Liu Mingkang: China Will Face Long-term Slump in Foreign Demand Credit Management Should be Improved

The “China Financial Forum 2009” was successfully held in Beijing on December 22. Sponsored by the China Society for Finance and Banking and Financial News, the forum was themed on the reform and development of China’s Financial Industry in the post financial crisis era.
During a speech at the forum, China Banking Regulatory Commission President Mr. Liu Mingkang stated that industry loans for steel sheets, electrolytic aluminum and plate glass granted by China’s main commercial banks either grew or declined by 13%, 19% and -45% respectively, all being significantly lower than the average loan growth rate of 31%. These figures show that efforts to adjust the loan structure have been highly effective.
The following is a transcript of Liu Mingkang’s speech.
Liu Mingkang: Honorable guests, ladies and gentlemen, good morning. This forum is about low carbon economies. The speech that I am about to give to day is about credit support in low carbon economies and during the process of industrial structure adjustment. At the recent Copenhagen Climate Conference, the focus of discussions and the basic common understanding among the nations was the reduction of carbon emissions. In China, accelerating the pace of transformation to adjust and enhance the industrial structure has become a crucial task which will have a major bearing on the national economy. In the wake of the global financial crisis, the global economy and global finance are beginning to be rethought. Despite only just having begun, this is something that will be hugely significant. Under such circumstances, it is important that we discuss the development of low carbon economies. I would like to stress three issues in brief.
I. The development of low carbon economies is vital to the sustainable development of China’s economy and society. First, new modes of economic growth, characterized by low carbon economies, are gradually becoming a ray of hope for economic recovery in the wake of the financial crisis. At present, the international economic and financial system is struggling to recover. The international community has reached common understandings on climate change, ecological environment and sustainable development. With this, the concept of green economies and low carbon economies, which are characterized by low energy consumption, low emissions and low pollution, are continuing to become an irrevocable trend. Second, although faced with great challenges, it is imperative that China develops low carbon economies and promotes sustainable development.
First, China’s economic mode of the past, which is characterized by heavy industry and high consumption, is becoming increasingly dependant on energy, and is thus difficult to sustain. Since the mid of 1990s, with the rapid progress of industrialization and urbanization, heavy and chemical industries represented by automobiles, petroleum chemicals and heavy equipment have developed at a high pace, and heavier industries have come to account for an increasingly large proportion of China’s economic structure. The output value of heavy industry in 1995 accounted for 52.7% of the gross value of industrial output. In 2008, this total increased to 71.1%. In response to the financial crisis in 2009, we have taken special action to ensure development, but this however also served to intensify this trend. Along with this trend, energy consumption has increased rapidly. From 2000 to 2009, the annual average growth rate of China’s energy consumption has been close to 10%. Of this consumption, chemical industrial energies such as coal and petroleum account for 90%. Second, the long term slump in foreign demand has forced us to make painful efforts to adjust a structure dominated by low and medium-end products that involve high energy-consumption. In our judgment, the downturn in foreign demand will not recover within in a short period of time. China’s high carbon economy structure has historical origins. In our opinion, it is an inevitable historical stage in the process of industrialization and urbanization. Developed countries in Europe and America passed through this stage decades ago. But in view of the domestic and foreign market environments at present, the obstacles that China faces in this process are unlike any faced by developed counties while they were in this stage. The current global financial crisis is far from over, and many difficulties are hindering the recovery of the global economy. European and American countries will be confronted with long-term problems such as deleveraging, high financial deficits and effective demand shortage. The growth mode of the past that involved excessive loans and excessive consumption has started to change. In addition, protectionism in international trade is set to become more prominent. We should be clear that China will be confronted with a sustained downturn in foreign demand for a very long time. The growth of China’s economy is mainly driven by investment and imports and exports. Consumption has been growing slowly and lacks driving force. The economy is still highly dependant on foreign trade. Foreign trade dependence in 2008 increased to 60%. Many industries are located at the low and medium end of the global industrial chain. In some industries there are serious domestic surpluses, and thus they are highly dependant on the international market. For instance, 25% of crude steel output is consumed by the international market, the output of plate glass accounts for 50% of the total global output, the productivity of electrolytic aluminum accounts for 44% of the global total, 44% of the ship building industry accounted for by exports, and 98% of solar batteries are exported. With the shrinkage in foreign demand, the restructuring of industries that are highly dependant on foreign trade is inevitable. So, there is an urgency to reverse the mode of high energy-consumption and high-discharge, speed up technical innovation, develop low energy-consumption industries of high added value, increase energy efficiency, develop green economies, low carbon economies and cyclic economy, and thereby optimize the growth mode of the economy from a structural perspective.
Secondly, the banking industry has played an active role in the development of low carbon economies industrial restructuring. In recent years, in order to urge the banking industry and financial industry to implement national macroscopic regulatory policies and perform social responsibilities, the China Banking Regulatory Commission has issued a series of policy measures such as the Guiding Opinions on the Credit Work for Energy Conservation and Emission Reduction and the Guidelines for Risk Management by Commercial Banks of Loans Extended for Mergers and Acquisitions. Banks and institutions have taken active measures to reduce the amount of credit granted to high energy-consumption and polluting industries and to support the adjustment, optimization and upgrading of the industrial structure. According to figures, from the end of 2008 to the end of September 2009, loans for steel, electrolytic aluminum and plate glass granted by China’s main commercial banks either increase or decreased by 13%, 19% and -45% respectively, all being lower than the average growth rate of 31% for the period in question. This shows that efforts to adjust the loan structure have been highly effective.
The banking and financial institutions are required to play two roles in promoting the adjustment of the industrial structure and realizing the change of China’s economic structure from “high carbon” to “low carbon”. The first role is that of a promoter of the concept of low carbon. It is critical that China’s banking industry embraces this concept and puts it into practice. The second thing is to develop long-term financial access mechanisms for energy conservation and environmental protection, i.e. developing business strategies, management mechanisms and incentive and examining system so as to manage projects and related punishments with clearly defined business processes and rules. The second role is to be an innovator of low carbon economies. In recent years, through cooperation with foreign institutions, some banks have made sound progress and financial gains by developing ”green credit” products for energy conservation and emissions reduction projects, clean energy utilizing projects and renewable energy development projects. Carbon emission rights have become a financial asset that can be invested in and traded. China’s banking industry should further look into the development of international carbon finance, and actively create innovative green credit and other financial products and services involving carbon under the precondition that risks are controlled. They should increase their product pricing ability and strive for greater influence, participation and initiative in the global carbon financial system.
Third, we should improve credit management and prevent credit risks during the adjustment of the industrial structure. Developing a low carbon economy is actually to enact a major change in the mode of economic development. This means that deep reforms are set to occur in industry and the market in future. The value distribution of industrial chains will slant from voluntary enterprises to enterprises with low carbon technologies. Thus, the ratio of low carbon to high carbon in industrial chains will improve continuously and push the national economy toward a standard low carbon economy. In such a major reform, the banking industry must determine the direction of restructuring and make the necessary changes to its credit structure in order to grasp new opportunities and avoid risks in restructuring.
In my opinion, there are two issues that the banking industry should be concerned about when supporting the development of low carbon economies and the adjustment of industrial structure. The first is the lack of a comprehensive supporting policy. The lack of an effective comprehensive supporting policy for risk compensation, guarantee and tax exemption and reduction as well as the lack of a policy supporting structural adjustment from high carbon to low carbon often results in cost increases and profit reductions in companies trying to transform. Despite having social effects, such companies lack financial effects. This directly leads to an increase in bank credit risks. Moreover, since each green credit project relates to different industries and different regions, it is hard for commercial banks alone to determine the exact environmental protection conditions and rate environmental risks. Information support requires coordination and cooperation between all parties. Together with the relevant departments, we will actively promote the stipulation of professional standards such as a catalog guideline for green credit, environmental protection standards and environment risk rating. At the Copenhagen Climate Conference, 45 countries have reached a common understanding. This is very important. Each country is required to make a self evaluation on its energy conservation and emissions reduction in its low carbon economy and announce it to the international community within two years. This requires us to establish a complete set of systemic programs and stipulate professional standards such as catalog guidelines, environmental protection standards and risk ratings. It also requires us to make an operational progress and break through so as to allow our banks to perform this task on an international level.
The second thing is risks in the sustainable development of new industries. Blind expansion exists in traditional industries such as steel, coal and chemicals, which have excessive productivity. But a trend of repeated introduction and construction exists in new industries such as wind power equipment and multi-crystal silicon that are related to low carbon economies. Meanwhile, certain new industries and new energy industries are still in the primary stage of development. From a global perspective, there are problems such as immature industrial standards and technologies. Even if the latest equipment and processes are adopted, they might be outdated rapidly. One of the significant features of these industries is that they need sustained investment on a huge scale. When compared to the effective output, these huge investments will cause great uncertainty.
Therefore, the factors above not only pose great challenges to the risk control of already granted bank loans, but also made it harder for banks to evaluate the risks on new loans and make loan decisions so as to promote the development of the low carbon economy. We hope that the related departments will strengthen the support and guidance from all levels, help banking and financial institutions to realize business interests and sustainable operation while undertaking their environment and social responsibilities, and support the development of the low carbon economy and prevent new credit risks during the process of industrial structure adjustment.
Honorable guests, developing a green economy and a low carbon economy is not only the desire of the international community, but is also an objective need for the sustainable development of China’s economy and society, and an embodiment of the Scientific Outlook on Development. I sincerely hope that with our joint efforts, our land will become greener and greener. Thank you!
(Source: China Finance Information)TOP