Review of ifc s role in china s financial sector transformation
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Review of IFC’s Role in China’s Financial Sector Transformation. Yanni Chen & Chaoying Liu Development Impact Department March 19 2013. Agenda. Context and Methodology Key findings – Advisory Services Key findings – Local Currency Financing Key findings – Investment Operations

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Review of IFC’s Role in China’s Financial Sector Transformation

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Review of IFC’s Role in China’s Financial Sector Transformation

Yanni Chen & Chaoying Liu

Development Impact Department

March 19 2013


Agenda

  • Context and Methodology

  • Key findings – Advisory Services

  • Key findings – Local Currency Financing

  • Key findings – Investment Operations

  • Conclusions and Lessons Learned


Agenda

  • Context and Methodology

  • Key findings – Advisory Services

  • Key findings – Capital market

  • Key findings – Investment

    5. Conclusion and Lessons Learned


Context

  • IFC’s engagement in China’s financial sector

  • China started financial sector reform in 1990s. Successful financial sector reform would have huge impact on the country’s economic development and poverty reduction

    • 1992 – IFC office in China

    • 1995 - IFC's Operations and Strategy in China

    • 2002 – IFC AS facility in Chengdu, Western region of China

    • 2003 - World Bank and IFC’s country strategy for China

    • 2007- IFC’s financial sector strategy for China

  • Operations

    • First investment to Bank of Shanghai in 1999, 50 Investments in FIs, valued at $1b

    • AS facility in Western of China - 46 Advisory services projects , valued at $50m

    • 3 Bond issuances, valued at $300m


Objective of the review

  • To understand if and in what ways IFC has contributed to the financial sector reform in China

  • To identify lessons learned for future strategy and operations

  • First such review in IFC covering IS, AS and treasury operations - focusing on IFC’s contribution


Scope of the review

  • Advisory Services

    • Policy work relating to financial infrastructure (secured transactions and credit reporting system), Microfinance, Housing finance, Green credit, and sector-wide capacity building

  • Investment Operations

    • Commercial bank investments and Microfinance

  • Local Currency Financing

    • Renminbi denominated bond, Swaps facility


  • Data sources

    • Primary

      • Interview: unstructured interviews with over 30 key stakeholders, investment clients, government agencies, and IFC staff

      • Site visit and in-depth interviews with beneficiaries of IFC’s clients: SME banking, microfinance, RMB-denominated bonds

    • Secondary

      • Project documents

      • Available evaluations and reviews

      • Media materials


    Analytic Framework

    • Secured Transactions

    • Credit Reporting

    • Green Credit

    • Capital markets

    • Commercial banks

    • MFs

    • Energy Efficiency

    • Sector-wide capacity building

    IFC’s intervention

    Results chain

    • How IFC contributed to building institution capacity?

    • How IFC contributed to creating a favorable environment?

    • How IFC intervention helped improve business access to finance?

    Storyline


    Agenda

    • Context and Methodology

    • Key findings – Advisory Services

      • Secured transactions reform

      • Credit reporting system

      • Green credit policy

      • Sector-wide capacity building

  • Key findings – Capital market

  • Key findings – Investment

  • Conclusions and Lessons Learned


  • Supported Secured Transactions Reform

    • Context

    • 2005/2006 SME survey – 70% SMEs no access to finance due to lack of acceptable collaterals

    • Lenders’ concern – no proper legal framework, no single registry

    • $9 trillion in dead capitals locked in SME sector

    • Intervention

    • A 5 year collective effort of WB, IFC and Chinese government, costing $1.6m

    • Legal framework – passed the property laws in 2007

    • Infrastructure – a centralized registry

    • Capacity building – regulators, bankers and public


    Supported Secured Transactions Reform Results

    • Enabled a strong growth of movables financing

      • Loans secured by movable assets comprise 40% of the total loans in China during 2008-10 vs 4% in 2005

      • $3.5 trillion cumulative value of accounts receivable financing as of 2012

    • Increased SME lending portfolio - 7 large commercial banks reported 45% in 2008-10 vs. 20% in 06-08 period

    • Removed barrier for SME access to finance – 68,575 SME received financing secured by accounts receivable over $1 trillion

    • 60% of the surveyed SMEs believe that without their current access to accounts receivable financing, their business development would be severely impacted


    Advised the establishment of Credit Reporting System

    • Context

    • Before 2003, China had no consumer credit database

    • Intervention

    • A 7 year effort, costing $400,000

    • Regulation – PBOC Regulation on Consumer Credit Information Database; CBRC - administrative rules requiring all FIs to report credit information

    • Infrastructure - Consumer credit information database

    • International best practice, capacity building


    Advised the establishment of Credit Reporting System Results

    • The largest credit information database in the world built in 2006. By the end of 2010, the database covered more than 777 million individuals

    • 2007 China was recognized as one of the top 10 reformers in Doing Business

    • By the end of 2010, the cumulative number of inquiry for 812 million consumer database

    • Credit reporting system helps enterprises and individuals build up their credit history, and facilitate loans to the lower-end of the market. From 2006 to 2009, the number of enterprises with bank loans increased by 50%; the number of individuals with bank loans increased by 145%.


    Promoting Green Credit Policy

    Intervention

    • Started in 2007, Provided policy advice to and PBOC and CBRC on formation of Green Credit Policy, eg., Guidelines on Credit Granting for Energy Conservation and Emissions Reduction; Provided training and study tours.

      Results

    • IFC’s PS and EP are now well established within key Chinese banks

    • Green Credit Guidelines launched in 2012 which specified how to integrate energy-efficient financing practices into lending

    • Demonstration effect

      The IFC-China Green Credit partnership model has been expanded to Vietnam, the Philippines, Malaysia and Indonesia

    • South-South knowledge exchanges

    • Too early to tell the impact on the ground


    Sector-wide Capacity Building


    Agenda

    • Methodology

    • Key findings – Advisory Services

    • Key findings – Local currency financing

      • Renminbi denominated bond

      • Renminbi swap facility

    • Key findings – Investment

    • Conclusions and Lessons learned


    Local currency financing

    • Intervention

    • Renminbi denominated bond

    • In 2005 IFC and ADB became the first foreign issuer of bonds on the Chinese domestic market through yuan-denominated “Panda Bonds.”

    • From 2005-2011, in total IFC issued 3 Bonds at valued at $300m or RMB 2.15b.

    • Renminbi swap facility

    • In 2011 IFC signed a swap legal agreement with 2 banks and became the first multilateral institution authorized to conduct transactions with Chinese financial institutions in the domestic local-currency swap market

    • In 2012 Board approved a lend of $50 million to Jiangsu Financial Leasing to be funded through the Swap Facility


    Local currency financing Results

    • Opened the Chinese bond market to international financial institutions

    • Improved and strengthen regulatory framework

    • Introduced international good practice

    • Supported high quality domestic companies with long-term local currency financing, with low interest rate

    • Job creation, research development, GHG emission reduction

    • Evaluation of impact on the local capital markets is underway


    Agenda

    • Context and Methodology

    • Key findings – Advisory Services

    • Key findings – Local currency financing

    • Key findings – Investment

      • Commercial Banking

      • Microfinance

    • Conclusions and Lessons Learned


    Commercial Banking


    Context in the 1990’s

    • Financial sector dominated by banks

    • Banking sector dominated by the “Big Four” state-owned banks

    • High NPLs in banking sector: 25-40%

    • Regulation prohibits foreign investment in banks

    • No foreign banks were interested

    • Bank loans most important source to firms

    • No access to finance for SMEs: 1% bank loans to private sector


    What Did IFC Do?- Investments (Excluding CHUEE facilities)


    What Did IFC Do?- Advisory

    +

    Sector level seminars and training programs

    Presentations to the banking regulator


    Results

    • Demonstration effect

    • Business strategy and risk management

    • Corporate governance

    • Strategic focus on SMEs


    Structure of China’s Financial Sector


    Results - cont’d

    IFC contribution limited in a few of the banks due to:

    • Small stake

    • Less developed region

    • Heavy government influence

    • Management not receptive to international investors’ influence


    Microfinance


    Context in late 2000’s

    • ~ 300 NGO type programs, unsustainable

    • Regulatory environment, “formative” – no clarity on which agency regulates and licenses MFIs

    • Lack of professionally managed MFIs

    • Government experimenting different models, including VTBs

    • Legal status of MCCs only established in 2008


    What Has IFC Done?- Institutional Level


    Results

    • Most investments too early to tell yet

    • Success story: CFPA Microfinance Co.:

      - NGO transformation

      - Strong business performance

      - Clear focus on poverty reduction

      - Opportunities for women

    • Challenges faced:

      - Delayed government approval

      - Slow ramp-up

      - Funding constraints, partly due to regulatory issues


    Agenda

    • Methodology

    • Key findings – Advisory Services

    • Key findings – Local currency financing

    • Key findings – Investment

    • Conclusions and Lessons learned


    Conclusion of the Review

    • China’s financial sector experienced transformational changes in the past 20 years.

    • Many factors were at play, and an important force behind the change was the Chinese government.

    • IFC has made significant positive contributions to this progress by playing roles of

      - a catalyst

      - a strategic investor

      - and a technical advisor, facilitator, and knowledge broker.


    Lessons Learned

    • Taking calculated strategic risk pays off

    • Remaining relevant to government’s priorities and having strong client commitment help move forward agenda

    • A programmatic approach and long-term view is crucial for delivering systemic impact

    • Combining local knowledge and international expertise is critical

    • Co-investing and collaborating closely with strategic investors enhances success chances


    Lessons Learned – cont’d

    • Being supply-driven leads to less success

    • Better resource allocation within IFC would help increase impact

    • Timing and mode of entering less-developed region needs to be better planned out

    • Small stakes restrict influence


    Feedbacks from Clients

    “Not just to Bank of Shanghai, but to the entire banking sector in China, IFC brought in international best practices in bank management.”

    - Han Wenliang, Director of Board Supervisory Office, Bank of Shanghai

    “There would not be today’s Bank of Nanjing without IFC. IFC was a pioneer in pushing through China’s financial sector reform.”

    - Zhang Weinian, Head of Executive Office, Bank of Nanjing

    “IFC was a pioneer. Since IFC’s investment in 2005, Bank of Beijing has seen improvement in all aspects. IFC has played an irreplaceable role.”

    - Yang Shujian, Board Secretary, Bank of Beijing

    “The most important contribution of IFC was to bring in the concepts of corporate governance and balancing shareholder interests.”

    - Tang Bin, Director of Board Secretariat, Industrial Bank

    “IFC contributed to the transformation of the bank from a rural cooperative to a rural commercial bank.”

    - Long Yun, Chief, Office of Board of Directors, United Rural Commercial Bank


    Feedbacks from Clients

    They also told us that IFC:

    • Is bureaucratic, slow, and inefficient

    • Uses cookie-cutter approach, lacks customization and flexibility

    • Is big on ideas and concepts, weaker on implementation and technical support

    • Lacks continuity in relationship management sometimes

    • Was HQ-centric back then: meetings at 12am Asia time; no decision-making power in region


    Looking ForwardChallenges facing China and IFC’s Strategic Focuses

    • Climate change

    • Access to finance

    • Balanced growth between urban and rural

    • Integration in the world economy


    • Lessons Learned: M&E Recommendations

    Thank You!


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