role there as it did in other banks for these exact reasons, said Haworth and Wu. Another reason for limited success relates to shareholding structure. After the capital increase in 2001, IFC had 7-percent equity interest in Bank of Shanghai, HSBC had 8 percent, and
had 3 percent. Compared to other models such as Bank of Beijing38 and Bank of Nanjing,39 where one investor had a much higher stake that actually enabled both strategic investors to play complementary roles, none of the three foreign investors in Bank of Shanghai, under a fragmented shareholding structure, said YAN Meng, IFC senior investment officer. In other words, one dominant strategic investor seemed to yield better results.40 As for the CHUEE program, it was not as well-received by some other banks. At United Bank of Hangzhou, CHUEE has been placed on hold because, we think our risk management skills are fairly good and we have very low default rate. But I F C experts thought that default rates globally or in certain regions are very high, so they set up a fairly
said Long of United Bank of Hangzhou. Pricing is indeed a problem, agreed Wu of IFC. program has had no default41, which makes it challenging for us to convince clients for a charge of 2 percent United Bank of Hangzhou also was un that it agree to participate in the risk-sharing facility before receiving advisory services. that I F C give us the training first, and if we felt fine then we would make a decision to participate in the risk-sharing facility. We are willing to pay for the training. However, I F C did not agree with us, saying that we had to confirm (participation in) the risk-sharing facility first before it would Long said. ! !
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!38 Where ING had 19.9 percent and IFC 5-percent stake. 39 Where BNP had 19.9-percent stake and IFC 5-percent stake. In 2004, IFC helped Bank of Nanjing complete a strategic alliance with BNP, and sold 10 percent of its own 15-percent stake to BNP to enable BNP to take a 19.9 percent stake, knowing that Bank of Nanjing was well on its way to an IPO. 40 Javed Hamid and Stoyan Tenev, 2008. 41 As of May 2012, when Wu was interviewed.
B%#$%&!!
Chapter 5 Supporting Microfinance and Non-Bank F inancial Institutions
A . Microfinance
(1)
Microfinance began in China in the early 1980s, when the first international donors such as United Nations Development Program and International Fund for Agricultural Development promoted its development. Dedicated bodies were created within the Chinese government to liaise with each of these donors. All of the programs were characterized as non-government organizations (NGOs) or foundation-type organizational structures, and relied on international grants and soft loans. They focused on rural areas in the less-developed western and central regions of the country. When , there were about 300 NGOs offering microcredit programs in China. The largest of those in terms of clients were the International Centre for Economic and Technical Exchanges and the China Foundation for Poverty Alleviation (CFPA). They were operating in an environment of administered interest rates (applicable to all financial institutions), which were kept at low levels, so this microlending was not sustainable. Over the years, the number of institutions of this type has declined, dropping to about 100 by the end of 2011 as a result of their lack of legal status, sustainability, and funding. Out of the remaining 100, only a very few have achieved sustainability and are still growing by having adopted other business models or legal status, IFC client CFPA Microfinance Co. being one of them. All the others are shrinking. When IFC entered the microfinance sector in China, the regulatory environment for the sector was still in the formative stages and there was no clarity on which regulatory agencies would license and supervise microfinance institutions (MFIs), so it was difficult for private sector investors to obtain the relevant licenses to undertake commercial microfinance activities. There was a lack of professionally managed MFIs in China, as well as a shortage of commercially driven microfinance management skills. As the Chinese economy developed and in recognition of the important role that microbusinesses play in the economy after years of discussion and preparation, the Chinese government started to gradually liberalize interest rates, beginning with the lifting of lending-rate ceilings in the beginning of 2005. Meanwhile, many international organizations, including the World Bank and IFC, had made significant efforts to work with the Chinese government to expand microfinance in ways consistent with international best practices. They also had helped formulate guidelines to foster the establishment of MFIs. These undertakings enabled the creation and growth of commercially oriented and sustainable MFIs in China. In the second half of 2005, PBOC launched a pilot to develop non-deposit-taking microcredit companies (MCCs). In May 2008, PBOC and CBRC promulgated a regulation on MCCs,
,
B$#$%&!!
status of MCCs. In 2006, amid a new wave of reforms to lower entry barriers to new financial services providers in rural China, CBRC launched the village and township bank (VTB) pilot. VTBs are full-service, deposit-taking rural banks. For the most part, these are miniature versions of traditional banks, but it is hoped that their geographic locations will force them to reach out to business at the lower end of the market. Over 700 VTBs had been created by the end of 2011, and by then, IFC had committed to work with four of them: Renshou VTB, Bayan VTB, Beichuan VTB, and Shenzhen VTB. A few state-owned banks, such as Bank of China and China Construction Bank, joint-stock banks, city commercial banks, and foreign banks all have been proactively creating VTBs. In 2006, PBOC and CBRC also adopted a new approach to strengthen and develop the industry by establishing a new postal savings bank with a limited lending license. Following its success in supporting the transformIFC had a clear strategy for financial markets strategy for China in 2007 listed microfinance as one of its key focus areas. By 2010, the strategy had become well laid-out, featuring a combination of advisory and investment services. IFC Advisory Services strategy aimed to:
help create an appropriate regulatory and supervisory framework that supports microfinance, through cooperation with the World Bank and other partners;
focus on building the long-term institutional capacity of the microfinance sector as a whole; and
facilitate innovation and knowledge transfer to promote best international practices in the sector.5"
IFCs investment strategy focused on frontier regions and experimenting with new business models and different legal entities supporting the Chinese g nitiatives. At the institutional level, the strategy aimed to support both banks and non-bank financial institutions to develop best practices and create demonstration effect. At the sector level, the strategy aimed to disseminate global best practices and provide training.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!42 IFC CFPA Microfinance Investment Project 28702 Board Paper, 2010
B"#$%&!!
(2) I F C Interventions
F igure 5-1 Intervention F ramework Supporting Development of the M icrofinance Industry in China
A t the policy level, IFC helped the government formulate the needed regulatory framework. In October 2007, IFC organized a study tour for PBOC, CBRC, and the Legislative Affairs Offices of the State Councils to the United States and South Africa to study the Non-Deposit-Taking Lending (NDTL) systems. Advocacy work was also conducted by IFC and PBOC in order to build awareness of the concept of NDTL and its importance to the
South Africa, through major media such as the Financial Times (Chinese edition) and the Journal of Financial Research. Presentations were given at the Rural Finance Reform Conference, microfinance pilot workshops, international microfinance summits, and other related events. At the sector level, IFC worked with several market players, including the China Banking Association (CBA), MicroCred Nanchong and Shanghai International Banking and Finance Institute (SIBFI), CBRC, and the Ministry of Finance, to educate the market and disseminate best practices on microfinance operations.
IFC conducted a series of workshops and training programs for regulators, financial institutions, and the public to promote added experience with and knowledge of microfinance, including its operations, sales and marketing, product development, risk management, loan analysis, and pricing. IFC facilitated dialogue among international and domestic investors, as well as provincial and national authorities. For example, IFC in 2008 co-sponsored with CBA, MicroCred Nanchong, and SIBFI a workshop on Microfinance Best Practice in Nanchong. About 170 people from all over China participated in the training, including regulators and industry practitioners. The event also proved to be a good occasion for the pilot institutions to network and exchange experiences. The participants were highly satisfied, as their overall rating of the workshop was 4.43 (with 5 being the highest rating).
IFC also created opportunities for the Chinese practitioners and regulators to study international experiences in this area. For example, IFC organized a Chinese
@%2%3'17%6$!'V!N+!,6/8-$()!!
W"X!T:+1+27*0!3.(2+:!
/.;.-+E1.*2!!
W$X!'/;737*0!E+-7(A!<*/!:.0?-<27+*!!
WLX!@?EE+:27*0!<*/!7*;.327*0!!!
VMF3!7*3272?27+*3!!
BL#$%&!!
delegation of 21 people to participate in the 11th Microfinance Center Conference (a major international MFI event) in Ulaanbaatar, Mongolia. This was the first time for most of the Chinese delegates to participate in an international conference on microfinance.
In order to build the capability of the microfinance sector, IFC assisted the CBA in developing a certificate program for microfinance.
And IFC helped a university to develop courses on microfinance. During 2007-08, it provided materials on microfinance to a professor Southwest University of Economy and Finance (SWUFE) and sent a partner trainer and also invited the professor to participate in the training on microfinance operations organized by IFC. Later, SWUFE added
,students about commercial banks adopting smaller-scale microfinance operations. IFC has made considerable contributions to shape the microfinance industry. JIAO Jinpu, secretary general of the China Microfinance Institution Association, commented, After several years of efforts by different stakeholders, including IF C activities, the microfinance industry in China has basically emerged and will continue to grow 43 The scale of the microfinance industry has expanded over the IFC intervention period. In 2005, there were only few MFIs; by the end of 2011, China had 4,282 MCCs and 726 VTBs. By June 2012, there were 247 rural commercial banks, 173 rural cooperative banks, and 1,858 rural credit cooperatives, providing much-needed financing to the rural and MSME sectors. Developing NDTL is beneficial to the formation of multilevel credit markets, breaking the current structure of a bank-dominated market, and effectively improving access to finance for China's SMEs and rural residents.
LIU Ping, Director General, Senior Advisors Office, PBOC A t the institutional level, IFC has investments in eleven Chinese institutions offering microfinance four in VTBs, two of which are pending government approval and seven in microcredit institutions. See Table 5-1 for details. IFC also has provided advisory services to nine of these institutions (plus others that are not IFC clients), and in most cases, tailored Advisory Services work took place two to three years before the investments were made.
to acting as an incubator for greenfield MFIs. For these greenfield institutions, IFC helped form the concept, conduct market studies, promote them to investors, develop the business plan, facilitate dialogue with the authorities and other stakeholders, develop information management systems, obtain licenses and permits, and provide initial training. To help China open the MF sector, IFC China AS team has overcome many operational challenges. At the time when AS embarked on the microfinance sector work, the only !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!43 IFC China Microfinance Pilots Project 548525 Advisory Services Project Completion Report.
B5#$%&!!
funding instrument available for China was the Performance Based Grant Initiative (PBGI). Because most of the MFIs supported by IFC were greenfield institutions, and some of them were located in remote and underdeveloped areas of China, many MFIs lacked knowledge and connection with international experts in MF. These factors, coupled with the language barrier to communicating with foreigners, presented huge challenge to the grantee MFIs in using the PBGI funds effectively and efficiently.. The IFC AS team made efforts to help clients identify, recruit, and procure international experts to work on the projects. To overcome the translation barriers, the team paired IFC staff, international experts, and clients to develop solutions and products such as credit risk manuals unique to China. The team faced challenges in establishing targets that would both attract international consultants to work on newly emerging MF in China and be effective in measuring the performance . Looking back, targets set for some of the projects could have been set higher, some regional IFC staff said. 44
for institutional development has helped China build the foundation for its microfinance sec investment in it. Table 5-1 Advisory S Microfinance Sector
On the investment side, IFC implemented different models. In many cases, such as with MicroCred Nanchong, Bayan VTB, Renshou VTB, Beichuan VTB, CFPA, Xinjiang VTB, and Puhui Rural Guarantee, the investment models initially were developed by Advisory Services.
IFC made its first microfinance investment in China in 2007 with Zhong An Credit, an existing commercially run MFI providing small loans, mostly unsecured, to salaried workers and private business owners, typically market vendors, restaurant owners, and others involved in small cash-generating businesses. The company has evolved to become primarily a service company for commercial banks serving the same segment.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!44 Sources: phone conversation with the regional staff.
<W,-$,6&!*62%-$7%6$-*6-$,$8$,'6!
5)1% 5)1%
*+"!.'#(/!
011('2#3!4%#(
*+"!*62%-$7%6$!07'86$!9:;
*+"!>?#(%!'V!5'$#3!<=8,$)!
*+"!*62%-$7%6$!*6-$(87%6$
*+"!0/2,-'()!>%(2,A%-!
07'86$!9:;
C#$%-$!@D5>!@%2%3'17%6$!D8$A'7%!E#$,6&
fD+*0!'*!C:./72! VMF =>7327*0 "%%K "I&%%I%%% Q C!6+<* K$%I%%% @?((.338?-
V7(:+C:./!CD7*< VMF \:..*87.-/ "%%K $I$5RI5"& $&^ =g?72A $I%%%I%%% V+32-A!e*3?((.338?-
O.*3D+?!hNJ!a hNJ \:..*87.-/ "%%R $I5B5I&%5 "%^ =g?72A KU5I%%% Q
J<A<*!hNJ! hNJ \:..*87.-/ "%%R $IK5BI&UB =g?72A UL&I%%% Q
CMT'!VM! VMF N:<*38+:1<27+* "%$% &IKK%I5U5 $5^ =g?72A $I%%%I%%% @?((.338?-
@D.*]D.*!hNJ! hNJ \:..*87.-/ "%$% "IRL%I%$K $%^ =g?72A Q N++!=<:-A!N+!N.--
J.7(D?<*!hNJ!a hNJ \:..*87.-/ "%$% $IKL$I"UU $%^ =g?72A $I%%%I%%% Q
c7*`7<*0!VCC VMF \:..*87.-/ "%$$ $I%&%I%%% $%^ =g?72A "I%&%I%%% Q
M?--.:2+*!C:./723aa VMF =>7327*0 "%$" &%I%%%I%%% Q '!6+<* Q Q5'$#3 XSIYFOIYJP GIYGZIJJJ
S<2<!3+?:(.Y! FMC!E:+H.(2!/+(?1.*23
S<2<!*+2.3Y! aY!E.*/7*0!CD7*.3.!0+;.:*1.*2!<EE:+;<-
aaY!7*(-?/.3!M?--.:2+*!C:./72!@7(D?<*I!M?--.:2+*!C:./72!CD+*0g7*0I!<*/!M?--.:2+*!C:./72!b?9.74
B&#$%&!!
Also in 2007, IFC made two more MFI investments, in Chifeng MFI and Microcred Nanchong. Both were greenfield projects with international microfinance networks as their sponsors. (Chifeng MFI was dropped by IFC in 2012.)
IFC started making investments in VTBs in 2009, with Renshou VTB and Bayan VTB. Renshou VTB is located in the County of Renshou, which is a frontier region in Sichuan province in western China with annual GDP per capita of $930, much lower than the national average. At the time of IFC Board approval of the project, Renshou VTB had been in operation for less than six months, and it would be the first Sino-foreign joint-venture VTB in China. (However, there already were three wholly foreign-owned VTBs by then.) Bayan VTB is located in Heilongjiang Province in northwestern China. In 2010, IFC made two more investments in VTBs: Shenzhen VTB in Guangdong Province in southern China, and Beichuan VTB, at the epicenter of the devastating 2008 Sichuan earthquake.
IFC also invested in an NGO-type microfinance institution and helped it transform into a commercially run MFI, CFPA Microfinance Co.
from late 2011 to early 2012, with an equity investment in Xinjiang MCC and a loan to Fullerton Credit. Xinjiang MCC is located in the Xinjiang Uyghur Autonomous
orest and most remote provinces, and it represents the first investment in the Chinese financial sector by a Mongolian private sector company. The Fullerton Credit investment included support to a network of three Fullerton companies in Sichuan, Chongqiang, and Hubei in western and central China.
(3) Case study: C FPA Microfinance Co.45
Established in 1989, the China Foundation for Poverty Alleviation (CFPA) was one of the first non-profit organizations in China. It started its microfinance program in 1996 as part of a World Bank project. IFC became acquainted with the foundation in 2007, and suggested that it make its microfinance business an independent department. In November 2008, CFPA Microfinance Co. was established. IFC provided advisory services on business planning and brought international experts to the company to introduce their experience. IFC also paid global consulting firm KPMG to perform an audit of CFPA, the first the company had had. In 2010, Sequoia China Capital, a private equity fund in China, made an equity investment of $9 million in CFPA Microfinance for a 25-percent equity interest, and IFC made an equity investment of $5.3 million for a 14-percent stake. After these investments, the foundationownership in CPFA Microfinance was reduced from 100 percent to 61percent.
contributions to CFPA Microfinance after its investment included:
IFC appointed director knowing China, speaking the Chinese language, having
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!5&!poverty county in Hebei Province, and two of its clients.
BB#$%&!!
expertise in microfinance IFC appointed one of its own staff to the board. LIU Dongwen, CEO of CFPA Microfinance,
spoke up if he had a disagreement with other board members, defended his views, and shared his expertise in helping the company design an optimal organizational structure. The IFC-appointed director also helped CFPA Microfinance to join the newly established credit reporting system under PBOC (which was an IFC Advisory Service project, discussed in Chapter III).
ave a board before, but it was a fake one, not active. The foundation was
our biggest shareholder, so the secretariat of the foundation would make the decisions (for the b said Liu in the interview with the research team. , after (IF C) investment, the board has been exercising its power. It reviews the annual report. It has been meeting quarterly since the first board meeting in January 2010, and it discusses all sorts of issues. Therefore, the decision-making mechanism has
IT systems: With IFC and strategic investor!a sophisticated information technology (IT) system that allowed daily monitoring of
-plus operating outlets and 400 loan us with increasing efficiency and managing risks. Many other institutions, including IFC client Harbin Commercial Banks (the sponsor of Bayan VTB), came to learn
HR and risk management: After the investment in 2010, IFC put together an expert team through bidding, which helped CFPA Microfinance improve its human resources (HR) and risk management functions.
Liu said. These efforts by IFC helped the company achieve results, in both business performance and social development:
Business results: has seen a 50-percent to 60-percent growth rate every year since then. The number of clients increased from 30,000 in 2010 to 110,000 in 2011. In just two years, our outstanding loan amount increased from RMB100 million ($15.9 million) to RMB700 million ($111 million). In 2009, we had operating outlets in only 26 counties. That increased to 39 counties in 2010, and to 53 in 2011 (of which 49 are in poverty-stricken areas and three are in earthquake- said Liu. CFPA Microfinance now ranks among the top microfinance institutions in China in terms of profitability, asset quality, operating efficiency, and (low) average loan size.
Access to finance: In a study of CFPA Microfinance clients last year conducted for the company by the China Agriculture University and China Academy of Social Sciences, 80 percent to 90 percent where
BK#$%&!!
question, Liu said,
borrow from banks. (If not for us), they will have to turn to informal finance or usury.
Poverty reduction: 49 out of the 53 CFPA Microfinance operating outlets are in
CFPA programs are helping clients in those areas develop business opportunities, increase income, pay for their cthe case in the box.
C reating opportunities for women: 91 percent of all CFPA Microfinance clients are women. Most men would not discuss with their wives when they borrow money. So we insist that women have to participate in the borrowing process, and have to come and sign
said Liu. hard-working, good at planning, and family-oriented. Microfinance is the best fit for
said GUO Baocang, manager of the CFPA Microfinance operating outlet in Tang County, Hebei Province, where the research team interviewed him and also visited two of his clients.
While a large number of NGOs established small-scale microfinance institutions in China, they lacked commercially sustainable structures and practices. IFC has pursued a strategy that includes working with regulators on policy and with institutions on practice, and combining technical assistance, capital, and board participation. Partnering with CFPA Microfinance, IFC has helped the foundation translate its goal of providing low-income families access to finance into a disciplined and self-sustaining operation that has substantially expanded its outreach.
(4) Looking ahead
of all international investors, IFC also has faced challenges in some of its investments in this sector, including delayed government approval, slow ramp-up at a couple of companies, and funding constraints, some due to regulatory issues.
so said IFC Vice President
Finkelston.
help shift the market by improving the enabling environment and having demonstration effect XU Weichuan, IFC Investment Officer said.
BU#$%&!!
Box 13: M icrofinance A Developmental Way to A lleviate Poverty
Operating Outlet of C FPA Tang County in H ebei Province
GUO Baocang, a retired government official whose last two jobs were town administrator and head of the County Urban Planning Bureau, became the manager of the operating outlet of CFPA Tang County in 2010. Nearly half of
520,000 has an annual income of under RMB2, 000 ($317), and the average income of the county is just RMB2, 500 ($397, less than $1.25 a day). Guo set up the CFPA Tang County center in April 2010, and hired a team of 12, including eight loan officers. Between April 2011 and March 2012, they lent an aggregate RMB39 million ($6.2 million), with 5,000 active clients
percent, without a single late p
Also, for a loan of (only) several thousand y
Most of the clients in Tang County, 60 percent, are in fish culture and animal husbandry, followed by those working at tree plantations in mountain areas, and then those providing services in small-scale manufacturing and retail shops.
poverty. People did not value poverty alleviation efforts in the past because they were free. Those efforts did not yield good results. This time around, microfinance is a whole different way of alleviating poverty. Our loan is not free; it needs to be repaid, and it comes with interest charges as well. So, as a borrower, you have to have a project to be able to repay the loan. This serves the purpose of reducing poverty. And once we get the loan repaid we can use the money for the next round of poverty alleviation. T
is a farmer living in Ma Village of Tang County. She and her husband are in their 50s and have three daughters. She was in the pig-raising business, but due to turbulence in the market she lost all of her investments and savings. Her husband is disabled and cannot work, and
-the family decided to open a workshop making incense, they needed the start-up capital to purchase equipment and
There are banks in the town but they ar
if she could form a group of five women who would provide mutual guarantee
als and equipment. Now that we are able to get the business started, we are looking for opportunities to expand and buy
SHAO Peixia and NIE Haiqiu, both in their 50s, are a couple living in Ye village. They make a living by raising over 100 pigs. At one point, they were short RMB10, 000 ($1,580) when they needed to buy pig feed and turned to CFPA Microfinance after seeing a poster. They eventually formed an investing team with four other famithem (CFPA), they came to my house and took a look. Then on the third or fourth day, they brought the money to our
BR#$%&!!
B . Non-Bank F inancial Institutions
With promoting access to finance for SMEs as strategy in China,46 IFC has, in addition to the commercial banking and microfinance sectors, also provided investment and advisory services in the non-bank financial institutions sectors, which play an important role in providing access to finance. Non-bank financial institutions include sectors such as leasing, insurance, asset management, credit guarantee, and mortgage services. Compared with its exposures in the commercial banking and microfinance sectors, IFC investments in each of these sectors have been relatively small in number and amount. And some are still too new to indicate results. Therefore, this review does not go into as much detail on these sectors as it does with the other two. L easing
goal in the leasing sector in China is to play a catalytic role in promoting the development of the sector. On the Advisory side, IFC worked with legislators in China to improve the legal and regulatory framework and spur the further development of leasing in the country. Starting in 2004, IFC played an instrumental role in supporting the development of a comprehensive leasing law. The main objective of the project was to assist the National
NPC) in preparing a financial leasing law consistent with international best practices. IFC also hoped to disseminate knowledge and guidance on financial leasing to the key stakeholders through workshops, conferences, and dialogue with the drafting group members and other concerned authorities. In February 2005, the Ministry of Commerce established a regulation on foreign-invested leasing companies titled, the Leasing Business. sult, at least 20 foreign-funded leasing companies were established within
iesannounced by the CBRC. The leasing market was reopened to the commercial banks and within two Advisory Services project in the country made a crucial contribution to the development of these two regulations.47 In December 2007, China Leasing Business Association awarded IFC the Special Award for Legislative Contributions for Financial Leasing, demonstrating industry participants . Although the draft Leasing Law was prepared in 2007, it never came into full effect because the newly elected NPC that came into power in 2008 brought a new reform agenda. Nevertheless, the process of preparing the draft law has started the engine for a leasing industry in the country. The formation of the two Ministry regulations, the establishment of bank-affiliated leasing companies, five published books on the subject of leasing taxation, regulation and repossession, and other related topics, and various workshops and conferences all raised awareness and shared knowl!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!46 Jiangsu Financial Leasing Co., Ltd. Project 26449 Board Paper, 2009. 47 !
K%#$%&!!
30 times larger than it was in 2004. On the investment side, IFC made an equity investment of $22 million in Jiangsu Financial Leasing Co. (JFLC) in 2009, taking a 10-percent stake. IFC client Bank of Nanjing was a strategic investor, with a 35-percent stake. This investment followed the work with Chinese legislators in drafting the to identify potential investment opportunities. By 2011, JFLC had significantly outperformed
Its lease portfolio experienced compound annual growth rate of 76 percent between 2008 and 2011. Unlike its peers (licensed by CBRC) that focus on large projects (average project size of more than RMB500 million or $79.5 million) and large-scale enterprises, JFLC has committed to a well-defined, SME-oriented strategy, focusing on specialized areas (such as the health and education sectors) and frontier regions. At the end of 2011, JFLC reported net leasing receivables of RMB9.9 billion ($1.57 billion), 82 percent of which were from SMEs. It had 1,181 active customers and 1,665 active contracts. The average initial contract size was RMB11.7 million ($1.86 million), average outstanding balance per customer was RMB9.7 million ($1.53 million), and average outstanding balance per contract was RMB6.9 million ($1.09 million). 48 Frontier regions accounted for 44 percent JFLC is also committed to good corporate governance, and has a qualified board of directors with three committees, on risk management, audit, and remuneration and compensation. An IFC-nominated director with solid financial market experience and local knowledge now sits on the audit committee and remuneration and compensation committee. As requested by CBRC, JFLC also has a supervisory board, which oversees the work of the board of directors and reports directly that JFLC is well-governed and has low corporate governance risk.49 Like other leasing companies, JFLC has significant maturity mismatch between its assets and liabilities, due to the general lack of long-term debt financing available to leasing companies. Most of its lease terms are three to five years. In May 2012, IFC Board approved a RMB-denominated senior loan of up to RMB315 million ($50 million equivalent) to JFLC to support its SME-oriented business expansion in frontier regions and to help strengthen its financial structure and diversify funding sources. The project also was one of the very first IFC loans to be funded through (see the next chapter on local-currency financing), making it an important innovation and breakthro financing operations in China. Insurance
The Chinese insurance market is one of the major untapped insurance markets in the world and the domestic insurance sector remains small. In 2000, IFC Board approved an equity investment of $31 million in New China Life Insurance Co., equivalent to 6 percent of
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!48 Jiangsu Financial Leasing Co., Ltd. Loan Project 31941 Board Paper, 2012. 49 Jiangsu Financial Leasing Co., Ltd. Loan Project 31941 Board Paper, 2012.!
K$#$%&!!
. Together with other foreign investors, including Zurich Financial Services, this was the first foreign investment in a Chinese life insurance company. At the time, the Chinese insurance sector was still in its infancy, and the life insurance market was dominated by three state-owned insurance companies, which together had a market share of 97 percent. New China Life was established in 1996, and was the only Chinese insurance company with private sector ownership greater than 50 percent. The newly established company was facing stiff competition from the well-established state-owned insurance companies. investment, and an accompanying technical assistance program, were implemented to help increase competition and commercialization in the sector and to introduce international expertise. 50 Prior to the investment, IFC arranged $250,000 in technical assistance for the regulatory authority, China Insurance Regulatory Commission (CIRC), at the request of the Chinese government. The assistance focused on conducting a comparative study of the regulatory regimes in a number of advanced economies to help CIRC create an environment aligned with best international practices. (The funding was arranged with the government of Australia and IFC was not directly involved in providing advice to CIRC.)51 In 2003, IFC Board approved an equity investment of $16 million in China Life Re Co., equivalent to 7.5 percent major step on the part of China Re, which was 100-percent-owned by the Ministry of Finance, to privatize its operations through a spinoff of its life and non-life reinsurance operations and the establishment of a direct property insurance company. IFC had been engaged in China Life Re since early 2002, and had played a critical role in advancing the privatization process through knowledge-sharing with the company and potential investors.52 The company later experienced various problems and was re-nationalized by the government. IFC sold its stake in 2007. 53 Also in 2003, IFC Board approved an investment of $12 million in CUNA Rural Credit Cooperative Insurance Co., equivalent to 15 percent However, the company was liquidated in 2009.54 Asset management
After years of lending to unprofitable state-owned enterprises, the Chinese banking system had accumulated a large amount of NPLs by the late 1990s, estimated to be on the order of $440 billion, equivalent to 40 percent of all bank loans, or 42 percent 2000.55 In response to mounting NPL problems within the state-owned banks, and with the aim of supporting SOE reform, the government formed four asset management companies in 1999 to take over, manage, and dispose of -owned banks plus China Development Bank. China Huarong Asset Management Corporation was one of the four formed and it specifically addressed NPLs of the Industrial & Commercial Bank of
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!50 New China Life Insurance Co., Ltd. IFC/R2000-200 Board Paper, 2000. 51 New China Life Insurance Co., Ltd. IFC/R2000-200 Board Paper, 2000. 52 China Life Re Company, Ltd. Project 11741 Board Paper, 2003. 53 China Life Re Company 54406 Project Supervision Report, 2007. 54 CUNA Mutual Company 517576 Project Supervision Report, 2010. 55 China Huarong Asset Management Corporation Project IFC/R2001-0207 Board Paper, 2001.!
K"#$%&!!
China. In 2001, IFC made an investment of $50 million in 2001 in the form of a local-currency loan guarantee to finance the winning bidder(s) of the auction by Huarong of NPLs, the first such auction in China. International investors at that time were wary about entering the Chinese NPL market, as the process of acquisition of the NPLs through bidding and the resolution of the se transactions provided needed comfort to international investors.56 To continue to help address the NPL problem, IFC and two other investors, Huarong and Cathay Capital 2, formed the Rongde Asset Management Co. Ltd. in 2006, which was set up to acquire and service NPL portfolios. The company resolved RMB800 million in NPLs (approximately $100 million) in 2007. However, its financial performance was not strong and it posted low returns. IFC exited the company in 2008.57
distressed-asset resolution industry with a $55 million equity investment in a greenfield Sino-foreign equity joint-venture asset management company, taking a 14-percent stake. China Orient Asset Management Corp. (also one of the four asset management companies formed by the Chinese government in 1999) and CFS Investment Holdings (China) Ltd. (a wholly owned subsidiary of General Electric) were the two other main investors. After three years of operation, the company began liquidation due to unsatisfactory financial performance.58 C redit guarantee
Credit guarantee plans have been used by policymakers in an attempt to augment lending to selected groups. They are typically implemented as part of a larger strategy to redirect lending toward certain preferred or disadvantaged groups and activities. 59 Given the challenges faced by Chinese SMEs in gaining access to finance, some believe that credit guarantee companies have a role to play in improving access to finance, at least in the intermediate term. Two months after the devastating earthquake that hit Sichuan Province in May 2008, IFC Board approved a $15 million equity investment (or a 20-percent stake) and a $15 million risk-sharing facility with the Chengdu Small Enterprise Credit Guarantee Co., which became the first project under the IFC Sichuan Earthquake Reconstruction Program. IFC had been assisting the company since its formation in 2001 through Advisory Services. With the investment, a new Advisory Services program also was implemented to improve the
he areas of risk management, internal control, employee training, and product development. IFC nominated a director to serve and also played a key role in introducing a foreign technical partner, the State Secretariat for Economic Affairs of Switzerland (SECO). !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!56 China Huarong Asset Management Corporation Project IFC/R2001-0207 Board Paper, 2001. 57 NPL Joint Venture Asset Management Company Project Company 560683 Project Supervision Report, 2009. 58 Orient Fortune Company 612719 DOTS 59 Orbeta, Lopez, and Adams, 1998.!
KL#$%&!!
state-owned enterprise mentality before to serving the interest said LI Xiaohua, manager of the Audit and Supervision Unit of the company. The company has maintained rapid growth, with a 50-percent year-on-year growth rate in volume. By the end of 2011, the company had guaranteed bank loans of RMB3 billion ($2.06 billion), with an outstanding guaranteed amount of RMB9 billion ($1.42 billion). It was serving 2,000 clients, almost all SMEs. Since establishment in 2001, default rate had only been 2.2 percent. In the early years, 90 percent of its clients would not have been able to get loans from banks. That portion gradually has decreased to about 50 percent as the company has grown and its capital base has increased, according to Li. In addition to investments and Advisory Services projects in leasing, insurance, asset management, and credit guarantee, IFC also has left its footprint in finance and mortgage servicing companies. IFC made a $10 million loan (plus $20 million in syndication) in Orient Finance Co. in 1997, which was a licensed non-bank financial institution offering a wide range of financial services. Between 2001 and 2003, IFC made investments in two mortgage origination and servicing companies industry experienced rapid growth. The investments were a $245,000 equity investment in Advantage China Holdings Ltd. in 2001 for a 15-percent stake, and a $10 million convertible redeemable preferred share in Anjia Group Holdings Co. in 2003. Besides those in banking, microfinance, and non-bank financial institutions, IFC also has made close to 20 investments in about a dozen private equity funds in China, totaling $250 million. These funds target financing SMEs, energy efficiency, and renewable energy sectors such as water, as well as biotechnology companies, distressed assets, and other areas. The private equity funds projects suppor gic priorities in China and help create jobs. In its involvement, IFC plays important roles in providing a vote of confidence and promoting best practices in governance, along with environmental and social standards.
!
K5#$%&!!
Chapter 6 Capital Market
Companies with revenues in local currency benefit from borrowing in that currency, instead of in a foreign currency. Borrowing in local markets also allows companies to eliminate foreign exchange risk on their balance sheets. The financial crises that have affected emerging markets in recent years demonstrated that even stable exchange-rate regimes may not hold in times of crisis; therefore, being hedged against currency risk in other countries is a prudent financial strategy. IFC has made local-currency financing a priority in China to help develop local capital markets. Over the past ten years, IFC has worked with the Chinese government to improve its capital market development by introducing local-currency debt-financing products, including renminbi-denominated bonds and currency swaps that allow IFC to fund itself in renminbi for on-lending to its borrowers. Prior to the local-currency financing initiative, international development organizations funded themselves in international markets. Loans to Chinese entities were normally denominated in U.S. dollars or other freely convertible currencies, requiring a foreign debt quota. While borrowing foreign currency to purchase imported goods might make sense, it was not rational if a substantial amount of the proceeds were to be used to cover local costs. Lending in foreign currency introduced an element of exchange-rate risk and variation in the amount of the loan principal paid in renminbi (RMB). These problems disappear when the loan is denominated in renminbi. The borrower is able to repay the loan from its domestic revenue, and does not have to deal with fluctuating exchange rates or the complicated process of purchasing foreign currency and obtaining permission to remit the funds overseas.35 The borrower also can ts as a AAA-rated issuer are lower than if it attempted to directly access markets.
A . Renminbi-denominated bonds
The bond market is an important place for corporations and governments to raise long-term capital. It plays a key role in ensuring the healthy operation of the macro economy, effective transmission of monetary policy, proper allocation of financial resources, and, more recently, the Chinese
China has developed a large and increasingly diverse market that includes both public and private debt (Figure 6-1). Despite the rapid growth of bond market over the years, when compared with other developed markets, the market scale, degree of marketization, and effectiveness in resource allocation remained limited and has
K&#$%&!!
F igure 6- Bond Market G rowth Over the Last 10 Years
2012 Goldman Sachs.
The composition of bond market was also undiversified, with more than 80 percent of the depository balance in 2005 comprising government bonds, central bank notes, and financial bonds. Corporate bonds have not been fully used as an effective means of direct financing, and the majority of required capital has been financed through indirect channels in China. Large corporations have dominated the limited number of bond issues. The irregular structure of the bond market not only fostered potential financial risk but also seriously hindered optimal resource allocation. Table 6-1: Size and Distr ibution Comparison Between U .S. and China Bond Markets in 2005
U .S. Bond M arket in 200560 China Bond M arket in 200561 Category $ Billion % Category $ Billion % Treasury 4,165 15.72% Government 335 37.29% Mortgage 6,160 23.25% Central Bank 280 31.17% Corporate 4,964 18.74% Financial 244 27.17% Municipal 3,044 11.49% Corporate 39 4.34% Money Market 3,433 12.96% Foreign 0.26 0.03% Agency 2,616 9.87% Asset Backed 2,111 7.97% Total 26,493 100% Total 898.26 100%
In October 2005 IFC, together with the Asian Development Bank (ADB), became the first foreign issuer of bonds on the Chinese domestic market through yuan-denominated Panda Bonds IFC issued RMB1.13 billion in 10-year Panda Bonds and ADB issued RMB1 billion in ten years. This inaugural renminbi bond was the result of five years of hard work. From 2000 to 2005, IFC worked very closely with the PBOC, Ministry of Finance, and other related ministries to address many technical and regulatory issues, both from the perspective of a development organization and of a market participant. IFC organized several workshops for the relevant ministries, most notably PBOC, MOF, NBRC, and the China Securities Regulatory Commission (CSRC) to share its experience in other countries such as Mexico to show how
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!60 Securities Industry and Financial Markets Association, http://www.sifma.org/ 61 China Central Depository & Clearing Co., http://www.chinabond.com.cn!
KB#$%&!!
IFC helped these countries launch a local-currency bond, as well as the processes and the country's regulatory framework required for issuing. Over the period from 2005 to 2011, IFC issued two tranches of Panda Bonds on the Chinese mainland, and one Dim Sum Bond in the Hong Kong SAR, with total proceeds of RMB2.15 billion. The issuance of the Dim Sum Bond also helped further the internationalization of renminbi and the development of a renminbi bond market in Hong Kong as an offshore market. Interviews with IFC staff in the Treasury Department and in the China Country Office about the issuance process indicated that IFC had to overcome two significant challenges: Chinese cautiousness about using international rating agencies and the application of international accounting standards. China stipulated that international development organizations must be rated by a domestically registered credit rating agency in China and provide financial statements in compliance with Chinese accounting standards. These requirements were difficult for IFC to accept. According to Finkelston, the associate director of IFC East Asia and the Pacific office at that time, if IFC accepted a local rating agency and accounting standards, this could open the door for similar requirements to be made in the future in other markets, which would cause unnecessary burdens..62
After lengthy discussion and negotiations with the Chinese regulators as well as educational efforts, IFC was finally exempted from these requirements and allowed to follow international credit-rating and accounting standards, which helped lead to a successful bond issue. Nevertheless, IFC staff interviewed agreed that IFC would not have been able to open the renminbi bond market without the continued support and encouragement of the Chinese government, particularly the Ministry of Finance.
a Bond' generated numerous challenges in areas of issuing procedure, language, and applicable laws. There are no precedent cases to reference, thus it provided a rare opportunity for very valuable explorations, according to DING Wei, managing director of China International Capital Corp.Bond.62
The successful launch was strategically significant. " This is an historic step, " said CAO Honghui, director of the Chinese Academy of Social Sciences, International Financial Research Institute. The significance of the birth of the Panda Bonds does not lie in their size, but rather it is an important strategic deployment of China's financial markets to international participants 63 Panda Bonds have helped deepen the overall capital market in the country, open the Chinese renminbi bond market to international financial institutions, and provide a model for future
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!B"!LO, 2005 Birth of Panda Bond, China Bond Market Opens the Door to Foreign Capital (熊猫债出世国债券市场对外资进入打开大门), Chinese Financing 63 Zhang, 2005.
KK#$%&!!
issuers. According to the publication Today, with the huge trade surplus and ample liquidity, money is clearly not a problem; the real attention that authority paid is to reform of the bond market. 62 The participation of IFC ushered in useful international experience and management skills in bond issuance, particularly in disclosure, documentation, and deal management, despite the fact, that no other foreign institutions or companies have been approved by the Chinese government to issue renminbi-denominated bonds in China since 2005. One central bank official commented in an interview with the press, entities have rich experience in helping emerging market-oriented economies to open up their capital markets, and have maintained good cooperation relations with China in the financial fieldmarket 64
Furthermore, as a result of the Panda Bond issuance experience, the Chinese government revised twice its regulation on management by international development agencies of the issuance of RMB bonds. initiative and experience has certainly contributed to the development and subsequently the revision of the measure, especially in two areas: credit- rating methods and accounting standards, ZHU Wenqin, senior IFC China Country Officer, said he believed.
bond market is at a new level in terms of its size and diversity of participants versus its status in 2005 (see Table 6-1 for 2005 status). Although the rapid development and diversification of the Chinese bond market cannot be said to be
introduced modern knowledge and best international practices to the country. This may have contributed to the perception and culture shift on local-currency bonds. F igure 6-2: Size of Sectors of the Bond Market as of June 2012
Adopted from FAQ: Chin 2012 Goldman Sachs.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!64
KU#$%&!!
Panda Bonds supported high-quality companies that needed long-term local-cur rency financing, while successfully addressing exchange-rate risks and raising fund-use efficiency
Issuing Panda Bonds helped develop the local bond market in China and, to some extent, improved the smaller-than-normal proportion of direct financing and its domestic
irrational structure. It also represented a significant effort to accomplish long-term strategy of improving financing channels for private enterprises in the Chinese domestic market and helping them gain better access to medium- to long-term financing. Nina Shapiro, IFC vice president and treasurer, said in the first Panda Bond issu press release, market. We hope that this bond will facilitate further expansion of the non-government bond markets in China and will increase access to capital for private 65 IFC used proceeds from the bond to finance a total of eight Chinese companies. These companies operate in industries such as health care, environmental efficiency, and financial services, all of which are top development priorities for the Chinese government. For example, the United Family Hospital, one of the beneficiaries of the bond issue, was the first joint-venture private hospital in China.
Table 6-2 Issuances and Investee Companies
Most of these companies earlier could not directly access the bond markets for financing, and short-term funding from banks is inadequate for large, capital-intensive operations such as business expansion or research and development. QIAN Xuejie, deputy general manager of Beijing Shenwu Environment & Energy Technology Corp., explained to the research team the
was get financing directly in the bond market. -term funding is critical for the construction of R&D facilities and development of the innovative HTC (hydrothermal carbonization) technology, which eventually helped us achieve stable development.
The companies financed by the Panda Bonds have used these IFC loans to expand or upgrade their facilities, improve environmental performance, strengthen corporate governance, and improve their management systems and adherence to industry standards. The financing !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!65 IFC Press Release, Oct. 10, 2005 IFC Panda Bond Launch Opens Renminbi Bond Market to International Institutions
Year Scale (R M B)
Interest Rate Term Investee Company
Panda Bond I 2005 1.13 billion 3.40% 10 years 1. Guangzhou Development Industry Holdings 2. United Family Hospitals 3. Anhui Conch Cement Co.
Panda Bond II 2006 870 million 3.20% 7 years
1. Bank of Nanjing 2. Changsha Aier Eye Hospital 3. Shanghai Fosun Pharmaceutical Group 4. Century Sunshine Group
Dim Sum Bond 2011 150 million 1.8% 5 years Beijing Shenwu Environment & Energy Technology Corp.
KR#$%&!!
ultimately generated a wide range of opportunities, employment, and contributions to economic and community development. As summarized in Table 6-3 below, in 2011, companies supported by the Panda Bonds created opportunities for about 70,000 workers and SMEs, provided high-quality services to millions of patients, and generated significant tax revenues for national and local governments, which can make more resources available for assisting the poor. Table 6-3: Development Results of Investee Companies F inanced by Panda Bonds in 2011
Box 14. Changsha A ier Eye Hospital G roup Co. Aier Eye Hospital is a private eye-care provider in China. In 2006, IFC provided Aier a loan of RMB64 million,
hain of eight eye hospitals serving 40,000 patients headquartered in Changsha, Hunan Province. As a hospital in China, Aier cannot mortgage its land and buildings as collateral, the preferred form of security for Chinese banks offering long-term loans, so its growth was restricted by lack of long-term financing. With the funding provided by IFC, Aier was able to expand and upgrade much faster and provide wider access to quality eye care in
by the company to: establish two new, full-service eye hospitals, one in Harbin and the other in Chongqing; relocate and expand three existing hospitals in Wuhan, Chengdu, and Hengyang; relocate and upgrade six optometry centers into standalone hospitals in Hefei, Nanchang, Nanning, Zhuzhou, Shaoyang, and Yueyang; and to establish an optometry school in Changsha. WU Shijun, assistant to the . Similar long-term and low-
at a very timely point and it was Importantly
in the company as a private eye-care provider. If I F C had not invested in Aier at that time, the company might not be what it is today. Moreover, the structure of the loan is reasonable to us. It would be hard for us to repay the entire loan of RMB64 mill ion in a single payment. We have a series of payments of reasonable amounts that allow us to
investment requirements in areas such as purchasing corporate insurance, environmental/fire, and safety practices also assisted Aier in meeting international standards while strengthening financial management and improving business transparency. With support from IFC, the company
*62%-$%%!A'71#6)!011('2#3!@#$%
4%#(K<6/!D8$-$#6/,6&!L'($V'3,'!9:N;
>N<!.'(('[%(-!
9\;
5'$#3!<713')7%6$!
9\;
5'$#3!L#$,%6$-!
E%#A?%/!9\;
5#W%-!]!D$?%(!
L#)7%6$-!9:N;
\?<*0]D+?!S.;.-+E1.*2!F*/?32:A!b+-/7*03 "%%& $IU$U!!!!!!!!!!!! 5K!!!!!!!!!!!!!
CD7*/.>!F*2.:*<27+*<- !F*(#e*72./!M<17 -A!b+3E72< - "%%K RU&!!!!!!!!!!!!!!! $$"I&%%!!!!!! B!!!!!!!!!!!!!!!
'*D?7 !C+*(D!C.1.*2!C+4I!62/ "%%& 5"IUKB!!!!!!!!!! &R"!!!!!!!!!!!
CD<*03D<!'7.:!=A.!b+3E72< - !\:+?E!C+4I!62/4 "%%B &I&L$!!!!!!!!!!!! $I&%$I5L5!!! U!!!!!!!!!!!!!!!
J<*)!+8!P<*H7*0 "%%B "IK"B!!!!!!!!!!!! LI"%%!!!!!!!
@D<*0D<7 !M+3?*!TD<:1<(.?27(< - !\:+?E!C+4!62/ "%%B $LI$R"!!!!!!!!!! &5!!!!!!!!!!!!!
C.*2?:A!@?*3D7*.!\:+?E!b+-/7*03 !!C+4I!62/ "%%B R&$!!!!!!!!!!!!!!! "45U!!!!!!!!!!J.7 H7*0!@D.*,?ND.:1<- !=*.:0A!N.(D*+-+0A!C+4I!62/ "%$% $IU5K!!!!!!!!!!!! &!!!!!!!!!!!!!!!
U%#$%&!!
completed an IPO on the Growth Enterprise Market in Shenzhen in October 2009 that raised RMB882 million in equity to fund additional growth.
u said. Aier is now the top private eye-care provider in China, with a 36-hospital network covering the country's 21 provinces and provincial-revenue reaching $130 million in 2011. In addition to fee-based services, Aier also provides free or highly subsidized eye care to needy patients with subsidies from the government, and has set up strong a presence in frontier regions as well as providing charity services to communities in rural and autonomous regions.66
B . Renminbi Swap Facility
Currency swap agreements help the parties in the transactions exchange the funding advantages they possess in different capital markets and better match the assets and liabilities on their balance sheets to avoid foreign-exchange risk. Since 2008, China has signed about 20 currency swap agreements to facilitate business and trades, particularly for import and export businesses. In November 2011, IFC signed agreements with China Development Bank and the Export-Import Bank of China that enabled it to extend long-term Chinese renminbi loans to support projects that improve access to finance in rural areas, education, and health care for millions of Chinese. By signing the National Association of Financial Markets Master Swap Legal Agreements with the two banks, IFC became the first multilateral institution authorized to conduct transactions with Chinese financial institutions in the domestic local-currency swap market. This initiative is another milestone for the IFC-China partnership; with our partner banks in China, it enables us to support key projects that are
, said Sérgio Pimenta, IFC director for East Asia and the Pacific. In May 2012, IFC Board approved lending $50 million to Jiangsu Financial Leasing, which was founded in 1985 and is controlled by the Chinese government. The loan is the first to be funded through IFC's landmark Renminbi Swap Facility. The funding will help Jiangsu Financial Leasing, an IFC investee, expand its business in China's poorer or frontier regions and strengthen its financial capability, thus increasing access to finance for SMEs in the education and health care sectors in less-developed regions of China. Supporting small and medium enterprises and developing frontier regions are IFC's focus areas in China, in line with the country's developmental priorities," said Hyun-Chan Cho, IFC's country manager for China and Mongolia, at the signing ceremony.
new investment, Jiangsu Financial Leasing is expected to double the total
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!BB!Aier Medical Co. 24778 Expanded Project Supervision Report, 2011.!
U$#$%&!!
financing of is SME business by 2016. 67 As a strategic investor, I F C offers a unique package of equity investment, long-term debt financing, and international best-practices know-how. This loan shows that the company's development has been further recognized by the international financial institutions, to help enhance the company's reputation in the capital markets. Now we are able to grow our business and provide competitive products to more clients, especially those in China's western regions, " said XION Xiangen, chairman of Jiangsu Financial Leasing.
C . Summary
IFC has addressed lagging capital markets development and its own need for local currency-lending capability by working with government officials to create the mechanism for the Panda Bond and the Renminbi Swap Facility. By providing local-currency financing products, IFC has been able to meet the needs of its private sector clients as they address the lack of long-term bank funding for domestic companies. At the same time, these products help clients avoid foreign-exchange risks. The loans made through Panda Bond proceeds and the new swap facility have been placed with companies in national-priority industries that otherwise would not have been able to directly access the bond market for financing or to obtain mid- and long-term financing from domestic banks.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
67 Company news江苏金融租赁公司与国际金融公司(IFC)签署长期贷款协议, June 25, 2012.
U"#$%&!!
Chapter 7 Conclusion and Lessons Learned
China has made impressive achievements in financial sector reform over the past twenty years. The main conclusion of this review is that, while the primary effort behind the achievement belongs to the Chinese government, I F C has made significant positive contributions to this progress.
, for example its work facilitating secured transactions reform; some of its projects, especially those with commercial banks, have had impact at the sector and institutional level; and some efforts, such as the Personal Bankruptcy Law project, did not succeed as expected. Nevertheless, a
economy evolved, able to address key issues as they emerged amid the Chinese financial sector . support and contributions to financial sector reform in China demonstrate its role as a catalyst, as well as a strategic investor, technical advisor, facilitator, and knowledge broker.
As a strategic investor, IFC took a huge risk investing in the sector when other private investors were unwilling or unable to enter on their own. Most IFC investments were seen by the recipients to be critical to their development. Many had demonstration effects that amounted to best practices that led other investors into the market later.
As a technical advisor, IFC provided experience, information, resources, and capacity-building that helped clients (both government and institutions) make informed decisions and choices in line with their reform agendas and action plans.
As a facilitator, IFC helped the various stakeholders in the reform process work together and resolve differences to reach the best conclusions or decisions.
As a knowledge broker, IFC created a link between China and other nations, and conduits among policymakers and service providers and end-users by translating, communicating, promoting, and integrating the best available evidence, knowledge, and experience into policy and business decisions.
L essons learned
taught many lessons, both success factors and areas for improvement. The success or failure of IFC interventions can be traced back to both external and internal factors. Two particular external factors timing and strong commitment from clients were critical to the success Timing
IFC decided to enter the Chinese market at a time when China was experiencing rapid economic development and its financial sector was considered one of the major bottlenecks slowing economic growth. Strong desire by the government and the
UL#$%&!!
country for reform and for learning from international expertise created a great opportunity for everyone, including IFC. t basics in the early years, but it worked very well because the capacity of the banks and government agencies at that point was so low, said Jerry Wu, IFC principal investment officer.
Committed clients both government and banks
IFC chose to partner with government agencies, notably PBOC and CBRC, which not only were committed to reform but also understood the sector and had the political influence and authority to make decisions and implement change. Moreover, the government was able to mobilize considerable resources, which was essential to translating reform ideas into practice. The loan registry system is one example of this.
pushing the reform effort from the top down and in facilitating wide outreach and increased awareness among financial institutions throughout the country.
At the institutional level, most of the banks with which IFC invested and worked had competent and committed management that was receptive to the ideas and practices
improved tremendously. The banks have improved in many ways that are not related to IFC. Partly this is due to a generation of young bankers who are very sharp and are
s could have happened, or at least in the same short time frame, Mike Ipson, former IFC country manager for China.
Several internal factors also were crucial to Taking strategic risk when warranted
Despite the presence of many opportunities, there were many political and operations uncertainties in China in the early and mid-1990s. IFC was one of the few institutions entering the Chinese financial market at that time. IFC took a huge risk in investing in
financial sector reform. In the meantime, some of those investments turned out to be big winners in terms of profitability for IFC. This shows that development impact and financial sustainability go hand in hand.
Bolstering the decision to take a risk on Chinese financial reform was the IFC strategic focus, long-term vision, and strong belief in its
mission of private sector development. This was reflected frequently during interviews and in numerous documents reviewed, including those detailing IFCearliest operations and strategy in China, starting in 1995. However, the first decisions did not come easily. In fact, internally, it was a very tough process for IFC to decide on its first investment Bank of Shanghai. Due to the high level of risk in the Chinese bangetting involved. It took a lot of explaining and pushing by the IFC regional management and investment teams to get the decision made. Recalling the choices
U5#$%&!!
that had to be made in the late 1990s and early 2000s on IFC investments in Chinese banks, regional Vice President Karin things right, there was a chance for great profitability and a chance for systemic impact if we maintained the strong relationship with the regulator.become the go-emerging markets commercial banking sector, IFC was also among the first to venture in
Carefully selecting interventions on the basis of their potential demonstration and catalytic effects was one of the most effective strategies IFC used to reduce risk and ensure success.
Remaining
maintaining a close collaboration with the government as a trusted partner
priorities and reform agenda, and so, as a result, benefited from keen government
were completely the same as the goals of
who is also a major partner of ours in China. (For example,) the CHUEE program is a
IFC maintained a very close relationship with the government as a trusted partner. In the case of commercial banks, IFC kept the banking regulator informed of what it was doing while working with individual banks. The trust of the regulator was crucial for IFC to achieve systemic find a way to work, particularly with the policy-making institutions like CBRC and
we were to come and te Gamser, ccess to Finance program regional manager for East Asia-Pacificupon us and tell us what their agenda is, and then we help them prepare for things. We are not prescriptive and we try not to be dogmatic advisors. And as a result, we
Gamser said. Finkelston commentedfrequently during those years, giving them feedback on what we were doing, including MOF, CBRC, PBOC, and the provincial governments. Ipson saidPBOC was the regulator of these banks, we explained to them what we were trying to do and the focus that we had. They were prepared to give us the opportunity to invest. We were an investor for these banks but we were also working hand-in-hand with the PBOC. We helped the banks define what areas they should focus on and we also let PBOC and CBRC know what was going on with these banks, and not just the central people, but also the regulators local branches. There was good transparency on what we were doing with
Strong additionality led to greater development results
U&#$%&!!
IFC investment had a clear and strong political risk-mitigation effect on other s to co-invest with IFC, with the cases of Bank of
Shanghai and Bank of Beijing being two examples. In many instances, additionality is feature. Many clients sought
out the chance to work with IFC, not because of its financial position, but because of , which many other donors and
organization would not have. What makes IFC unique? Not just one type of service, but the s
s, such as the risk-sharing facilities in China, and the financial support it offers, coupled with tailored advisory services, are aspects frequently mentioned by our clients as the
Taking a programmatic approach to maximize development impact Interventions simultaneously at the regulatory and policy level, sector level, and
institutional level were omoting access to finance in China, said LAI Jinchang, then head of IFC Chengdu Office. Gamser also thought that being an advisor to the government on policies and regulations while an active participant in the investment market enabled IFC to have systemic impact. Some of the pre-investment technical assistance IFC provided to the banks was very important in teaching the banks fundamental skills in credit and risk management.
Integrating and strategically sequencing the AS and IS operation mattered think that we would not have been able to invest in any of the banks without any of the prior advisory work, director, A2F program.BU In my view, IFC's role and success in China was the success of AS, and investment gains came in handy as the consequence, along with good luck. Thus, the linkage between IFC Investment and Advisory should be sufficiently explored. AS played a huge role in re-establishing IFC in China in the early 90s. Most of the successful investments were a result of multiyears of AS, then, once the relationship and situation became mature, an investment project followed. I have never seen that much direct linkage between AS and IS in IFC anywhere in the world, 68 commented ZHANG Jun, IFC Caribbean regional manager.
Taking a long-term view also was important -term investor that emphasizes social impact and profitability, we take a long-
said. Taking a programmatic approach maximized the development impact, while at the
same time improving efficiency. In the case of the Panda Bonds, the proceeds were immediately used by pre-just to open the bond market, our aim is to support the development of the domestic private sector, said ZHU Wenqin, senior China country officer, who was involved in the entire process of issuing Panda Bonds in China.
Combining a strong local team with top-notch international expertise
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!BU!=1<7-!(+11?*7(<27+*!'?04!L%I!"%$"4!
UB#$%&!!
Access through IFC to international industry professionals, along with the strong technical expertise, commitment, dedication, local China teams, were benefits highly recognized and appreciated by the project partners and clients.
hard to bring them top-level expertise. We know China is big and complicated, so we go out of our way to try to find the best people in the world that have the best handle on the issues. And we often bring in several people, so they can have a dialogue with them, giving them several ideas inst Gamser.
Having the right people with the right skills sitting on boards enabled IFC to have a significant impact on the corporate governance of these banks. IFC-appointed directors had considerable experience working in Asia and China, a good understanding of local culture, spoke the language, and possessed strong technical expertise. All these were important to help them become effective board directors and to enable profound changes in the board.
Co-investing and close collaboration with strategic investors
In all investments in the city commercial banking sector, IFC joined with one to two strategic investors who also were commercial banks. The strategic investors were able to provide hands-on operational expertise to the investee banks, while IFC played a complementary role in other areas, including corporate governance and risk management. For example, BNP placed some of its own managers at Bank of Nanjing to manage daily operations, and this turned out to be very successful.
Organization efficiency
That IFC itself is a development institution with a multicultural environment worked
management and the strategic investor) understand that our position is to help better
IFC is a multi-country, multicultural organization, our people tend to be quite sensitive to how our partners look at things. We understand their background and we can put ourselves in their shoes and think why they are saying these things and what their motivation is. We can address misunderstandings that are not intentional but
decisions needed to invest in the high-really important is to have people at the country level who are willing to look beyond just transaction-by-transaction to see the overall picture and build a strong
kelston.
Be true to who you are
IFC also received requests to invest in some of the biggest state-owned banks, gambles that turned out to be hugely profitable for those who did so, but IFC turned these offers down because mission.
UK#$%&!!
The review has also identified several internal faand areas for improvement. Most IFC Advisory Services were successful, but in a few cases desired outcomes were not achieved. While negative effects from some overwhelming external factors, such as 2008 s global financial crisis or wholesale political changes, cannot always be avoided, some operational lessons could be drawn from these cases. Being supply-driven leads to less successful outcomes
For example, starting in 2004, IFC worked with legislators in China to improve the legal and regulatory framework for the development of a leasing industry. Among other things, IF in preparing a financial leasing law that was consistent with international best practices. Although the draft Leasing Law was prepared in 2007, it never was put into effect because a newly elected NPC came ibe supply-were asked to advise and we did, but the government was reluctant to go further. We kept trying to address changes that needed to happen but the progress has been very
secured transactions, which was very high on the priority list, we got very responsive results on
be designed based on a proper understanding of constraints to implementation in the local context. ommitment needs to be addressed and reinforced throughout project implementation. Lacking an understanding of the country and the situation likely will lead to poor design and implementation of a project. The Carbon Finance Aggregation through FIs - CHINA COMPONENT project was one example of this. It was designed and pushed through from IFC headquarters, bypassing regional and local teams. Because the project was designed in Washington, D.C., without proper understanding of the Chinese market, it set unrealistic targets without consulting with the local team. More important, the client commitment was not properly assessed by the project designer, and this later became a serious obstacle to implementation, eventually leading to project failure. Effective consultation, communication, and coordination between global and local IFC teams is a crucial factor to ensure the relevance and quality of a project design.
Better allocation of resources and a proper funding instrument could have helped results
and improved efficiency
UU#$%&!!
At the time that IFC was making multiple investments in the commercial banking sector, there were only two banking specialists in the region, who were spread very
nship with the banks. The banks benefited a great deal and really wanted to have an ongoing relationship with our banking specialist. I think it would have been worthwhile and
resources, we maybe could have spent more time on-
While it may be necessary to overcome financial constraints by pragmatically using the funding instruments available even when they are not ideal, it is also important to be mindful and prepared for consequent operational implications and constraints. As pointed out earlier, the only funding instrument available to support the IFC AS Microfinance work for China was the PBGI. Due to limited previous exposure to international experts and language barriers, it was difficult for clients to work with them. The IFC AS team made additional efforts to make the PBGI succeed, including helping to identify and recruit international consultants for the project. This may have added administrative burdens for the project team, which already was stretched with multiple projects. This operations model may have caused delay of project implementation. In retrospect, given the challenges posed by the instrument, PBGI may not have been right for China. A more suitable funding instrument would have been more efficient.69 The challenges presented by implementing the PBGI in China will be studied further as part of a global review of the PBGI program now underway.
Timing and the mode of entering the less-developed western part of the country or new
sectors could have been better planned out which
experienced problems with corporate governance, credit processes, risk management, and protests by its laid-off workers, Finkelstonand it also helped the regulators, to help them understand what was happening in the
have expanded to the western part of China earlier and helped the banks in that area to catch up with the developed banks in the coastal areas.
A small shareholding can restrict influence
I l Bank with 1percent and 2.5percent stakes, respectively.
thought IFC could have done better. The main feedback on areas for improvement was very consistent from the banks the team visited:
IFC is bureaucratic, slow, and inefficient; IFC uses a cookie-cutter approach, lacking customization and flexibility; There was a lack of continuity in relationship management in some cases; and
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!69 Source: interview and email communication with the regional staff.
UR#$%&!!
IFC was big on ideas and concepts, and weaker on implementation and technical support.
Looking ahead As China has grown into the second-largest economy in the world, it has faced many developmental challenges. The knowledge, relationship, and momentum IFC has built in the country over the past twenty years should enable IFC to continuously update and refine its strategy to address the key development challenges in China. As always, strategic focuses need to align with the development agenda of China. IFC needs to start engaging in new or expanded engagements in China now in recognition of the long lead time required to create opportunities. Tackling environmental challenges
China is facing increasing international pressure to address carbon emissions, pollution, and environmental management. The Chinese government made a serious commitment to energy conservation and emissions reduction in its Twelfth Five-Year Plan (2011-experience with CHUEE and reen Credit Policy over the past few years has placed it in a good position to: (a) initiate the next generation of CHUEE, focusing on the lower end of the energy markets (third-generation); (b) expand the CHUEE model to water efficiency; (c) support government agencies in policy development and outreach to more FIs
Box 15: A reas Where I F C Has Room for Improvement What the C lients Say
Tang of Industrial Bank: operating efficiency and lack of accountability. Top management has no way of hearing the voices (of
such a large institution to have standardization. But in the face of ever-changing challenges, I F C should try
Han of Bank of Shanghai:
Yang of Bank of Beijing: Different situations should be treated differently Long of United Bank of Hangzhou said, feel that different situations warrant different treatment because economies across the globe are in different stages of development and different regions within China vary widely as well. Therefore, I F C should not use
R%#$%&!!
on energy efficiency financing; and (d) facilitate implementation of the Green Credit Policy on the ground.
Supporting SM Es and rural, micro/small businesses
Promoting the development of SMEs is another priority in the Twelfth Five-Year Plan. On the one hand, more work can be done by IFC that builds upon the success of the secured transactions reform. These steps include: launching the second phases of credit reporting and secured transactions work to take the model to rural, micro/small (RMS) businesses; promoting rural collateral reform and credit reporting to further improve the financial services and credit guarantee system for SMEs; increasing the size and percentage of lending to SMEs; and broadening channels of access to finance for SMEs. On the other hand, as its additionality declines, invest more in banks. The challenge now for IFC is finding the next institutions in China that need its investment and advisory services. IFC will be forced to look at this issue on a broader, more systemic level, seeking ways to influence regulations and work with bank training organizations to create courses, standards, and certification, and to spread IFC knowledge more widely to the entire banking sector. Balancing urban and rural growth
China has an urban/rural income gap of 3:1, and it is still growing. Addressing inequality and balancing growth between urban and rural areas becomes a big challenge for the government. IFC has been preparing to respond with continued support for RMS business growth through: (a) improving the regulatory environment and financial infrastructure; (b) developing and scaling-up small and rural financial-service providers, for example, microcredit companies and VTBs; (c) expanding mobile banking networks to provide banking and remittance services to the growing rural migrant population; and (d) promoting gender finance concepts and good practices. IFC intends to do more on gender finance - the first Chinese bank recently joined the Global Banking Alliance for Women, with F acilitating China integration in the world economy
While to the global economy by sharing experience, and exchanging ideas and innovative practices with other countries. IFC can play a big role in making this happen by creating a knowledge-sharing platform and by connecting China with other nations for such exchanges.
R$#$%&!!
Annexes
R"#$%&!!
Annex 1: Terms of Reference
Background IFC as a member of the World Bank Group focuses on the private sector to promote growth,
multilateral financier for companies that do business in emerging markets. It finances and advises clients to support profitable and sustainable business development in these markets. As a development institution, IFC seeks to deliver development impact while achieving
work. Through its results tracking systems, IFC has established itself as a leader in development results measurement among multilateral development banks. IFC was the first multilateral development bank to report on the development results of its entire portfolio, beginning with its 2007 Annual Report, and the first to have an external firm review the application of its methodology and reported results. The Development Impact Department (CDI) was created in September 2010, incorporating the existing Results Measurement Unit for Advisory Services (AS) and the Development Effectiveness Unit for Investment Services (IS). The department is responsible for measuring
Investment and Advisory Services, and for -making and strategy formulation.
Over the past 17 years, IFC has provided advisory services, equity investments, loans, and risk-strategy for its financial-markets operations in China is to support sustainable development and a -discipline according to international standards, expanding access to finance for micro, small, and medium-sized enterprises, and promoting energy efficiency finance. IFCmanagement, corporate governance, strategic planning, and financial management, beginning in 1995. Building on this base and continuing to transfer knowledge, IFC made its first investment in Chinese banks in 1999, a critical time of reorganization. Since then, IFC has
of private sector banks and city commercial banks, financial infrastructure, green credit and energy efficiency financing, and SME access to finance and microfinance. Review Scope and Questions The overall objective of the review is to collect and summarize evidence of IFC activities in
the financial sector. The scope of the review will cover both IFC Investment and Advisory
RL#$%&!!
Services, as well as other products that IFC has offered in China, including: Advisory work on financial infrastructure, such as credit bureaus and secured
transactions frameworks Financial sector-operations related to climate change, such as Green
Credit P MSME access to finance and rural finance Panda Bonds
While the emphasis of the review is development results, it also will address several related questions, namely strategic relevance, sustainability, and lessons learned. The intended audience would be both internal and external.
Development results: activities have contributed to the , directly and indirectly. It will summarize development results generated by IFC s operations at various levels: country, sector, policy, institutions, households, and MSMEs. To the extent feasible and practical, impact on poverty and jobs will be assessed.
Relevance: The review will also analyze the provided, -economic and financial conditions. Alignment of financial markets (FM) and Access to Finance (A2F) operations with country and regional strategies will be analyzed.
Additionality and demonstration: The review will address the issue of additionality of IFC s support to China financial sector development, given all other assistance provided by the development community in the sector. It will also look at whether IFC s operations have produced any demonstration effect and the types of that demonstration.
Sustainability: The review shoubeen sustainable, both in terms of development results for own financial sustainability.
L essons learned: What key lessons can be drawn from the reviewed projects? Some of the operations are being replicated in other countries in the region. What are the key factors essential to ensuring future financial-sector operations in China as well as in other countries where the models could be applied? !
!
Methodology and Approach Desk review (1) Review project/program documents, board papers, reports, and presentations relating to background and context of Investment and Advisory Services projects in the financial sector (2) Review and synthesize the development results of IFC programs and key findings of completed evaluation reports/assessments (including project completion report, expanded project completion report or presentation) for the following programs:
Secured transactions China Utility Energy Efficiency (CHUEE) program
R5#$%&!!
Any other IFC programs that might be identified during the assignment The review should also cover other documents available in the public domain, including, but not limited to, news articles in Chinese. Interviews Interviews either face-to-face, or via phone with IFC staff, IFC clients (sponsors and investors), partners, other market players, policymakers/government officials, and beneficiaries related to the following programs:
IFC investee banks (past or current. Specific banks and contacts to be identified with advice from IFC operational staff)
Credit bureau program SME Banking Microfinance Green Credit Policy program Panda Bonds Any other programs that might be identified during the assignment
In-depth on-site interviews Selection of locations and sample interviewees will be determined in discussion with the task managers. In principle, the selection will be based on the geographic concentration and overlap of both IS and AS projects to maximize the efficiency and minimize potential burden on IFC task managers and external clients. Compile and summarize findings/notes/transcripts from the reviews and interviews K ey competencies required
Fluency in English and Chinese (spoken and written) Familiarity with Chinese financial sector and IFC Superb writing skills Prior experience conducting interviews and collecting primary- source data
R&#$%&!!
Annex 2: Development Results Rating of I F C Operations
a. DOTS (Development Outcome Tracking System) Development Outcome Rating of IFC and
!
Note: Data as of June 30, 2012, from the DOTS system.
b. DOTS Development Outcome Rating of China Panda Bond Projects
!
!
5%^5&^&%^&&^B%^B&^K%^K&^U%^U&^R%^R&^$%%^
M_%U M_%R M_$% M_$$ M_$"
@D5>!@%2%3'17%6$!D8$A'7%!E#$,6&!+4JSKHO
CD7*<I!MV!WPiLI!KI!RI!$%I!$&!:.3E.(27;.-AX
CD7*<I!<--!WPi"BI!5%I!&$I!&LI!&&!:.3E.(27;.-AX
FMC!WPi5LRI!5B&I!5RLI!&U"I!BLU!:.3E.(27;.-AX
RB#$%&!!
c. Development Effectiveness Rating of Access-to-Finance Advisory Services Projects
!
Note: No data for China A2F prior to FY09.
!
!
%^!$%^!"%^!L%^!5%^!&%^!B%^!K%^!U%^!R%^!$%%^!
M_%R! M_$%! M_$$! M_$"b$!
@%2%3'17%6$!<VV%A$,2%6%--!E#$,6&!+4JZK+4HO^H!
CD7*<I!'"M!WPi5I!5I!KI!L!:.3E.(27;.-AX!
CD7*<I!<--!WPiBI!BI!$"I!5!:.3E.(27;.-AX!
RK#$%&!!
Annex 3: K ey Players Supporting F inancial Sector Reform in China
O rganization Focus Asian Development Bank (ADB)
From 1998 to 2005, ADB approved private sector investment facilities equivalent to $586 million, consisting of six private sector loans ($308 million) and 11 equity investments ($274 million). Technical assistance (TA) amounts approved for the financial sector jumped by 64% from $9.7 million from 1990 1997 to $16 million from 1998 2005. The financial sector belongs to the core operational sectors identified under the Medium-Term Strategy II 2006 2008 (MTS II) of the Asian Development Bank (ADB). Priority areas include supporting financial sector reforprivate sector operations. ADB is focusing on NBFIs, smaller banks, and the Agriculture Bank of China. ADB is moving away from on-lending operations and toward infrastructure building for the financial sector. TA outcomes are rated likely to be sustainable because most recommendations had been effectively incorporated into enacted laws and development plans. For instance, many of the recommendations under the banking law TA were incorporated in the Banking Supervision Law, amended PBC Law, and Commercial Bank Law. The enactment of these three laws substantially strengthened the legal framework for the financial sector.
Europe Union (EU)
EU provided mostly grants for technical assistance and training in poorer areas in the areas of poverty reduction, social development, governance, and environmental management.
International Monetary Fund (IMF)
IMF is heavily involved in fiscal reform issues in China. During 2001 11, IMF provided TA to China in the following areas: tax system reform, tax administration reform, public financial management, intergovernmental fiscal relations, statistics, and monetary policy and bank supervision. In 2010, IMF/WB conducted a Financial Sector Assessment Program (FSAP) in China, focusing on identifying vulnerabilities and development opportunities in the financial system and determining needed reforms.
World Bank sector review (World Bank 1990) was the basis for its assistance strategy in the 1990s, which sought to create independent banks that, while still state-owned, would operate on commercial principles, subject to an improved regulatory and supervision system. Bank advice to create r OC), along the lines of those of the U.S. Federal Reserve, represented an early (successful) attempt to limit local political interference and reassert central authority over monetary aggregates. A Financial Sector Technical Assistance Project (FSTAP) completed in 1994 supported development of financial prudential supervision and regulation, and PBOopportunity for discussion of policy issues. In 2001, the Bank agreed with the government to renew Bank support for financial sector reform and development through a program of analytic and advisory activities. The Bank is helping deepen and broaden the Chinese financial sector and support the growth of private financial institutions. The overall framework includes support to strengthen the policy environment and infrastructure that would help develop more efficient financial intermediaries and capital markets. Its ultimate objective is to create more effective market-based channels to link savers/lenders with borrowers/users.
!
!
RU#$%&!!
Annex 4a: L ist of Interviewees
!
Annex 4b: Interview Questions
Questions for IFC clients (i) What was the motivation or strategic consideration for your company to work with IFC? (ii) What perceived uniqueness and additionality would you attribute to IFC support? (iii) How and to what extent has IFC's support made a positive impact on your business? (iv) In which areas can IFC improve?
Questions for IFC staff (i) What role do you think IFC has played in China's financial-sector development? What do
you think are the key impacts IFC has had on the sector?
U#7% 5,$3% *6-$,$8$,'6
Q'2%(67%6$67I!c7<+,.* S7:.(2+:!+8!'*<-A373!S7;737+*I!S.E<:21.*2!+8!@2<27327(3 CD7*<!J<*)7*0!O.0?-<2+:A!C+117337+*j<*0I!67-7 S7:.(2+: M7*<*(.!G887(.!+8!CD.*0/?!V?*7(7E<-72Aj<*0I!6? S.E?2A!S7:.(2+:! C:./72!O.8.:.*(.!C.*2:.j<*0I!j.7 @2<88 S.;.-+E1.*2!O.3.<:(D!C.*2.:!+8!2D.!@2<2.!C+?*(7-_<*0I!@D?A7*0 @2<88I!T+-7(A!O.3.<:(D!C.*2.:!8+:!=*;7:+*1.*2!<*/!=(+*+1A !V7*732:A!+8!=*;7:+*1.*2<-!T:+2.(27+**+"!"3,%6$j?I!@D7H?* '33732<*2!C=G '7.:!=A.!b+3E72<-_<*0I!@D?H7<* J+<:/!@.(:.2<:A J<*)!+8!J.7H7*0fD<*0I!j.7*7<* b.</!+8!=>.(?27;.!G887(. J<*)!+8!P<*H7*0V:4!67? V<*<0.:I!@1<--!=*2.:E:73.!J?37*.33!S.E<:21.*2 J<*)!+8!P<*`7*0!`717*037!J:<*(Db<*I!j.*-7<*0 S7:.(2+:I!J+<:/!+8!@?E.:;73+:3!G887(. J<*)!+8!@D<*0D<7[7<*I!c?.H7. S.E?2A!\.*.:<-!V<*<0.: J.7H7*0!@D.*,?!=*;7:+*1.*2!k!=*.:0A!N.(D*+-+0A!C+:E4CD.*I!V.7 @.(?:727.3!S.;.-+E1.*2!V<*<0.: J.7H7*0!@D.*,?!=*;7:+*1.*2!k!=*.:0A!N.(D*+-+0A!C+:E467?I!S+*0,.* C=G CMT'!V7(:+87*<*(.!V<*<0.1.*2!C+4!62/4j<*0I!N7<*9<7 M7*<*(.!k!F*;.321.*2!S.E<:21.*2 CMT'!V7(:+87*<*(.!V<*<0.1.*2!C+4!62/4\?+I!J<+(<*0 V<*<0.:I!N<*0!C+?*2A!GE.:<27*0!G?2-.2 CMT'I!V7(:+87*<*(.!V<*<0.1.*2!C+4!62/467I!b+*0>7<+ 6+<*!G887(.:I!N<*0!C+?*2A!GE.:<27*0!G?2-.2 CMT'I!V7(:+87*<*(.!V<*<0.1.*2!C+4!62/467I!c7<+D?< V<*<0.:I!'?/72!@?E.:;737+* CD.*0/?!@1<--!=*2.:E:73.!C:./72!\?<:<*2..!CG4I!6NS4`7I!`7<1<+ h7(.!T:.37/.*2I!M?]D+?!_<*0g7<+!J:<*(D F*/?32:7<-!J<*)!CG4I!6NS4N<*0I!J7* S7:.(2+:I!@.(:.2<:7<2!+8!2D.!J+<:/ F*/?32:7<-!J<*)!CG4I6NS467I!`7<**7*0 V<*<0.:I!J?37*.33!V<*<0.1.*2!S7;737+* F*/?32:7<-!J<*)!CG4I6NS4!M?]D+?!J:<*(D6+*0I!_?* CD7.8I!G887(.!+8!J+<:/!+8!S7:.(2+:3 e*72./!O?:<-!C+11.:(7<-!J<*).%6%V,A,#()CD.*I!@D+?g7*0 V<*<0.:I!M7*<*(.!S.E24 M?H7<*!@<*c7*6+*0!P.,!V<2.:7<-!N.(D*+-+0A!S.;.-+E1.*2!C+4@D<+I!T.7>7<!<*/!P7.I!b<7g7? M<:1.: C-7.*23!+8!CMT'j<*0I_<*0g7<+ M<:1.: C-7.*23!+8!CMT'f.*0I!S.,.* CD<7:1<* P<*H7*0!S+*0/7<*!F*3E.(27+*!k!V.<3?:7*0!=g?7E1.*2!C+4I!62/*+"!>$#VV'D+?<I!TD7-7EE.!64! T:7*(7E<-!M7*<*(7<-!G887(.: FMCJ+:2D,7()I!`+D* S7:.(2+:I!N:.<3?:A!V<:).2!GE.:<27+*3 FMCM7*).-32+*I!!Z<:7*! h7(.!T:.37/.*2I!'37<!T<(787(!O.07+* FMC\<13.:I!V<22 CD7.8!GE.:<27+*3!G887(.: FMCb<,+:2DI!J7-- CD7.8!@2:<2.0A!G887(.: FMCb?<I!`7*0/+*0 h7(.!T:.37/.*2I!N:.<3?:AI!@A*/7(<27+*3!<*/!FN FMCb?<*0I!67* GE.:<27+*3!G887(.: FMCFE3+*I!V7(D<.- M+:1.:!FMC!CD7*<!C+?*2:A!V<*<0.: FMC6<7I!`7*(D<*0 T:7*(7E<-!GE.:<27+*3!G887(.: FMC6<,I!`+D*! T:7*(7E<-!J<*)7*0!@E.(7<-732 FMCO.*I!67 @.*7+:!F*;.321.*2!G887(.: FMCj?I!`.::A T:7*(7E<-!F*;.321.*2!G887(.: FMCc?I!j.7(D?<* F*;.321.*2!G887(.: FMCc?I!_?<*! F*;.321.*2!G887(.: FMC_<*I!V.*0 @.*7+:!F*;.321.*2!G887(.: FMC_?<*I!j.7 GE.:<27+*3!G887(.: FMCfD<*0I!O+*0 @.*7+:!GE.:<27+*3!G887(.: FMCfD?I!j.*g7* @.*7+:!C+?*2:A!G887(.: FMC
RR#$%&!!
(ii) What are the key factors that contributed to the success of IFC's work in China? (iii) Were there any areas where you or IFC could have done better? (iv) Contribution to corporate governance was one of the most important and appreciated IFC
impacts mentioned at client banks we visited. For example, Bank of Beijing spoke very highly of the role board. What were some of the specific changes you saw in board operation and other corporate governance areas at client banks as a result of IFC's work and IFC-appointed directors like yourself?
(v) What do you see as the key challenges going forward for IFC's work in China's financial sector? Some worry that IFC might become irrelevant there in ten years time or less. What do you think?
$%%#$%&!!
Annex 5: Structure of
Source: IMF 2011
!
\!'V!*6-$,$8$,'6-!,6!OJHJ
>?#(%!'V!5'$#3!0--%$-!,6!OJHJ
.#6M,6&!*6-$,$8$,'6- YIXYZ SG_X!!!!C+11.:(7<-!J<*)3 LKR BR4K!!!!!!!!!!6<:0.!C+11.:(7<-!J<*)3 & 554$!!!!!!!!!!`+7*2Q@2+()!C+11.:7(<-!J<*)3 $" $54%!!!!!!!!!!C72A!C+11.:(7<-!J<*)3 $5K K45!!!!!!!!!!O?:<-!C+11.:7(<-!J<*)3 U& "4B!!!!!!!!!!M+:.70*!J<*)3!W9:<*(D.3I!-+(<--A!7*(+:E+:<2./!3?937/7<:7.3X $L% $4B!!!!T+-7(A!J<*)3 L K4"!!!!CD7*<!T+32<-!@<;7*03!J<*) $ L4"!!!!C+E.:<27;.!M7*<*(7<-!F*3272?27+*3!W:?:<-I!?:9<*X "IUK% K45!!!!P.,QNAE.!O?:<-!M7*<*(7<-!F*3272?27+*3! LUB %4%!!!!!!!!!!h7--<0.!+:!N+,*3D7E!J<*)3 L5R %4%!!!!!!!!!!O?:<-!V?2?<-!C:./72!C++E.:<27;.3 LK %4%U'6K.#6M!+,6#6A,#3!*6-$,$8$,'6- GSO HO_F!!!!F*3?:<*(.!C+1E<*7.3 $"& 54K!!!!T.*37+*!M?*/3 $ $4$!!!!M?*/!V<*<0.1.*2!C+1E<*7.3 BL "45!!!!@.(?:727.3!M7:13 $%B $4U!!!!M?2?:.3!C+1E<*7.3 $B5 %4"!!!
$%$#$%&!!
References and Bibliography
!
Journal of Environment & Development (2010), 19(2), June, 119-144. Barr, Michael S., Anjali Kumar, and Robert E. Litan, 2007. Building Inclusive F inancial Systems: A F ramework for F inancial Access. Brookings Institution Press, Washington, DC. Beck, Thorsten, Asli Demirguc-Journal of Economic Growth 12: 27-49. Boyreau-Debray, Genevieve, and Shang- -Dominated Financial
Dalberg, 2011. Independent Evaluation of the I F C Secured Transactions Advisory Project in China, Prepared for the International F inance Corporation.
Journal of Contemporary China (2008), 17(56), August, 449-468. Herd, Richard, Samuel Hill, and Economics Department Working Papers. Huang, Yasheng, Tony Saich, and Edward Steinfeld, 2005. Financial Sector Reform in China. Harvard University Asia Center, Cambridge, MA. International Monetary Fund, 2011. Assessment. Washington, DC. KPMG, 2007. .
Journal of Economic Literature (1997), 35 (2), June, 688-726. LIN Han Su, 2007, Secured Transactions Law Reform in China. LOU Wenlong, et al, 2007. The Win-Win Journey of Chinese and Foreign Banks. China Finance Publishing Company, Beijing. Orbeta, Aniceto C. Programs for Small-
$%"#$%&!!
-FIAS- Rabin SQW, 2009. Mid-Term Review of PEP-China Phase II, F inal report to the International F inance Corporation.
-Newspaper, London. The World Bank, 2002. China Country Assistance Strategy. Washington, DC.
Million & a Supplemental Lo
The World Bank, 2006. Doing Business in 2005: Removing Obstacles to Growth. Oxford University Press, Oxford. The World Bank, 2008. F inance for All? Policies and Pitfalls in Expanding Access. Washington, DC. The World Bank, 2010. -Based Energy Efficiency F inance Program. Independent Evaluation Group World Bank/IFC/MIGA, Washington, DC. Wang, Xiaotian, February 25, 2012. Green Credit Guideline for Banks Issued, China Daily, Beijing, China. http://www.chinadaily.com.cn/bizchina/2012-02/25/content_14691629.htm
熊猫债券发行 人民币区域化迈出重要一步
Panda bonds an important stride towards the regionalization of the renminbi). Xinhua News Agency, Beijing. http://news.xinhuanet.com/stock/2005-09/29/content_3560097.htm LO, 2005 Birth of the Panda Bond, China Bond Market Opens the Door to Foreign Capital (熊猫债出世国债券市场对外资进入打开大门), Chinese Financing Beijing.
bi Bond Market to International http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/0,,contentMDK:20676002~menuPK:1436941~pagePK:1497618~piPK:217854~theSitePK:318950~isCURL:Y,00.html Bank of Beijing Annual Report, 2007, 2011.
$%L#$%&!!
Bank of Nanjing Annual Report 2007, 2011. Bank of Shanghai Annual Report 2007, 2011. CFPA Microfinance Annual Report 2010, 2011. Hangzhou United Bank Annual Report 2010. IFC Project and Evaluation Documents: IFC Global Financial Markets China Strategy 2007- 10, January 2007. isk Convention, Beijing, September 2005
CBRC, 2009. Bank of Shanghai Investment Project Board Paper, 1999. Bank of Shanghai Investment Project Rights Issue 2 Board Paper (IFC/R2001-0215), 2001. Bank of Shanghai Company 50096 Project Supervision Report, 2010.
(IFC/R200 1-0101), 2001. Bank of Nanjing Investment Project 25473 Board Paper, 2006. Bank of Nanjing Investment Project 25473 Expanded Project Supervision Report, 2011. Bank of Nanjing Company 53547 Project Supervision Report, 2010. Bank of Beijing Investment Project 23943 Board Paper, 2005 Bank of Beijing Investment Project 23943 Expanded Project Supervision Report, 2010. Bank of Beijing Investment Project 23943 XPSR Evaluative Note, 2010. Bank of Beijing Company 532442 Project Supervision Report, 2009.
aper, 2002.
2010. Industrial Bank Investment Project 21114 Expanded Project Supervision Report, 2008. Industrial Bank Investment Project 21114 XPSR Evaluative Note, 2008. Industrial Bank Company 514916 Project Supervision Report, 2010. Minsheng Bank Investment Project 10693 Expanded Project Supervision Report, 2006. Minsheng Bank Investment Project 10693 EXSR Evaluative Note, 2006. United Rural Cooperative Bank of Hangzhou Investment Project 24401 Board Paper, 2006.
$%5#$%&!!
United Rural Cooperative Bank of Hangzhou Company 525051 Project Supervision Report, 2010. Binhai Rural Commercial Bank Investment Project 25511 Board Paper, 2007. Binhai Rural Commercial Bank Company 567255 Project Supervision Report, 2008, 2009, 2010. CHUEE I IB Investment Project 24631 Board Paper CHUEE SME IB Investment Project 29366 Board Paper CHUEE Program Brochure. CFPA Microfinance Investment Project 28702 Board Paper, 2010. CFPA Microfinance Company 642528 DOTS Chifeng MFI Company 570295 (project 25695) Project Supervision Report 2008, 2009, 2010. Microcred Nanchong Investment Project 25940 Board Paper, 2007 MC China Company 573218 Project Supervision Report, 2008, 2009. MC China Company 573218 DOTS Renshou VTB Investment Project 26982 Board Paper, 2009. Renshou VTB Company 620247 Project Supervision Report, 2010. Shenzhen VTB Company 656226 (project 29386) DOTS Zhong An Credit Group Investment Project 24966 Board Paper, 2007. Zhong An Credit Group Company 617058 Project Supervision Report, 2009, 2010. Zhong An Credit Group Company 617058 DOTS. Credit Reporting Project 521645 Advisory Services Project Completion Report. Secured Transaction Project 539924 Advisory Services Project Completion Report. China Financial Infrastructure Project 588747 Advisory Service Project Concept Note. China Microfinance Pilots Project 548525 Advisory Services Project Completion Report. TA to Zhong An Project 560605 Advisory Services Project Completion Report. CCBs Capacity Building Project 545084 Advisory Services Project Completion Report TA to CFPA Microfinance Transformation Project 573007 Advisory Services PDS Approval Document. TA to CFPA Microfinance Transformation Project 573007 Advisory Services Project Supervision Report. TA to Nanjing City Commercial Bank SME Lending Project 551926 Advisory Services Project Completion Report. Strengthening of Lotus Corporate Governance and Retail and SME Finance to Industrial Bank, Project 522549 Advisory Services Project Completion Report.
$%&#$%&!!
Beijing Shenwu Project 29845 Board Paper, 2010. Aier Medical Company 24778 Expanded Project Supervision Report, 2011. New China Life Insurance Co., Ltd. IFC/R2000-200 Board Paper, 2000. New China Life Insurance Co., Ltd. Company 51106 Project Supervision Report, 2010. New China Life Insurance Co., Ltd. Company 51106 DOTS. CUNA RCCI Project 20533 Board Paper, 2003. CUNA Mutual Company 517576 Project Supervision Report, 2010. CUNA Mutual Company 517576 DOTS. China Life Re Company, Limited Project 11741 Board Paper, 2003. China Life Re Company 54406 Project Supervision Report, 2007. Jiangsu Financial Leasing Co., Ltd. Project 26449 Board Paper, 2009. Jiangsu Financial Leasing Co., Ltd. Company 616699 Project Supervision Report, 2010. Jiangsu Financial Leasing Co., Ltd. Company 616699 DOTS. Jiangsu Financial Leasing Co., Ltd. Loan Project 31941 Board Paper, 2012. China Huarong Asset Management Corporation Project IFC/R2001-0207 Board Paper, 2001. China Huarong Asset Management Corporation Company 53762 Project Supervision Report, 2004. Rongde Asset Management Company Limited Company 560683 Project Supervision Report, 2009 NPL Joint Venture Asset Management Company Project 25745, 2007 Orient Fortune Company 612719 DOTS Chengdu Small Enterprise Credit Guarantee Co. Ltd. Project 27377 Board Paper, 2008.
!
International Finance Corporation
2121 Pennsylvania Avenue, NW
Washington, DC 20433
IFC.org