Finding Opportunities in Black Swans: China's Banking Industry Seeks Stability and Innovation amid COVID-19
What measures have Chinese regulators and financial institutions implemented to mitigate the dangers of the coronavirus? How have credit and liquidity risks changed in the aftermath of the outbreak, and will this tail event ultimately yield innovations in Chinese banking and a greener financial system?
Friday, March 20, 2020
By Catherine Chen
The coronavirus pandemic has been a true black swan event, significantly increasing liquidity and credit risks in the global financial services industry. However, in China, regulators, banks and financial technology (fintech) companies have taken steps to increase transparency about the pandemic, reduce social anxiety, boost market liquidity and revitalize the economy.
Eventually, the revised policies that emerge from this crisis could very well lead to more innovative Chinese business models for banking and “greener” investing. Clearly, though, there is more work to do in the present to mitigate coronavirus-driven risks.
Before we delve into 2020 ramifications, it makes sense to consider China's key liquidity and credit risk issues in 2019, prior to the COVID-19 outbreak.
During the last two quarters of 2019, liquidity risk became hard to manage. This trend was fueled, in part, by a couple of smaller banks (among the roughly 4,500 financial institutions) suffering bank-runs. The China Banking and Insurance Regulatory Commission (CBIRC) responded by tightening its liquidity management policy and offering to recapitalize these banks.
Credit risks at the provincial and municipal levels have been amplified, and local governments have been tasked with curbing their debts, because of the country's economic downturn and the ongoing China-US trade tensions.
Against the backdrop of 2019, many enterprises are now heavily indebted, despite their size. What's more, should the quarantine extend through April or longer, the very survival of many companies will be at stake.
Since the outbreak of the virus in January 2020, COVID-19 has fueled a vicious cycle: the downturn in the economy led to greater credit risks at banks, which in turn will yield more economic misery, if key issues are not addressed in a timely manner.
Managing Short-Term Risks: New Government Policies
To help small- and medium-sized enterprises (SMEs) weather the economic impact of COVID-19, Chinese authorities - led by the People's Bank of China (PBOC) - have implemented a series of measures since January 25. These are highlighted by three primary policies.
First, monetary easing has been implemented to provide enough liquidity to the market. Gradual monetary easing had in fact been in place since the beginning of 2020, but, in the wake of the outbreak, this policy is expected to remain in place through at least the end of the second quarter.
Second, multiple government agencies have imposed various policies to ensure social stability and to rejuvenate the economy. For example, the National Development and Reform Commission (NDRC) plans to invest ¥300 million for medical care facilities and supplies to treat COVID-19. Moreover, the Ministry of Agriculture, Ministry of Commerce, Ministry of Ecological Environment and China Food and Drug Administration (CFDA) have all announced immediate measures in their respective areas.
These pubic policies, together with innovative strategies from the private sector, have created a certain level of social confidence. Since the quarantine, the private sector has been particularly active with innovations - mainly in the areas of technology-enabled digital services to facilitate daily activities, and big data analytics to provide timely and transparent information on the pandemic. (The goal of the latter is to reduce social anxiety.)
Third, provincial and municipal banks have been encouraged by authorities to provide various support to the affected industries and the SMEs, while also closely monitoring credit risk exposure. Both companies and individuals now have access to reduced interest payments, cheaper refinancing options, flexible loan tenors and waived loan penalties through these coronavirus-driven bank assistance programs.
Policies to control credit risks are also now in place through all banks and other social functions. “Monetary policy serves its purpose, but to protect business from bankruptcies, fiscal support needs to be given to businesses,” says Adrian Zuercher, head of asset allocation APAC at UBS' chief investment office.
Since late January, Chinese banks have offered SMEs and individuals a variety of fiscal assistance, and are expected to do even more to try to reboot the local economy.
“From group level to branches, we have established due diligence and operational processes to scrutinize all credit and loan applications, specifically for those relating to the COVID-19 situations. We are familiar with and confident in giving the right assistance to the right companies and individuals in our local community,” says Yanbo Zhang, the Hexi sub-branch manager of retail service, China CITIC Bank in Tianjin.
The bank's IT function, Zhang elaborates, has also swiftly digitalized some face-to-face processes in complicated loan applications and consumer banking services, while adhering to the same stringent compliance standard. “We have the responsibility to facilitate our customers as much as possible during difficult times,” she says.
The Opportunities Going Forward
The outbreak of COVID-19 impacts the way we do business now and in the future. Business operations, workflow and supply chain will evolve in different directions. There will be more creation and adoption of innovative business models in banking and other industries.
“The way to make us more antifragile must be coming from strategies tailored to the modern banking industry, such as financial technology-enabled services, green banking and green debts, financing of the uprising industries and strengthening liquidity,” says Min Gao, the former head of treasury at ICBC Canada.
Fintech enables banks to serve customers in new ways and has helped the industry evolve from legacy systems. China banks have been at the forefront of facial recognition, AI-based credit assessment, online banking services, microfinance and SME insurance.
Indeed, thanks to the wide adoption of fintech in China, day-to-day financial services have not been severely affected. Payment technology providers like Alipay and WeChat pay have moved China toward a cashless country, particularly in comparison to the rest of the world.
Moreover, during the quarantine period, “contact-less” operations and client experiences have been adopted by banks, food and beverage services, pharmacies and almost all facilities a person may need daily.
The outbreak of COVID-19 has also raised environmental and sustainability concerns in the Chinese society. People making consumption decisions are now actively taking into account the nutritional value of food, the source and quality of meat, and business' approach toward “Environmental, Social, and Governance” (ESG) standards.
In the near future, banks in China and across the world will likely look more favorably on issuing green financial products and providing ESG investment solutions to their clients. Green banking services and financial products would positively move the economy and business growth toward a less disastrous state, at least reducing the probability of another virus pandemic. Moreover, a greener approach could also be a way to mitigate the downside risk exposures of banks.
We need to keep asking ourselves if there are better ways to do business. What was indirectly related to profitability in the past can be drivers of new profits tomorrow. Whether we can find opportunities in black swans depends largely on our creative skills and our imagination.
Catherine Chen (FRM) is the founder and managing partner of AvantFaire Investment Management Limited in China.