Better wealth management products needed to stop capital outflow, says Business school head

Pedro Nueno says there are dangers for the Chinese economy of going too far in liberalizing its banking system.

The 68-year-old president of China-Europe International Business School, the leading Shanghai-based business school, says the financial collapse of banks in both the United States and Europe carried lessons about too light regulation.

"I think part of the problem we had in the liberalized Western banking system was that regulation was not adequate. I think it is generally good to liberalize things, but at least there must be some minimums to be achieved by everybody," he said.

Nueno, who was speaking during the 6th Annual China Bankers Forum, hosted on the CEIBS Beijing campus, says China had to be careful with any reforms.

"The Chinese need to step cautiously. The banking sector is a very special sector. It is like the blood of the economy. You need borrowing and you need lending because it is part of our system," he said.

One of the key reforms China needs to make is to liberalize interest rates, which are currently set centrally by the People's Bank of China.

In June, the central bank made a major move in this direction by allowing banks to offer both lending and savings rates in wider bands around the central rate.

Some believe this will encourage banks to lend more to small businesses since they will be in a better position to price risk. As a result, there could be a better allocation of capital resources throughout the economy.

"I think it is crucial to find ways for banks to lend to small and medium-sized enterprises. Small and medium-sized businesses are suffering a lot in China. This is not exclusive to China, however. It is going on in other parts of the world."

Nueno, who is soft-spoken and has an old-fashioned southern European charm, says the small business lending problem in China is not all down to banks being unable to lend at higher rates to cover the risk of default.

"How do you decrease the risk by increasing the interest rate? Increasing the interest rate might be a way of protecting yourself but it might make it more difficult for the small business," he says.

Nueno says the main difficulty is that Chinese banks do not have the staff with the technical ability to properly assess small-businesses loans.

"What the banks need is to have employees who can evaluate a small entrepreneur when he comes up with an idea," he says.

"So if someone is opening a restaurant they need to ask the right questions. How much are you going to spend? Do you have experience? Are you going to rent or buy a property? If you ask adequate questions you can build up a mental picture of that project."

Nueno, who was born in Barcelona, was brought up in a poor family of five children immediately after World War II. Despite this, he and his brother went on to obtain doctorates at Harvard Business School.

"My father put a lot of pressure on us to study and it worked," he laughs.

He has gone on to have a long and distinguished academic career, specializing in entrepreneurship and teaching at Harvard and Michigan universities as well as speaking at numerous international conferences.

He was one of the founders of CEIBS, which grew as an idea in the 1980s when he was vice-president of the European Foundation for Management Development in Brussels. He has been chairman of its academic council since 1994 and is now president and the Chengwei Ventures chair professor of entrepreneurship at the business school.

He says the importance of banks has been drummed into him since an early age.

"I came from a poor family, and my mother and father talked about starting a company and did it with the help of a bank loan. I remember my father came and told us, 'You must love this bank because they lend me the money to start my company'. For him it would have been a crime not to pay the money back. He was committed to this bank."

Nueno says there is a need for China's financial services sector to be developed to facilitate a more consumer-driven society, one of the essential drivers of banking reform.

"Credit cards and car financing as well as mortgages are very important, and there are other products which need to be better developed," he says. "There is a concern people will get into debt with credit cards as in the West, but this can be regulated. We are in an electronic society and there is a point where the card can stop working."

He says one of the areas where the banks in China have to improve is in providing better wealth management products so money does not continue to flood out of the country.

"At present, the leading investment banks like JP Morgan and Morgan Stanley have problems operating in China. They have all kinds of problems in growing slowly and facing bureaucracy. The result is the Chinese go abroad and take their wealth somewhere else," he says.

"If the system worked better, most of this wealth would stay in China and create other wealth, rather than be spent on buying vineyards in the south of France."

Nueno says some of the debate about small-business funding in China at the end of last year created a false picture.

Businesses had got into financial trouble in cities like Wenzhou in Zhenjiang province by borrowing money to diversify in real estate.

"If you look at the big family concerns that have been in business for more than 100 years, they have all had investments in real estate. If you take a company like Benetton (the Italian clothes brand), they also have investments in shops and restaurants," he says. "I have analyzed many companies in China, and they have all made money from real estate as a non-core activity. This is not a bad thing."

With Chinese banks being cash-rich, many expect a Chinese bank to make a major acquisition in Europe or in the United States over the next few years, particularly with many of the banks there remaining in a parlous state.

"I think it would be very difficult for them to buy a bank as big as Royal Bank of Scotland, for example. It would be like someone in the global car industry buying Volkswagen. I think what you are more likely to see is them buying small and medium-sized banks. There are many small banks in the United States," he says. "If a Chinese bank was to buy a series of banks it could become a very big player, indeed."

One key question is whether there will be resistance internationally to Chinese banks going on an international spending spree.

Nueno says that if the Chinese banks are not given freedom to become more international some of the existing barriers to foreign banks operating in China may remain.

"If Chinese banks conquer markets in Europe or America, then there is no reason why banks from there can't operate here.

"I think Chinese banks won't let foreign banks take a big portion of their market, if Chinese banks don't get corresponding treatment outside."

However, Nueno believes China is well placed in advancing banking reform since it does not have to reinvent the wheel.

"There are many options in China for banking reform. The situation is that everything has been invented so China can just take the best model available."

Contact the writers at andrewmooday@chinadaily.com.cn and huhaiyan@chinadaily.com.cn

(China Daily 10/05/2012 page6)