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Review of IFC’s Role in China’s Financial Sector Transformation

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Presentation on theme: "Review of IFC’s Role in China’s Financial Sector Transformation"— Presentation transcript:

1 Review of IFC’s Role in China’s Financial Sector Transformation
Yanni Chen & Chaoying Liu Development Impact Department March

2 Agenda Context and Methodology Key findings – Advisory Services
Key findings – Local Currency Financing Key findings – Investment Operations Conclusions and Lessons Learned

3 Agenda Context and Methodology Key findings – Advisory Services
Key findings – Capital market Key findings – Investment 5. Conclusion and Lessons Learned

4 Context IFC’s engagement in China’s financial sector
China started financial sector reform in 1990s. Successful financial sector reform would have huge impact on the country’s economic development and poverty reduction 1992 – IFC office in China IFC's Operations and Strategy in China 2002 – IFC AS facility in Chengdu, Western region of China World Bank and IFC’s country strategy for China 2007- IFC’s financial sector strategy for China Operations First investment to Bank of Shanghai in 1999, 50 Investments in FIs, valued at $1b AS facility in Western of China - 46 Advisory services projects , valued at $50m 3 Bond issuances, valued at $300m

5 Objective of the review
To understand if and in what ways IFC has contributed to the financial sector reform in China To identify lessons learned for future strategy and operations First such review in IFC covering IS, AS and treasury operations - focusing on IFC’s contribution

6 Scope of the review Advisory Services Investment Operations
Policy work relating to financial infrastructure (secured transactions and credit reporting system), Microfinance, Housing finance, Green credit, and sector-wide capacity building Investment Operations Commercial bank investments and Microfinance Local Currency Financing Renminbi denominated bond, Swaps facility

7 Data sources Primary Interview: unstructured interviews with over 30 key stakeholders, investment clients, government agencies, and IFC staff Site visit and in-depth interviews with beneficiaries of IFC’s clients: SME banking, microfinance, RMB-denominated bonds Secondary Project documents Available evaluations and reviews Media materials

8 Analytic Framework Storyline Results chain Secured Transactions
Credit Reporting Green Credit Capital markets Commercial banks MFs Energy Efficiency Sector-wide capacity building IFC’s intervention Sector Institution Beneficiary Results chain How IFC contributed to creating a favorable environment? How IFC contributed to building institution capacity? How IFC intervention helped improve business access to finance? Storyline

9 Agenda Context and Methodology Key findings – Advisory Services
Secured transactions reform Credit reporting system Green credit policy Sector-wide capacity building Key findings – Capital market Key findings – Investment Conclusions and Lessons Learned

10 Supported Secured Transactions Reform
Context 2005/2006 SME survey – 70% SMEs no access to finance due to lack of acceptable collaterals Lenders’ concern – no proper legal framework, no single registry $9 trillion in dead capitals locked in SME sector Intervention A 5 year collective effort of WB, IFC and Chinese government, costing $1.6m Legal framework – passed the property laws in 2007 Infrastructure – a centralized registry Capacity building – regulators, bankers and public

11 Supported Secured Transactions Reform Results
Enabled a strong growth of movables financing Loans secured by movable assets comprise 40% of the total loans in China during vs 4% in 2005 $3.5 trillion cumulative value of accounts receivable financing as of 2012 Increased SME lending portfolio - 7 large commercial banks reported 45% in vs. 20% in period Removed barrier for SME access to finance – 68,575 SME received financing secured by accounts receivable over $1 trillion 60% of the surveyed SMEs believe that without their current access to accounts receivable financing, their business development would be severely impacted

12 Advised the establishment of Credit Reporting System
Context Before 2003, China had no consumer credit database Intervention A 7 year effort, costing $400,000 Regulation – PBOC Regulation on Consumer Credit Information Database; CBRC - administrative rules requiring all FIs to report credit information Infrastructure - Consumer credit information database International best practice, capacity building

13 Advised the establishment of Credit Reporting System Results
The largest credit information database in the world built in By the end of 2010, the database covered more than 777 million individuals 2007 China was recognized as one of the top 10 reformers in Doing Business By the end of 2010, the cumulative number of inquiry for 812 million consumer database Credit reporting system helps enterprises and individuals build up their credit history, and facilitate loans to the lower-end of the market. From 2006 to 2009, the number of enterprises with bank loans increased by 50%; the number of individuals with bank loans increased by 145%.

14 Promoting Green Credit Policy
Intervention Started in 2007, Provided policy advice to and PBOC and CBRC on formation of Green Credit Policy, eg., Guidelines on Credit Granting for Energy Conservation and Emissions Reduction; Provided training and study tours. Results IFC’s PS and EP are now well established within key Chinese banks Green Credit Guidelines launched in 2012 which specified how to integrate energy-efficient financing practices into lending Demonstration effect The IFC-China Green Credit partnership model has been expanded to Vietnam, the Philippines, Malaysia and Indonesia South-South knowledge exchanges Too early to tell the impact on the ground

15 Sector-wide Capacity Building

16 Key findings – Advisory Services
Agenda Methodology Key findings – Advisory Services Key findings – Local currency financing Renminbi denominated bond Renminbi swap facility Key findings – Investment Conclusions and Lessons learned

17 Local currency financing
Intervention Renminbi denominated bond In 2005 IFC and ADB became the first foreign issuer of bonds on the Chinese domestic market through yuan-denominated “Panda Bonds.” From , in total IFC issued 3 Bonds at valued at $300m or RMB 2.15b. Renminbi swap facility In 2011 IFC signed a swap legal agreement with 2 banks and became the first multilateral institution authorized to conduct transactions with Chinese financial institutions in the domestic local-currency swap market In Board approved a lend of $50 million to Jiangsu Financial Leasing to be funded through the Swap Facility

18 Local currency financing Results
Opened the Chinese bond market to international financial institutions Improved and strengthen regulatory framework Introduced international good practice Supported high quality domestic companies with long-term local currency financing, with low interest rate Job creation, research development, GHG emission reduction Evaluation of impact on the local capital markets is underway

19 Agenda Context and Methodology Key findings – Advisory Services
Key findings – Local currency financing Key findings – Investment Commercial Banking Microfinance Conclusions and Lessons Learned

20 Commercial Banking

21 Context in the 1990’s Financial sector dominated by banks
Banking sector dominated by the “Big Four” state-owned banks High NPLs in banking sector: 25-40% Regulation prohibits foreign investment in banks No foreign banks were interested Bank loans most important source to firms No access to finance for SMEs: 1% bank loans to private sector

22 What Did IFC Do? - Investments (Excluding CHUEE facilities)

23 What Did IFC Do? - Advisory
+ Sector level seminars and training programs Presentations to the banking regulator

24 Results Demonstration effect Business strategy and risk management
Corporate governance Strategic focus on SMEs

25 Structure of China’s Financial Sector

26 Results - cont’d IFC contribution limited in a few of the banks due to: Small stake Less developed region Heavy government influence Management not receptive to international investors’ influence

27 Microfinance

28 Context in late 2000’s ~ 300 NGO type programs, unsustainable
Regulatory environment, “formative” – no clarity on which agency regulates and licenses MFIs Lack of professionally managed MFIs Government experimenting different models, including VTBs Legal status of MCCs only established in 2008

29 What Has IFC Done? - Institutional Level

30 Results Most investments too early to tell yet
Success story: CFPA Microfinance Co.: - NGO transformation - Strong business performance - Clear focus on poverty reduction - Opportunities for women Challenges faced: - Delayed government approval - Slow ramp-up - Funding constraints, partly due to regulatory issues

31 Agenda Methodology Key findings – Advisory Services Key findings – Local currency financing Key findings – Investment Conclusions and Lessons learned

32 Conclusion of the Review
China’s financial sector experienced transformational changes in the past 20 years. Many factors were at play, and an important force behind the change was the Chinese government. IFC has made significant positive contributions to this progress by playing roles of - a catalyst - a strategic investor - and a technical advisor, facilitator, and knowledge broker.

33 Lessons Learned Taking calculated strategic risk pays off
Remaining relevant to government’s priorities and having strong client commitment help move forward agenda A programmatic approach and long-term view is crucial for delivering systemic impact Combining local knowledge and international expertise is critical Co-investing and collaborating closely with strategic investors enhances success chances

34 Lessons Learned – cont’d
Being supply-driven leads to less success Better resource allocation within IFC would help increase impact Timing and mode of entering less-developed region needs to be better planned out Small stakes restrict influence

35 Feedbacks from Clients
“Not just to Bank of Shanghai, but to the entire banking sector in China, IFC brought in international best practices in bank management.” - Han Wenliang, Director of Board Supervisory Office, Bank of Shanghai “There would not be today’s Bank of Nanjing without IFC. IFC was a pioneer in pushing through China’s financial sector reform.” - Zhang Weinian, Head of Executive Office, Bank of Nanjing “IFC was a pioneer. Since IFC’s investment in 2005, Bank of Beijing has seen improvement in all aspects. IFC has played an irreplaceable role.” - Yang Shujian, Board Secretary, Bank of Beijing “The most important contribution of IFC was to bring in the concepts of corporate governance and balancing shareholder interests.” - Tang Bin, Director of Board Secretariat, Industrial Bank “IFC contributed to the transformation of the bank from a rural cooperative to a rural commercial bank.” - Long Yun, Chief, Office of Board of Directors, United Rural Commercial Bank

36 Feedbacks from Clients
They also told us that IFC: Is bureaucratic, slow, and inefficient Uses cookie-cutter approach, lacks customization and flexibility Is big on ideas and concepts, weaker on implementation and technical support Lacks continuity in relationship management sometimes Was HQ-centric back then: meetings at 12am Asia time; no decision-making power in region

37 Looking Forward Challenges facing China and IFC’s Strategic Focuses
Climate change Access to finance Balanced growth between urban and rural Integration in the world economy

38 Lessons Learned: M&E Recommendations
Thank You!

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