Dr Fred Hu is Chairman of Greater China at Goldman Sachs. He has advised the Chinese government on financial reform, pension reform andmacroeconomic policies, and has worked closely with China’s leading companies onbusiness strategy, capital raising, and cross-border mergers and acquisitions.
He is a member of the Strategic Development Committee for the Government of Hong Kong Special Administrative Region and the Advisery Committee for the Hong Kong Securities and Futures Commission.
Co-director and professor at the National Center for Economic Research (NCER) at Tsinghua University in Beijing, he teaches a graduate course in international finance and macroeconomics. He has published widely on economics and financial markets. He earned an MS in Engineering Science from Tsinghua University and an MA and PhD in Economics from Harvard University.
The Chinese Economy
The global financial crisis triggered by the US subprime fiasco has sent shock waves throughout the world economy and taken a devastating toll on the global financial system. China’s economy has also been negatively impacted owing to the country’s heavy reliance on exports. Nevertheless China’s financial sector, once considered the weakest link of the country’s otherwise dynamic economy, has escaped the current global crisis largely unscathed and demonstrated remarkable stability. Indeed, a stable and healthy financial sector at the moment has set China apart from United States, Europe, and other leading emerging markets such as Russia.
In contrast to many Western financial institutions battered by toxic assets, liquidity crunch, and capital shortfalls, Chinese banks, insurance companies, and securities firms generally boast strong balance sheets, with adequate capital, good asset quality, and impressive earnings performance. With average loan to deposit ratio at 60%, there is plenty of liquidity and funding in the Chinese banking system. Out of the world’s top 10 largest banks by market capitalization, at least three are now Chinese—ICBC, China Construction Bank, and Bank of China. China Life and Ping An are among the world’s largest insurance companies. ICBC, with net earnings at 110 billion renminbi (US$16.2 billion) for 2008, is easily the world’s most profitable financial institution.
These achievements reflect successful financial reforms undertaken over the past decade, which put China’s ailing banking sector on a much healthier footing. However, there is little cause for China to rest on its laurels. The financial stability China currently enjoys could quickly come under threat if China’s economy should experience a much sharper and more prolonged slowdown. Continuous and steep interest rate cuts by the People’s Bank of China (PBOC), the Chinese central bank, may compress lending margins and cloud outlook for bank earnings. Nonperforming loans, presently at very low levels, may start to rise as numerous export-oriented manufacturing firms experience financial distress in the face of plunging overseas orders and, importantly, China’s once red-hot real estate sector remains sluggish. Chinese insurance companies, securities firms, and fund management companies, once buoyed by a bullish and fast-rising stock market, may be bracing for a tough period ahead if the country’s stock market remains weak and depressed.
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