An American-born veteran of China’s banking sector says that the country’s financial system is fully capable of overcoming the risks and challenges that it currently confronts.
James Stent, a four-decade veteran of the Asian banking sector who spent 13 years on the boards of China Everbright Bank and China Minsheng Banking Corp, said to Bloomberg that he remains confident of the ability of the Chinese banking system to weather any future adversity, given the rapid adaptiveness he witnessed during his tenure as an expat executive.
“I saw from the inside this extraordinary change that was happening to banking…the hunger for Chinese to make the banking system work properly.”
According to Stent China doomsayers and permabears such as Charlene Chu or Kyle Bass failed to understand the Chinese banking system because they do not discern the country’s deep-seated systemic and structural differences vis-a-vis the West.
Chief amongst them are the cautiousness that China’s central government exercises when it comes to the implementation of new policies, which it first tests via regional trial schemes.
Another key difference is the central government’s strict control of the banking sector, which is dominated by state-owned lenders and lies at the core of the Chinese financial system.
“If you understand how the banking sector works, you understand how anything works in China,” said Stent.
“It’s like a conductor conducting the orchestra…they have all these levers which they can control, unlike the US. The central bank in China is not independent.”
Many analysts have expressed strong concern about the exorbitant debt levels that China has accumulated since the Great Financial Crisis, which have prompted ratings agencies such as Moody’s and S&P’s to downgrade the country’s sovereign credit rating.
Stent contends that China was right to let debt levels burgeon given the economic objectives it fulfilled, and that Beijing is now exercising “extraordinary caution” in the handling of the matter.
According to Stent China will very gradually curb acute sources of risk such as shadow banking over a five to 10 year timeframe, and ensure that all domestic lenders remain afloat while discretely pushing through with meaningful reform.
“There are so many tools available to the government and they are gradually using them. Bit by bit, the problem almost imperceptibly will be brought under control.
“It’s not going to be suddenly putting on the brakes, because suddenly putting on the brakes would put the whole thing into a hole….so, don’t look for quick solutions.”
The central government won’t let any of the domestic banks to capsize due to the social disrupt this could create, and instead opt to discretely recapitalise them while replacing their management.
When it comes to China’s mammoth state-owned enterprise sector which is the recipient of so much of the banking system’s credit, Stent says many concerns are overstated given that such lending involves sovereign risk, which is the lowest form of risk in a country.
Stent is instead far more concerned about private-sector lending, given that Chinese banks have much less experience in this more challenging area.
“It’s easy to lend to state-owned enterprises,” said Stent. “The minute you start getting into private-sector lending…then you have to use all the Western tools of cash flow analysis, market analysis, product analysis, the stability of the shareholders, the inter-related transactions of the shareholders, the character and capabilities of the managers, etc. – none of which Chinese banks have experience in doing.
“This is where Chinese banks will run into difficulty.”