Time to re-evaluate policies

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Opinion / Liang Hongfu

Time to re-evaluate policies

By Hong Liang (China Daily)
Updated: 2007-09-04 07:11

The credit crisis arising from the US subprime mortgage woes may not have
as big an impact on the markets in Asia, and China in particular, as it
has on those in the US and Europe. But the problems have brought into
sharp focus numerous pertinent issues weighty enough to cause financial
planners around the world to rethink and re-evaluate their policies.

One of the foremost questions is the future of commercial banks.

As developments in the US and Europe show, the middleman role for
commercial banks between depositors and borrowers is falling into eclipse
because more and more corporations are raising capital directly from the
public by issuing debt instruments and their derivatives that can be
traded easily in the various capital markets.

Thanks to the highly developed and relatively transparent market for such
instruments, it is possible to securitize almost anything that promises
to generate a predictable and consistent stream of income.

The outbreak of the credit crisis in the US, therefore, must not be seen
as a condemnation of the securitization trend. The crisis merely shows up
the problems that need to be addressed by the supervisory agencies to
facilitate and ensure a more orderly development of the market which is
providing an efficient channel for corporations to raise capital directly
from the public, who, in turn, are willing participants in search for
higher returns on their savings than bank interest rates.

Many commercial bankers long ago saw what was coming and made
preparations to adapt to the changes by focusing on expanding their
service-based incomes to such businesses as corporate advisory and
personal wealth management. The large commercial banks, empowered by
their huge capital bases, have also got into the securitization act in a
big way through their investment and private banking subsidiaries.

To be sure, the small- to medium-sized companies which lack the clout to
raise capital in the market, will continue to finance their operations
with loans from commercial banks. But in a highly competitive market
where interest rates are free, commercial banks are finding it
increasingly difficult to make a profit because of the narrowing spread
between the lending rates and cost of funds. The thinning profit margin
has prompted some banks in Hong Kong, for example, to charge service fees
on small deposits.

The threshold of the securitization business is high in terms of capital
and expertise. For that reason, the principal players in the market are
limited to the large international banking groups that control extensive
deposit collecting networks.

Taking the long-term view, the Shanghai municipal government has proposed
to establish a financial powerhouse, built around the Pudong Development
Bank, the largest Shanghai-based joint stock commercial bank. It is hoped
that such an entity will have adequate enough financial resources and
business scope to compete with the international banking groups as
Shanghai is making rapid progress to becoming an international financial
center.

Playing host to nearly all the major international banks in the world,
Hong Kong has remained structurally way ahead of other aspiring financial
centers in the region. To keep its lead, the Hong Kong monetary officials
have in the past several years reformed the regulatory framework to bring
it more in line with other international financial centers.

The US credit crisis is troubling, but it serves to focus people's minds
on the big changes that will reshape the global financial marketplace.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 09/04/2007 page10)

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