October2000TheView:People’sRepublicofChinaPeople’sRepublicofChinaHSBC23CreditResearchAgriculturalBankofChinaTheAgriculturalBankofChina(ABCorthe’Bank’)isoneofthe’BigFour’commercialisedbanksinChina.ConsistentwithitspurposeasaninstrumentcriticaltoChina’sagriculturaldevelopment,ABCisafull-fledgedcommercialbankwithafocusonagriculturalandruralfinancing.InHSBC’sview,ABCcanberegardedasenjoyingalmostthesamedefaultriskasitsparent.Ratherthanitsstandalonefundamentals,ABC’screditprofileisshapedbyitsroleasanagentofpovertyalleviationandagriculturaldevelopment,andisunderpinnedbyits100%stateownership.NoteABCisratedBaa1/stable/EbyMoody’sandisunratedbyStandard&Poor’s.ABC'son-going'commercialisation'theoreticallyimpliesaseparationanddistancingintherelationshipbetweentheBankandthestate.Formanyyearstocome,however,HSBCbelievesABC'sintimaterelationshipwiththegovernmentimpliesthestronglikelihoodofsupportintheeventoffinancialdistress.WebasethisassumptiononABC'sremitinrespectofruraldevelopmentandpovertyalleviation;thesignificantpartABCplaysinChina'sfinancialintermediationprocess;and,theBank'sstrategicimportanceandcontributiontothewidereconomy.ByvirtueofArticle3ofthePRCLawofEnterpriseBankruptcy,state-supportedenterprisessuchasABCareexemptedfrombeingdeclaredbankrupt.However,suchenterprisesarenotallowedtorelyonthislawtoavoidrepaymentofdebt.Notwithstandingtheabove,however,governmentsupportcanonlyberegardedasimplicitinnature,ratherthanadirectandunconditionalguaranteeinrespectoftheBank'sexternalobligations.TotheextentthatABC'sinvestmentcaseispredicatedonitscloserelationshipwiththeState,nevertheless,theBankfacesextraordinarychallengesinrespectofimprovingitscreditworthiness.Forexample,zeroornegligibleyieldingpolicyloansandthefactthatABCisunabletoriskpriceresultsinstructurallypoorassetqualityandstructurallyweakearnings.Withlittleinthewayofinternallygeneratedretainedearnings,capitaladequacyisimpairedandasaconsequence,netinterestmarginspreadsaretypicallyinsufficienttodriveearningsforward.Aparticularlydisquietingtrendhasbeentherapidandrisingexpansionofloansasmeasuredagainstprofitability.Thisindicatesthatbothproductivityandprofitabilityarelaggingcreditgrowth,whichunderscoresFixedIncomeResearchChinaAgriculturalBankofChinaMoody’sBaa1/StableS&PNotratedChinaMoody’sA3/StableS&PBBB/StableAnalyst+8522822+JohnWoods2174CharlesOoiCFA2292firstname.lastname@hsbcib.comHSBCglobalresearchisavailableelectronicallyonBloomberg,FirstCallResearchDirect,I/B/E/S-Trapeze,Multex,Reuters,andontheInternetatwww.hsbcib.com.IssuedbyHSBCSecurities(Asia)Limited.MITAP/148/09/2000October2000TheView:People’sRepublicofChinaPeople’sRepublicofChina24HSBCtheextenttowhichloansarebeingdirectedatunproductiveand/orunprofitablepurposes,resultinginvaluedestruction.Totheextentthatthe’BigFour’ingeneralandABCinparticular,arestillinatransitoryperiodfrompolicytocommerciallending,theirinherentunprofitabilitycomesaslittlesurprise.However,acceleratingcreditgrowthwithlittleregardtoprofitrepresentsasystemicrisktoABC’sbalancesheetandone,wewouldargue,investorsshouldbeaware.ProfileABCwasestablishedin1955,mergedwiththePeople’sBankofChina(PBOC)in1957,andthenre-establishedbytheStateCouncilin1979toassumedirectcontrolofthePBOC’sagricultural-directedpolicylending,andmanagementofChina’sruralcreditco-operatives(RCC).In1994,aspartofChina’sfinancialdere...
