Listed in Hong Kong there are now several Chinese City Commercial Banks (CCBs); and many more have plans in the pipeline to come here. If you’ve invested in the sector, have been or might be tempted then read on. What follows is depressing work on why this sector is (most likely) a solid avoid.
Writing for the Bank of Finland’s Institute for Economies in Transition in a working paper Chunyang Wang from the Peking University investigates how CCBs have affected economic development in the locales where they’ve been established.
A bit of history first. To help local economies at the grass-roots a long time ago China created Credit Cooperatives with limited borrowing and lending powers. By 1995 it had been recognized these institutions were no longer fit for purpose given how the economy was developing. The big nationwide banks though had little interest in taking on smaller customers (and, to this day, still resist). Solve for Y? The Chinese Banking Regulatory Commission decided to consolidate the credit cooperatives into City Commercial Banks who would have much broader mandates for operation than their predecessors.
The idea was simple and intuitive. Who would know local economies better than locally established banks and who therefore would be in a better position to give promising local business a leg up? It makes perfect sense, no?
It would, in a perfect world, of course make perfect sense; but this is China. Cynics will already have guessed what happened next. Instead of seeking out the hardiest entrepreneurs, the most innovative local sons and the neediest start ups it seems the CCBs became victims of influence peddling.
Using data collected from 206,771 enterprises and critically looking at who spent longest interacting with local banks Wang draws a near direct line between what is most likely bribery and loan facilitation. Thus only those with deep pockets, and capable of finding the facilitation fees, benefited from the presence of a CCB, not the very operations they were set up to help.
Bribery and corruption suck; but they suck for practical reasons beyond moral reprehensibility, they retard growth. This, the research shows, is clearly what happened. Towns with a CCB probably initially cheered its establishment, but later probably grew to resent its presence. The research highlights areas without one did manifestly better, in economic terms, than ones with.
The research cuts off on 2011 and perhaps these predatory leopards have since changed their spots? That’s a possible outcome in a perfect world; however, China, as even I’m forced to admit in this case, is still far from a perfect world.
You can access the paper in full via this link Crony Banking and Local Growth in China.
Happy Sunday