Fending off the Crisis

October 10, 2008
LAN XINZHEN

The U.S. financial crisis is having an adverse impact on China, but also offers some opportunities and lessons for the country

The U.S. financial crisis was a hot topic at the World Economic Forum's summer meeting in the Chinese port city of Tianjin in late September. More than 1,000 participants discussed what role China would play in global economic leadership in the years ahead and its economic development.

In light of the U.S. financial crisis, Chinese companies, just as other international firms, must overcome the challenges it has introduced to play a significant role in global economic leadership in the future. How companies should cope with the risks of the crisis was the central focus of the participants at the Annual Meeting of the New Champions, also known as the Second Summer Davos Forum.

Making the Best of It

The U.S. financial crisis has directly affected the Chinese banking industry. Many Chinese banks do business with U.S. financial companies, and China considers the U.S. financial market as its model for financial reform.

Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC) and one of the speakers at the forum, said on September 27 that despite the current financial turmoil, China would make the best of the situation to improve its information sharing system. He said the CBRC has cooperated with bank regulators from various countries and signed 32 memorandums of understanding for cooperation.

"Since the beginning of this financial turmoil, we have been providing various kinds of very important information, telling our opinions to financial regulators of other countries in a friendly but straightforward way," Liu said. He also said the CBRC would adopt a more effective way to protect the depositors so they could avoid losses from the financial crisis, but he did not provide details.

On September 16, the day that Lehman Brothers Holdings Inc. said it had filed for bankruptcy, the People's Bank of China, the country's central bank, lowered the interest rate on loans as well as the deposit reserve rate to allow more capital to enter the market. It was one of the steps the central bank has taken of late to loosen the tight monetary policy that has been in place for more than a year.

When the U.S. financial crisis started, some Chinese economists suggested that China's financial institutions purchase U.S. financial stocks. But Jiang Jianqing, Board Chairman of Industrial and Commercial Bank of China (ICBC), said at a forum session on September 27 that his bank would hold on tight to its "pockets" instead of "bottom fishing" for U.S. financial stocks.

"We are still stressing our investment base on strategies, but not on finance," Jiang said.

Liu added that China's banking industry also was ready to absorb unemployed talent from the Wall Street.

Boon for Venture Capital

The venture capital sector is one of the fuses that ignited the current U.S. financial crisis. John Zhao, CEO of Beijing Hony Future Investment Advisor Ltd., said he believes that while the crisis may have a negative impact on China's investment banking industry, it would not be the same overwhelming disaster that it has been for American investment banks. Unlike U.S. institutions, Chinese investment banks are still in the initial stages of development, and bankers are making cautious investment decisions.

Zhao said the U.S. financial turmoil has brought an opportunity of transformation for those in the Chinese venture capital sector who have not yet experienced a financial crisis. It would let them draw on the experience and learn its lessons to prevent similar mistakes, he said. Although the five largest U.S. investment banks have now either closed their doors or been taken over by other companies, Zhao said Chinese investment banks would continue to grow, because China's economy is developing quickly and offers many attractive investment opportunities.

Chen Hong, Board Chairman of the Hina Group, also believes that China's venture capital and private equity sectors are still in the initial stages of development and that the country's economy will continue its high-speed growth over the next decade. Currently, Chinese venture capital firms invest billions of dollars each year in only a few hundred companies, while most of China's 27 million small and medium-sized enterprises find no access to such capital. This, on the other hand, projects the broad vista for Chinese venture investors.

At present, most of China's venture capital and private equity firms are located in major cities such as Beijing, Shanghai and Shenzhen, and in some second-tier cities such as Chongqing, Dalian and Tianjin. Chen noted there are many excellent companies in other cities that need, but cannot obtain investment, because venture capital firms are not familiar with the cities or that entrepreneurs do not know how to contact them.

"When people are familiar with this sector, I think there will be more companies of better quality that can get investment from venture capital firms, so I am not worried about the development of China's venture capital and private equity sectors," he said.

Going Global

Skyworth Group Co. Ltd. is a Chinese electronics company in the process of going global. Zhang Xuebin, the company's board chairman and chief executive officer, said at the forum that he believes it is difficult for Chinese companies that want to do business internationally to make an assessment now about how the U.S. financial crisis will affect their prospects. But in general, the crisis would serve as a good opportunity for more Chinese enterprises to become international players.

Whenever an economic or financial crisis occurs, some companies collapse while others grow stronger, Zhang said. For example, South Korea's Samsung Group grew very rapidly after the Asian Financial Crisis a decade ago, he added.

"I think that the market will finally be concentrated around some strong companies," Zhang said. "As often happens, a crisis or difficult period is the best time for such concentration to be accomplished."

The current financial crisis would make it difficult for some small and medium-sized enterprises to survive or maintain their previous operating pace, thereby forfeiting many market resources, Zhang said. As for Skyworth, Zhang said he views the crisis as an opportunity and not a threat, because the company has been growing quickly and is at the forefront of China's color TV industry.

Because the financial crisis will have the greatest impact on companies in developed countries, Wang Jianzhou, Board Chairman and CEO of China Mobile Communications Corp., said at the forum on September 28 that his company's international strategy would mainly focus on prominent emerging markets, where companies from developed countries may not set up operations because they are mired in the current financial turmoil.

Real Estate Woes

Forum participants also discussed the fallout from the U.S. subprime mortgage crisis on the real estate market as one of the root causes of the overall financial turmoil. They raised questions as to whether China's overheated real estate market would experience a similar situation.

Guo Shuqing, Board Chairman of China Construction Bank, believes such concerns are unnecessary.

"On China's housing loan market, there won't be a subprime mortgage crisis as in the United States," Guo said at the forum. He pointed out that China's home loans, which amount to 3 trillion yuan ($439 billion), account for only 13 percent of the country's GDP, much less than the 50 percent of GDP they account for in the United States.

Ronnie Chichung Chan, Board Chairman of the Hong Kong-based Hang Lung Properties Ltd., said on September 27 that China's real estate market would not suffer a collapse, because the government has been aware of the industry's overheated development and has adopted macroeconomic measures to cool down the market.

Although domestic property developers are not experiencing serious problems, it does not mean they have not or will not be affected by the financial crisis, Chan said. At present, most must deal with broken capital chains, a problem that the current financial crisis makes doubly difficult to solve.

"Some real estate companies will be inevitably knocked out," Chan said.

It will take time for the country's real estate industry to be further reorganized, but when it happens, the industry will emerge stronger and more orderly, he added.