The Study on China

Since the financial crisis burst out in 2008, the capital structure of banking has become the important question which the theorists pay close attention to, so this article focused on China Listed Commercial Bank’s capital structure. Based on a summary on the capital structure theory, this article analyzed the definition and characteristics of the banking capital structure. Besides, this article analyzed the present situation of the core capital structure and the attached capital structure of China listed commercial banks and came up with some countermeasures such as “reasonably control the subsidiary capital ratio” to optimize the capital structure of China’s commercial banks. Keyword: Commercial bank, Capital structure, Listed Company Enterprise capital structure profoundly influences the management structure and management achievements. In order to deal with the financial crisis which in 2008 exploded, each country in the world generally adopted a series of reform measures and the institutional arrangements like raising Capital Adequacy Ratio and controlling Leverage Ratio. These measures mainly focused on remolding and optimizing the banking capital structure. This background enabled the research on China banking capital structure to show the importance theoretically and realistically. Viewing China listed commercial banks as samples; this article has carried on a more systematically generalized analysis to their capital structure. 1 The Summary of Capital Structure Theory The capital structure theory is based on realizing the goal of maximizing the enterprise value or the shareholder wealth, and researches the influence of proportion change between long-term debt capital and equity capital in the enterprise capital structure. The capital structure theory might be traced back to Hicks’ "Value and Capital" in 1946. In 1952 American economist Durante divided the capital structure's researches into three kinds: Net Income Theory, Net Operating Income Theory and the traditional theory between them. But the study of the modern capital structure theory is thought to start in 1958 as American economists Modigliani and Miller's theory. The MM theory limitation lays in only considering the tax revenue brought by the debt while neglecting the risk and the extra cost caused by the debt. Afterward some capital structure theories like balance theory, the agent theory, the pecking order theory and the signal theory are relaxing some suppositions of the MM theory to conduct the research. The balance theory discusses the relationship between the enterprise value and the capital structure after considering that the enterprise has the financial risk and the bankrupt cost as well as the agent cost. The balance theory believes that the key aspect of restricting the enterprise infinite pursuing tax-free income or the debt maximum value is the business risk and the expense which are formed by the debt rising. The enterprise capital structure must spot the most appropriate choice to balance the financial crisis cost and the agent cost brought by the debt value maximization and the debt rising. The pecking order theory believes that stock market's non-rationality has the material effect on the financing behavior to the company, and the enterprise financing behavior and the market capital financing environment is closely related. As the research that Myers and Majluf made on UK, US and other countries’ companies indicated, the enterprise must measure the market which the different ∗ [Sustentation Fund]: National Science Fund of China (70703030) Zhejiang Province Science Fund (Y6080222), Humanity and Social Science Fund of Chinese Ministry of Education (07JA790083, 09YJC790240) ORIENT ACADEMIC FORUM 14 financing way brings to respond, and compare the debt cost and the income when collecting the new capital. Therefore we usually follow so-called “the pecking order” to choose financing way, after namely first endogenous financing, extraneous source financing, as to extraneous source financing primordial consideration debt financing, insufficiency distributes the new stock again, namely the enterprise financing order is: endogenous financing, debt financing , stockholder's rights financing . The signal theory introduces the asymmetrical information theory to capital infusion structural theory research. The enterprise capital structure is one kind of the signal tool that passes the insider information to the market. For example, the ratio of debt rising was considered as a positive signal. It indicated that the superintendents have expected highly of the enterprise income in the future. Simultaneously, the hard binding character of debt will also urge the manager even to be more diligent thus strengthening the investors’ confidence to company. Then debt cost will drop and the enterprise market value will also increase along with it. Integrating each kind of theory's research results of modern capital structure, the enterprise capital structure may through the following four ways influence enterprise behavior and the management achievements and even the enterprise market value: First, through changing the financing structure, reducing the capital cost, increasing the direct investment to enterprise, we can increase the income; Second, transmits the signal through the enterprise capital structure choice, affects the market to enterprise's judgment, thus influence enterprise's market value; Third, as a result of capital structure's difference, affects the enterprise surplus claim power and the surplus domination disposition, then influence enterprise's government efficiency, thus influence enterprise achievements and company value; Fourth, brings the management through the debt capital's existence to the superintendent the pressure and the enthusiasm, thus influence enterprise market value. 2 Particularity of Banking Capital Structure 2.1 Banking Capital Definition Banking capital's three types, respectively are the account capital, the supervision capital and the economical capital, the economical capital is the new concept which in 2004 “Barthel New Capital Agreement” proposed. The account capital (Book Capital) is from the bank storehouse keeper's angle definition. The account capital may observe directly from the property debt table, makes concrete by the paid in capital, the capital surplus, the earnings surplus, and the undistributed profit and prepares to be composed generally. 2004 "New Capital Agreement" will supervise the capital (Regulatory Capital) to divide into the core capital, the attached capital and the third-level capital. Core capital includes rights and interests capital and public reserve. And the rights and interests capital defines the common share which distributes for oneself and pays, as well as non-accumulation preferred stock. Attached capital includes not public reserve, simple loan loss preparation, mix capital instrument, evaluation reserve and long-term junior debt and so on five kinds. The third-level capital is the short-term junior debt. The economical capital (Economic Capital) is from the bank internal management angle definition. The bank superintendent usually divides into the bank risk initiation's loss three types, namely the anticipated loss, the non-anticipated loss and exceptionally loses. 2.2 Banking Capital Structure's Particularity Since the other hand, the financial development's globalized tendency has strengthened unceasingly in the 1990s, the financial innovation changes with each new day with the information technology widespread application, various countries' finance supervision organization relaxes in abundance to Commercial bank's control, but in the capital control, actually generally has adopted compared to formerly the stricter monitoring measure. After especially in 2008 the whole world financial crisis erupts, regulatory authority oneself will suppress the bank risk, the confirming bank repayment ability important tool to the bank capital sufficient control achievement. Therefore, regulatory authority’s lowest capital sufficiency of capital request is also affects the Commercial bank capital structure the important attribute. In this case, the Commercial bank must in satisfy the lowest capital sufficiency of ORIENT ACADEMIC FORUM 15 capital request in the foundation to choose the capital structure, the capital sufficiency of capital becomes the Commercial bank capital structure decision-making the basic restraint. 3 The Analysis of China Listed Commercial Banks’ Capital Structure 3.1 China Listed Commercial Banks’ Core Capital Structure Situation According to “Barthel New Capital Agreement” to core capital's stipulation, Commercial bank's core capital namely or is called the stockholder's rights capital for the rights and interests capital. Up to June 30, 2009, in our country city bank stockholder's rights capital structure situation. Our country state-owned Commercial bank's core capital structure overall presents the following characteristic: (1) The state-owned shares occupy the dominant position, but the national holding method tends to be the diversification. State-owned Commercial bank after transformation, generally is by Central Huijing Ltd. to represent the country to exercise to the state-owned Commercial bank member's authority, and based on the modern finance enterprise system's request, fulfills the state asset member's function by the trustee and the supervisor in the bank. In recent years, our country might also owned bank stocks indirectly through national or local finance department, the property management company and entrusts some State-owned business and so on many kinds of forms to have the bank stock, through this kind, then realized the national holding. The Bank of Communications (BOCOM) and the China Industrial Bank (CIB) separately takes the first major stockholder by national Ministry of Finance or the place provincial finance department to own stocks; China Citic Bank, Shanghai Pudong Development Bank (SPDB) and Huaxia Bank 's first major stockholder respectively is the Citic Group, the Shanghai International Group and the Shougang Corporation, the above three shareholder nature was the State-owned business, the country owns stocks the way through this kind of State-owned business legal entity to realize to commercial bank's state-owned holding status. May see from table 1, Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and the Bank of China (BOC), state-owned sharer’s share surpasses half. COCOM and CIB own stocks the proportion to be lower than 50%, but the government still separately had 26.48% and 20.80% stocks is at the first major stockholder position; China Citic Bank, SPDB, Huaxia Bank do not have national direct holding, but the government owns stocks the way through the state-owned legal entity to obtain the bank domination indirectly: China Citic Bank’s state-owned corporate shares proportion is 62.33%; SPDB’s state-owned corporate shares proportion is 35.10%; The Huaxia Bank’s state-owned corporate shares proportion is 36.91%. (2) The Ownership Concentration significantly differs. First, the state-owned commercial banks are highly concentrated. Table 2 has shown the average ratio of the largest shareholder in state-owned banks is 54.19%, and the top five shareholders in state-owned commercial banks hold the average ratio of 92.17%, in which the ratio stock in China Merchants Bank, CCB, BOC and BOCOM, is respectively 94.33%, 96.14%, 97.12%, 69.91%. Second, the Ownership Concentration in the joint-stock bank is obviously lower than that in the state-owned commercial banks. (3) Ownership structure is diversifies and foreign ownership increases annually. On the one hand, equity diversification has become the mainstream. In 1987, the establishment of China Merchants Bank opened the prelude of ownership structure’s diversification in commercial banks. Up to now, the type of equity in China’s commercial banks includes state ownership, state-owned legal entity shares, within the natural person holding, within the legal entity shares and foreign shares. On the other hand, foreign ownership is in the ascendant trend. Except Minsheng Bank, the other shareholders in the top five banks have foreign equity participation, and the type also varies: Foreign financial institutions became shareholders as strategic investors (such as HSBC Bank; Citigroup shares SPDB, etc.); Foreign non-financial institutions joined as financial investors (such as the GIL shares of CITIC Bank); directly in the Hong Kong issued H shares to introduce foreign investors (such as ICBC, CCB, CITIC Bank, China Merchants Bank, etc.). The proportion of foreign ownership also increases year by year. At the end of June in 2009, the foreign ownership in China’s major listed banks have the average ratio (including domestically listed foreign shares A shares and overseas listed foreign shares H shares) of 22.11%. In the BOCOM, BOC, CCB and CITIC Bank, the proportion of foreign shares are higher than ORIENT ACADEMIC FORUM 16 30%, and among them the Bank of Communications reaches as high as 40.51% (all H shares). Table 1 China Listed Commercial Banks’ Core Capital Structure—shareholding ratio Unit: % Data source: Each line in 2009 semi-annual reporting Seen from Table 2, at the end of June in 2009, China's primary listed banks’ capital adequacy ratio and core capital adequacy ratio averaged respectively 10.75% and 7.89%, both having reached the relevant requirements in the “Commercial Bank Capital Adequacy” promulgated by CBRC. However, after large amount of lending in the first half of 2009, some joint-stock commercial banks, such as SPDB, Minsheng Bank, have consumed their capital seriously; meanwhile capital supplements are relatively slow, leading to their capital adequacy ratio close to the fire line. Table 2 China’s listed banks capital adequacy ratio and core capital adequacy ratio (as to June 30, 2009) Data source: Each line in 2009 semi-annual reporting In 2010, the China Banking Regulatory Commission, according to the proposed changes in the macroeconomic situation of commercial banks, requests to establish the dynamic capital and dynamic provisioning. It requires that every commercial bank should be timely to raise the minimum capital adequacy from 8% to 10% (small banks) and 11% (large banks), and raise the provision coverage from Bank Largest Shareholder Nature Proportion of the largest shareholder Proportion of the top five shareholders Proportion of foreign ownership ICBC CHI State-owned 35.42 94.33 20.62 CCB CHI State-owned 57.09 96.14 37.65 BOA CHI State-owned 67.53 97.12 29.39 BOCOM MOF State-owned 26.48 69.91 40.51 China Citic Bank CITIC State-owned 62.33 93.41 30.65 SPDB SIG State-owned 21.16 38.88 3.78 Huaxia Bank Shougang Corporation State-owned 13.98 48.18 11.27 SDB New Bridge Asia Non-state 16.76 27.64 16.76 CIB Fujian Financial Department State-owned 20.80 43.04 12.78 Merchants Bank HKEC Non-state 17.76 43.36 17.76 Minsheng Bank NHG Non-state 5.9 22.22 0 Bank Capital Adequacy Ratio Core Capital Adequacy Ratio Capital Adequacy Ratio Compliance Whether Meet the Latest Requirements ICBC 13.06% 10.75% Meet Meet CCB 12.16% 10.17% Meet Meet BOC 11.53% 9.43% Meet Meet BOCOM 12.57% 8.81% Meet Meet CCB 12.04% 10.45% Meet Meet SPDB 8.11% 4.68% Meet No Huaxia Bank 10.36% 6.84% Meet Meet SDB 8.58% 5.27% Meet No CIB 10.75% 7.91% Meet Meet Merchants Bank 10.63% 6.56% Meet Meet Minsheng Bank 8.48% 5.90% Meet No ORIENT ACADEMIC FORUM 17 the past 100% to 150%, aiming to require the banks to set aside earnings into capital and hedge in case of potential risk of future when it is good time for credit expansion and profitability. What is worthy of attention is that ,under the control of this standard, joint-stock banks’ conditions are worrying: the capital adequacy ratio of mid-2009 in SPDB, SDB, Minsheng Bank's did not reach 10%, and also Huaxia Bank, CIB and China Merchants Bank is just a step away fire line. 3.2 Situation of the subsidiary capital in China’s listed banks In December 2003, China Banking Regulatory Commission officially announced to allow commercial banks to issue subordinated notes (Subordinated Notes and Debentures) to supplement the capital. In February 2004, the CBRC promulgated the “Commercial Bank Capital Adequacy” (referred to as “measures” below), formally adding long-term subordinated debt to bank subsidiary capital in commercial banks. The introducing of “Notice” and “measures” has opened up a shortcut for China’s commercial banks in quickly adding capital and the capital adequacy ratio. During the period from January to June in2009, China's main subsidiary capital in listed banks totaled 562.272 billion Yuan, accounting to 28.97% of the total capital ratio. Due to the pursuit of value maximization by shareholders and profit pressures, when adding capital, the joint-stock bank management, compared with the state-owned banks’, tends to choose subsidiary capital rather than core capital in order to increase financial leverage and further to increase ROE. Apart from China Citic Bank (13.18%), other joint-stock banks’ subsidiary capital occupies more than 28.97% of total capital ratio. State-owned banks’ capital occupies much higher, and its capital structure accounts for the vast proportion of core capital, while their subsidiary capital is relatively lower: ICBC of China’s is 19.68%; BOC, 21.72%; CCB, 17%, BOCOM, 30.19%.