JS audienceJames Stent, who has served on the boards of several PRC banks, addressed CFA members on 29 September 2017 (Photo by Mabel Lee)

James Stent served for 12 years on the boards of China Minsheng Bank and China Everbright Bank in Beijing, and is presently on the board of Xacbank in Mongolia.

He has written a book that challenges the consensus foreign view of Chinese banking as fragile and dysfunctional -- China’s Banking Transformation: The Untold Story published by Oxford University Press in 2017.

The former banker was in Singapore on 29 September 2017 to share with CFA Singapore members the informed view of an insider to the reality of Chinese banking.

This article, an excerpt of his discussion, is republished (with permission) from the CFA Singapore quarterly newsletter produced by NextInsight.

LQM 7A7A7A You cannot understand Chinese banks unless you understand the political economy that they are part of. And you cannot understand the political economy unless you understand the culture in which the political economy is embedded.

An Inside Story

If you were a journalist from Bloomberg and you wanted an interview with the chairman of Hong Kong and Shanghai Bank, you will probably be granted it. If you wanted to interview the chairman of Bank of China, you probably won’t be.

Chinese banks have a very opaque corporate culture. They don’t communicate with the outside world. The annual reports tell you quite a bit, but that is all.

In the days of Mao Zedong, the Party Secretary told you what to do. They didn’t have boards of directors.

BookCover JSIn 2003, the founder and chairman of China Minsheng Bank, Jing Shuping, realized he needed corporate governance, a board of directors, and independent directors.

He asked the International Finance Corporation to recommend Westerners with long banking experience, resident in China, who could operate at the board of directors level in the Chinese language.

That is a very small population of people. That was how I got the job and how this book came to be written.

Transformation of Banks

In the 1990s, when China’s economy was beginning to take off and the free markets were beginning to be accepted, Premier Zhu Rongji saw that the banking system was still operating like in the 1970s.

It was lending according to quota. It had no concept of risk management. Many of the state-owned enterprises they were lending to didn’t even know they were supposed to pay back a loan.

JamesStent 9.2017
“Most accounts in the media, in financial analysis, and even in much academic work give little recognition to what has been achieved in the Chinese banking sector over recent years.”

- James Stent

Author of China's Banking Transformation: The Untold Story
(Photo by Mabel Lee)

It was like in the old days when the government gives you money and you spend it. The nonperforming loans went up to about 40% to 50%. The banks were technically bankrupt.

Zhu Rongji, as he did with many other things, sent teams around the world to study global best practices.

The teams came back and said, “Prime Minister, if we don’t have a dynamic, well-run, and efficient banking system, we will not be able to support rapid economic growth.

Banking systems are core to rapid economic development.

“On the other hand, if we have a bad banking system like what we have seen in Thailand, Indonesia, and in Korea in 1997, inefficiency and poor management can bring the whole economy down.“

Zhu Rongji understood and said, “We are going to transform our banking system.”

Corporate Governance

It’s hard to remember just how little they knew just 15 years ago. What does an independent director do? What does an audit committee do? The auditing profession disappeared from China from 1952 to the 1980s. When they resurrected the auditing profession, they had to bring retired auditors who were more than 70 or 80 years old back from Shanghai to teach the young people what auditing was all about.

“You won’t become the CEO of a privately owned bank like Minsheng or Pingan without the blessing of the Party, and you have to be a Party member. I was probably the only non Party member on the board of China Everbright Bank.”

- James Stent

In 2006, the China Banking Regulatory Commission instructed that every bank was to have a robust internal audit programme, not just external.

When I first chaired the audit committee of China Everbright Bank in 2006, the internal audit team couldn’t tell the management in a coherent way where the risks of the bank were.

By 2010, they were a very professional, well-managed part of the bank that engaged in very constructive dialogue with the management. The speed of learning was incredible. They now conform to global banking standards and international best practices.

Risk Management

Risk management started with credit risk, followed by operational risk. It was only a few years ago that enormous cases of bank fraud would hit media headlines. A particularly notorious example was when Gao Shan, the head of a sub-branch of the Bank of China, was sentenced to jail in a case that involved almost 3 billion yuan (about US$350 million). Such things still occasionally happen, but very rarely.

“...Operational controls in Chinese banks are probably at least as good, if not better, than those in European banks now.”

- James Stent

The internal controls of Chinese banks have improved a great deal.

The ability of internal audit to pick up deviations from operational controls has improved immensely.

Partners who study that particular technical subject tell me that operational controls in Chinese banks are probably at least as good, if not better, than those in European banks now.

Information Technology

In the course of writing my book, I interviewed people from IBM and Hewlett-Packard who are the main suppliers of hardware and software to Chinese banks. They told me, “Chinese banks are ahead of New York and the European banks. When New York and European banks merged one after another, they pack the IT systems together without integrating the platforms. They have old legacy systems that they invested in 20 to 40 years ago.

“Chinese banks invested in much more integrated and much newer IT platforms [compared to New York and European banks] as they came late into the game.”

- James Stent

Chinese banks invested in much more integrated and much newer IT platforms as they came late into the game.”

Customer Service

When I joined China Everbright Bank in 2006, customer service was awful.

During 2009 to 2010, Chinese banks started to promote customer service with campaigns such as Model Worker of the Month. Nowadays, Chinese banks have good customer service.


In China, hardly anyone pays with cash. They pay with cell phones. That is way ahead of America. Apple Pay in America has not succeeded. WeChat and Weixin payments are everywhere in China. Most Chinese customers no longer go to bank branches. They do most things by themselves online.

Political and Economic Culture of Chinese banks

Americans like to think, “Our way of doing things is the gold standard with universal values. You need market capitalism and democracy.” Actually, America is at one end of the spectrum and China is at the other.

“The lens through which we see ourselves overstates China’s downside risks and misses the strategic building blocks of its nascent structural transformation.”

- Stephen Roach

American economist
(former chairman of Morgan Stanley Asia)

Chinese understand Americans but Americans don’t understand China’s very different culture of relationships between society, economy, individuals, government, etc.

In America, it is all about freedom, the individual, liberty, and rights. Americans are very suspicious of government. Ronald Reagan, when he was president, said, “Government is not the solution to our problem. Government is the problem.” So, we constrain our government.

Like Americans, Chinese are very competitive. But way back from Confucian times, China has been very much about how you create social harmony -- duties and relating to the society around you starting with the family, then clan, village, province, and eventually loyalty to the emperor. Hu Jintao’s basic slogan when he was head of China was: Harmonious Society.

♦  Structural Characteristics of the Chinese Economy
  1. Market Socialism
    In America, market and socialism are opposites. Xi Jinping said, “We should make good use of rules of both the market (the invisible hand of Adam Smith) and the government (the visible hand). Deng Xiaoping said the same thing, “I like markets and I like central planning.”

    Chinese are very good at handling contradictions and are also very good at trying to find a balance. That is the essential idea of market socialism. The government can do certain things very well. The market does certain other things.

    In America, the market is sacred -- The market solves all problems. On the other hand in China, the market is a very useful tool but it doesn’t get everything right. The government has to stimulate the economy, restrain market excesses, and create harmony when there is too much competition. So, there is no ideological reluctance in the Chinese government taking an activist role to affect market outcomes when it wants to.

    “I like markets and I like central planning.”

    - Deng Xiaoping

    The result of this is a hybrid banking system. If you asked Jamie Dimon, the chairman of JP Morgan Bank, “Why do you go to work in the morning?” He would say, “I go to work to create profits for my bank, create shareholder value for the shareholders, and then I get a big bonus.” Bottom line is what American capitalism is all about.

    On the other hand, the chairman’s message in the annual report of a major Chinese bank would probably start out by saying, “We effectively contributed to national development plans and delivered X% returns on the bottom line to the shareholders.”

    Chinese banks have socialist goals contributing to national development as well as market goals to create shareholder value. They are all ultimately owned by the state, but they compete vigorously because that is how the CEOs of the banks are measured.

    If a bank CEO produces 12% ROE when someone else produces 15%, the government is probably going to retire the first guy. Most Chinese banks have the same ROE. The market is a tool to foster efficiency in the operations of the bank.

    The purpose of the bank is to support the real economy much like how a water utility provides water and makes a return out of that. Chinese banks make a return for shareholders but its objective is to supply funding to the economy, to provide a store of value to the savers, and to effect payments between people.

  2. Role of the Communist Party
    I can compare market socialism in China to market capitalism in America but I can’t compare the Communist Party with the Republican and Democratic Party. They are totally different. They are both called parties but that is the end of the resemblance. The Communist Party sets the general policy for the country, communicates that policy down and enforces discipline, as many people are learning in China under Xi Jinping’s anti-corruption campaign.

    “...the Organization Department, apart from being the largest HR department in the world, is also very effective within the banking sector.”

    - James Stent

    The Communist Party Organization Department (中共中央组织部) controls all the major appointments in the PRC government, in state-owned enterprises, and in the banks (including even the privately owned ones).

    You won’t become the CEO of a privately owned bank like Minsheng or Pingan without the blessing of the Party, and you have to be a Party member. I was probably the only non Party member on the board of China Everbright Bank. The significance of this policy is that it allows an alignment of the Party system to what the banks were doing with what the nation has decided it wants to do. This is communicated down through the Party level.

    I argue that the Organization Department, apart from being the largest HR department in the world, is also very effective within the banking sector. The people that I have worked with at the board level and in management are very professionally qualified. The China Banking Regulatory Commission has to approve all appointments to the board level, and they often turn down people that they don’t consider as having adequate economic, financial, accounting or other relevant skillsets and experience. Banks are too important in China to leave in the hands of amateurs.

  3. Power of the State
    Americans will often tell you, “But the government cannot do that.”

    The PRC government, if it decides it wants to, can. An example when they did it really fast, decisively and effectively was in 2008 when they routed the RMB 4 trillion stimulus through the banking system.

    “China is on track to double its real per capita GDP between 2010 to 2020 at a time when Europe has stagnated.”

    - James Stent

    That has resulted in a great accumulation of debt which is worrying.

    But it accomplished its purpose: At a time when western economies were collapsing and export markets were drying up, there would be new drivers of growth to prevent millions of people from being unemployed.

    Economic growth in China continued. The slogan then was: 8% economic growth. In fact, in 2009, it achieved GDP growth of 9.4%. Since then, it has been gradually coming down in a very controlled and planned way. China is on track to double its real per capita GDP between 2010 to 2020 at a time when Europe has stagnated.

China’s Banking Transformation -- the Untold Story is available at Alkem and at Books Kinokuniya Singapore.

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