Conclusions

We tried to delve into the manifest problems of the banking system, currently posing a threat to the continuation of the Chinese economic miracle. We argued that the persistence of a latent banking crisis in a country experiencing average annual growth around 9% for some 25 years is only an apparent puzzle. We claimed that the crux of the banking problem stems from the unhealthy link between loss-making SOEs and SOBs, which we labeled the “Old Mammoths” and still dominate banking in PRC. We posited that this SOE-SOB nexus did not materialize by chance but, rather, was the negative side of the policy choice for gradual transition, which left unprofitable SOEs in business while, due to political interference, SOBs could not discontinue their lending to them and, later, had to bear the losses created by their inefficient operations.

Next we discussed how to bring better banking to PRC. First, we reached the conclusion that foreign banks will only play an ancillary, though very important, role in this. Given PRC’s size, it is unlikely that foreign banks can manage retail banking throughout the country. Then, we asked whether the emergence of a new breed of dynamic banks (the “New Tigers”) can be the answer. We provided details on the growth of the New Tigers, giving a performance comparison between them and the Old Mammoths (the SOBs). We considered whether the New Tigers offer PRC an option to “growing out” of its banking problem. Although extrapolating the New Tigers’ growth might lead one to answer that they are rapidly supplanting the Old Mammoths, we posited that an accurate answer requires carefully evaluating the sources of the New Tigers’ better performance. Specifically, we need to understand whether this is caused by better corporate governance only or to what extent the New Tigers are better simply because they do business in the most developed area of the country., To address this we drew on the results of a field survey to check whether amongst the New Tigers, performance differs by the development level of their area of location. This was exactly the rationale behind looking at City Commercial Banks (CCBs), one of the most vibrant segments within the New Tigers, which include banks located throughout the whole of the country. By focusing on 20 CCBs located in three provinces featuring diverse levels of development, we kept corporate governance (relatively) constant and could, thus, ascribe any significant difference in performance across the provinces to their relative underlying prosperity. We confirmed that CCB performance is systematically and positively related to the level of economic prosperity in their provinces.

The main result of our analysis suggests that the New Tigers may be unable by themselves to bring better banking to the whole of the country. Thus, it seems that the authorities are right in stressing the need to restructure and rehabilitate the Old Mammoths. While the authorities’ push to corporatize the SOBs goes in the right direction, it is not clear that their listing on the stock exchange can really, per se, improve the SOBs’ corporate governance. Given their size and considering that the government could continue to be the largest shareholder, it is legitimate to doubt that simple listing will change SOBs’ conduct. Perhaps, as suggested by Huang (2002), it would be advisable for PRC’s authorities to consider breaking up its Old Mammoths. Such a measure would help streamline the SOBs and could also facilitate the processes of introducing foreign strategic investors and public listing.

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