PAS Speaker Barth Relates U.S. Banking Experience

UNCLAS SECTION 01 OF 02 GUANGZHOU 018103

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV KPAO CH
SUBJECT: PAS Speaker Barth Relates U.S. Banking Experience
to China



1. SUMMARY: Visiting speaker James Barth spoke to banking
regulators, attorneys, and students in Guangzhou about the
development of financial systems and similarities between
the U.S. and China experience. He highlighted the role of
governments in banking industry bailouts, foreign ownership
of banks, and the futility of imposing a universal model for
financial regulation. Attendees appreciated Barth's
enthusiastic presentations and participated eagerly in the
discussions. END SUMMARY


2. James Barth is a participant in the China Mission's
visiting speakers program. He is currently the Lowder
Eminent Scholar in Finance at Auburn University and a Senior
Fellow at the Milken Institute. He recently served as
leader of an international team advising the People's Bank
of China on banking reform and coauthored a book titled
"Rethinking Bank Regulation and Supervision: Till Angels
Govern". During his June 13-14 visit to Guangzhou, Barth
held separate meetings with officials from the China Banking
and Regulatory Commission, attorneys from H.J.M. law office,
and students and professors from Sun Yatsen and South China
Normal universities.

Similarities with the U.S. Experience
--------------


3. In his presentations, Barth drew parallels between the
development of financial systems in the United States and
China. For example, during the first 60 years of the United
States, U.S. banks were owned by state governments, with
politicians sitting on boards and ordering loans to
particular companies or industries. Separately, U.S. banks
in the 1980's earned approximately 90 percent of their
income from interest rates, similar to China's banks today.
Since then, U.S. banks have developed a number of services,
the fees of which account for half of their total income.
Lastly, the U.S. banking industry was faced with massive non-
performing loans in the late 1980's, in part because of
overinvestment in the real estate sector. To avert a
widespread crisis, the U.S. government spent USD 200 billion
to bail out its banks -- reflecting China's current efforts
to recapitalize its own banks.

China Has Room to Improve
--------------


4. Barth also contrasted the characteristics of the U.S. and
Chinese financial systems. China's system is oriented
toward banking (with the big four state-owned banks
accounting for over half of the industry's assets). The
U.S. system, however, is capital market intensive, with
stock and bond markets serving as key sources of funding for
companies. Chinese companies thus are without a "spare
tire" -- in the event of a banking collapse, companies
cannot easily generate money from alternate sources. Barth
also noted the lack of deposit insurance in the Chinese
system. Deposit insurance, which guarantees that investors
will recap their money in the event of a banking crisis, is
a vital part of any healthy banking system. Fortunately
China is reportedly drafting just such a law. Barth also
said that China needs to increase the amount of banks loans
to small and medium enterprises. He discussed his
successful efforts to convince U.S. banks that a low-rate
credit card for SMEs is profitable.

Who Should Control the Banks?
--------------


5. During discussions, participants revealed a particular
interest on the role of the private sector and foreign
ownership in China's banking industry. Barth estimated that
98 percent of China's banking industry is controlled by the
government, in comparison to none in the United States and
United Kingdom. He said foreign investment undeniably
brings benefits to the banking industries of developing
countries, including managerial skills, technology, and
funding. Nevertheless, there is no definitively "correct"
amount of foreign investment for all countries. Both the
United States and New Zealand have healthy banking
industries, despite the fact that foreign ownership in the
U.S. banking industry is 20 percent while in New Zealand it
is 98 percent. In China's case, Barth said the government
is pursuing a logical course by targeting foreign ownership
in particular regions and in smaller banks before opening up
its big four banks.

A Universal Model Does Not Exist
--------------

GUANGZHOU 00018103 002 OF 002




6. Students and regulators reacted positively to Barth's
enthusiastic presentation style as well as the substance of
his talks. They asked questions about the effect of the
Sarbanes-Oxley Act on U.S. competitiveness, China's real
estate boom, and the ideal model for regulation of a
financial industry. In response to the latter question,
Barth said no such model exists and those who proclaim a
universal solution are misguided. Each country is unique,
particularly in the development stage of their government
and commercial institutions, and thus each requires a
different model. Indeed, a country may have "beautiful"
financial laws, which exactly reflect those used by the most
developed countries, but still suffer from slow growth and
weak capital markets.

Comment
--------------


7. It is noteworthy that so many students were interested
in what is ordinarily considered a dry subject. This may be
in part because the Chinese press has made China's financial
industry an everyday topic. Regardless, educated Chinese
people realize that their country's financial institutions
are in fact important to their lives and seem genuinely
interested in learning from the U.S. experience.

DONG