South China Bankers Calm in Face of U.S. Financial Storm

C O N F I D E N T I A L SECTION 01 OF 02 GUANGZHOU 000562

SIPDIS

E.O. 12958: DECL: 09/24/2033
TAGS: PFIN ECON EINV ETRD CH
SUBJECT: South China Bankers Calm in Face of U.S. Financial Storm

Classified By: Consul General Robert Goldberg; reasons 1.4 (d)


1. (SBU) Summary: The U.S. financial crisis will have little impact
on China's financial sector, according to U.S. managers at two south
China banks. They point out that the exposure of Chinese banks to
"toxic" instruments that have been weakened by the crisis is very
small. They are more concerned about what impact asset value changes
in China's property market and the difficult business environment
facing small and medium enterprises (SMEs) might have on their banks.
Both gave Chinese regulators good marks for their response to the
U.S. crisis, but cautioned that dealing with a weaker economic
environment could be difficult for Chinese bankers, businessmen and
officials, many of whom have no experience with anything but rapid
economic growth. End Summary.

Predicting Little Direct Impact
--------------


2. (C) The U.S. managers at two south China banks believe that U.S.
financial sector troubles will have little direct impact on China's
financial sector or economy as a whole. Michael Zink, the President
of Guangdong Development Bank (GDB),which is part owned by
Citigroup, pointed out to us that Chinese financial institutions
generally have very little exposure to "toxic" U.S. financial
instruments that have been weakened by the crisis and the direct
impact would be minimal. What exposure that exists has already been
disclosed, he said.


3. (C) Frank Newman, the Chairman of Shenzhen Development Bank (SDB),
which is part owned by private equity firm Newbridge Capital,
emphasized that most challenges facing China's financial sector and
broader economy have local roots. He said that SDB had no exposure
to Lehman Brothers or Fannie Mae securities. However, he noted that
"everyone was watching" the situation in the United States.

Concern about SMEs and Property
--------------


4. (C) Zink highlighted the property sector and SMEs as being a
greater concern for local banks. For the property sector, he
commented that it remains uncertain whether there is a bubble in the
market. He also listed some of the difficulties facing small and
medium enterprises, including rising wages, input prices, energy
costs and transportation expenses. Zink pointed out that the
financial situation in the United States would indirectly affect
these firms by weakening export demand, but noted that most of their
problems remained domestic ones.


5. (C) Newman (who served as Deputy U.S. Treasury Secretary 1994-95)
emphasized concerns about the environment facing SMEs over potential
problems in the property sector. Despite wide-spread reports that
export-oriented SMEs in the Pearl River Delta have been closing in
large numbers, especially Taiwan and Hong Kong owned firms, Newman
said that there had been almost no failures among SDB's SME clients.
However, he said demand for borrowing among these clients had
weakened, which in many cases could be tied to lower export demand.
Despite government easing of restrictions that limited lending to
SMEs, Newman said that SDB was having trouble finding good SME
clients that want to borrow.


6. (C) The real estate market is a concern, according to Newman, but
he doesn't believe it will become a problem for SDB. SDB has been
very careful about its involvement in the real estate market. It
offered credit primarily for owner-occupied properties as these
tended to be good loans. Defaults were more common among loans to
speculators buying more than one property, an area SDB had generally
stayed away from. He also noted that with rates coming down, it
would become easier for most borrowers to keep up with their payments
since nearly all mortgages in China have a variable rate.

Good Marks for Local Regulators
--------------


7. (C) Zink asserted that Chinese regulators were "doing all the
right things" in dealing with the potential effect of U.S. financial
uncertainty. He told us that they had inquired repeatedly to GDB to
find out more about its exposure to weakened assets, non-performing
loan ratio, risk assessments and liquidity. Regulators had been
focused in ensuring that banks were adequately capitalized. They
also asked about exposure to the real estate market; Zink noted that
they were trying to take on board the lesson from the U.S. situation
by assessing the impact of a change in value in major asset classes.


8. (C) The regulators are "doing fine," according to Newman, by
gathering information but not taking extreme measures. Like Zink, he
noted that there had been repeated requests for reports on SDB's
status, often with a close-of-business deadline. He also pointed out
that although sudden, unannounced regulatory changes have been an
ongoing problem in China's banking sector, he had not detected any

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significant up-tick in this kind of regulatory change since the U.S.
crisis emerged.

Lack of Experience with Hard Times
--------------


9. (C) Zink and Newman agreed that charting a course through a more
challenging economic environment was difficult for Chinese banks,
businessmen and officials. Zink pointed out that the current
generation of managers had practically no experience with economic
downturns. He marveled at the notion that many were concerned about
levels of GDP growth of "only" 8 percent. Newman pointed out that
the Chinese government was playing a difficult balancing act trying
to maintain growth and keep inflation in check. He wondered how it
would navigate the situation with current signs that oil and food
prices may be coming down.

GOLDBERG