Interview Transcript: "We have to transform ourselves from being a traditional bank"

• Hong Qi said CMB's large base of SME clients provides the bank with insights into the operations of SMEs and the whole Chinese economy.
• He explains that the Minxin index can accurately reflect the operational status of enterprises and track more specific indicators such as financing cost, labour cost, and land cost.
• The bank has no plans to include additional index for consumer perception.

Emmanuel Daniel (ED): We have been following China Minsheng Bank’s small and medium-sized enterprises (SME) business for some time, and you are one of the banks that we like in this area. I would like to look at the profile of your SME business and get an update on your latest initiatives, including the purchasing managers’ index (PMI) that you introduced.  

Building the SME business

Hong Qi (HQ): We started our small and micro business in 2009. It has been six years since we started. In terms of this business, we have seen a lot of results, because the outstanding loans for our micro business are RMB400 billion ($598 million), and we have a lot of experiences and lessons.

We originally positioned ourselves for private enterprises and SMEs. We also made some inclusive finance, including a community banking business. The Chinese economy is facing a transition period and is in a downward position. The economic and financial transformation alongside with technology changes and advancements for internet finance prompted us to transition offshore. During the economic downturn, our top priority was how to strengthen our service quality for our customers as we increase the risk protection for our clients, especially due to interest rate liberalisation. Cost management, price management, and asset quality management are totally different from the period before.

The financial system is taking a new form. We also face challenges on how to integrate the traditional banking business with new techniques such as internet banking, big data, and cloud computing. The Chinese economy is not only attracting capital inflow, but there are still a lot of capital and company outflow, so from a management point of view, we need to have a complete and integral framework. So, the Phoenix project is, overall, a plan that addresses the internal and external changes such as the environment, business structure changes, and technique advancements.
Another key point for the transition period is that we need to prepare our current employees by shifting their mind set and upgrading technologies and the management. These upgrades are necessary in order to ensure that our staff can cope with environment changes and stress from competitors.

The Phoenix plan has two levels of meaning. The first level is transforming or changing ourselves; we do an overall upgrade of ourselves from a traditional bank. The second level is also about rebirth, in other words, reform.

For the second question, regarding the meaning of the Minxin index, ‘Min’ is from Minsheng Bank; whereas ‘Xin’ refers to China Academy of New Supply-side Economics Research Institute. We have our own institute and forum for this new macro index. We pool together economists, financial personals, bankers, and entrepreneurs from all circles of life. They may come from the government, academy, and university. We pool together these people and stretch out the plans for the strategies to address the challenges we are facing right now.

ED: The thing that I’m always impressed with your bank is the closeness with the small businesses, and I think that your employees are the big advantage you have; far more than other banks is the good feel of the real business environment. I can see PMI building on close understanding.

HQ: We have a large base of small and micro clients. The SMEs are playing larger role in the national economy and they are more sensitive to economic booms and advancements. We have 4,000 samples and among which, 70% are SME samples. For instance, in the market, we have Minxin PMI and Caixin PMI. The Caixin PMI has a total 430 industry and enterprises samples. For the Minxin index, the samples total is 4,000.

ED: How does the index play a role in your Phoenix strategy? Your Phoenix strategy seems to take modern channels into account?

HQ: There is no connection between the Phoenix project and the PMI index. We have the advantage of having a large base of SME clients. It may give us very acute judgment for the operation status of the SMEs to give us a forward looking judgment into the whole Chinese economy. The Minxin index, including the government and investors, is getting more attention nowadays.

Tracking SMEs through PMI

ED: We are interested in the index because we have a programme called ‘RMBWorld’, where we want to be the reference point for foreigners who want to understand China. We call it ‘RMBWorld’ because the most important interest foreigners have on China is the currency RMB, but behind the currency is the economy. This year we started to track all the RMB-based assets outside China, so we actually have a ranking of all the assets, from deposits to funds to government holdings of RMB denominated assets outside China. We can’t use the Caixin index because that’s a competitor in some ways. The government index is too macro. We are very interested in your index.

HQ: I cannot say that other indexes are not good, but the Minxin index has some features. The first is the parameter of the enterprises, which can accurately reflect the operating status of enterprises after one year. This index not only reflects the status quo of enterprises, overall it has 50 items that are sub-indexes. Using the sub-indexes, we can delve deeper into the reasons that contribute to the enterprises’ prosperity and sluggishness. We can track more specific indicators, such as financing cost, labour cost, and land cost; plus the market factors such as whether it is easy or hard for enterprises to get financing, so we can probe more deeply into the reasons behind the current situation of enterprises.

ED: Two questions. One is: are you a user of your own index? Second is: if you have such deep field, is the index indicative of different parts of China, whose economies are very different?

HQ: To answer your first question, I look at the Minxin index every month. The time from the incorporation of this index is not considered very long. We took a year to prepare the data and figures. We are also judging the accuracy of our index, whether it can accurately reflect the economic situation. Judging from my experience, generally speaking, it is accurate. For example, the October trend, the service industry is showing a good trend, while the manufacturing industry is still in recession. We believe that the whole economy will be picking up during the first half of next year.

ED: What about different parts of China? For instance, Wuhan is different from Fujian.

HQ: For the design of the index, basically it is a scientific system with different weightings to different industries, regions and size distributions. We covered almost the 25 industries and almost all the major cities in China when we use them as a gauge, but different weighting are used.

ED: Your bank’s financial performance, non-performing loans (NPLs) are rising quite steadily but the same thing goes for all banks in China but do you think there will be a brand problem in the perception that you are doing this index but your own NPLs are rising?

HQ: There is a time lag between the prosperity index and the NPLs. In real life, the NPL you get is peaking whereas the prosperity index is starting to show a good trend. The NPL will lag at least half a year, behind the prosperity index.

ED: Historically, I’ve understood China Minsheng Bank has a lot of goodwill in the commodity business. Does the commodity business show up in the index?

HQ: Yes, because the commodity index is more sensitive and more front-loaded than the SME index. There are more factors affecting the commodity index as compared to the SME index, so this index is showing a trend. Physically, the commodity index is generally reflecting the international market such as the supply and demand for commodities.

ED: But also, a lot of small businesses have a very large inventory of commodities, so that will also be reflected in the lag time to economic recovery?

HQ: This has an influence on the economy. It’s a trend for SMEs to reduce their inventories. The SMEs have to reduce their inventories and then they can increase their capacity for growth.

ED: I’m always very interested to know how much of a lead indicator is this kind of index?

HQ: You need some skills or techniques to make your own judgment. The declining pace, for example, in the whole economy cycle, is calculated through logarithms calculation. You can judge the degree by declining pace.

ED: The leadership that you gave the bank is very different from the DNA of the bank, the real culture of the bank. The culture of the bank is being very close to the small business customer on a relationship basis. This index seems like you’re taking the bank to more of a professional basis to have the relationship?

HQ: China’s economy experienced rapid growth and prosperity from 2002 to 2013; in other words, an upward incline. During this period, people are more concerned about customer relationship management and less concerned about the risks. There are a lot of uncertainties during the structure adjustment period and we all need to know more. For a bank, it is more important to pay more attention to the industry and regional reasons, and not just only a focus on the SMEs.

Future plans and strategies

ED: Any plans to have an index for consumer perception?

HQ: We have not considered including one for consumer perception. We have 50 sub-indexes that more or less, indirectly highlight the changes in the market.

ED: Your Phoenix project is one of the few bank strategies that we know about in China. Very few Chinese banks think in strategic terms. Strategy-wise, I think it is very clear and I think your employees will understand what you are trying to achieve. But implementation-wise – we have known Minsheng Bank for a while – and we’ve noticed that there is a way in which your bank is very good in grassroots-type of business. Grassroots means that you’re very close to the customers.

HQ: For customers to judge whether a bank is good or not, they look at indicators such as growth rate and growth in size. The growth rate of the bank is very important to make absolute judgments because it is like how we look the growth of China’s economy from a GDP perspective.

ED: I think foreign investors are used to very good growth rates, so the moment the numbers change, they get very worried. But this is actually normal.

HQ: In asserting your plan, when you talk about the transition, it is not simply about the growth in factors or performance indicators; we are talking about more efficient and innovative growth for sustainable development.

ED: China’s leaders put a number to achieve; so 7% GDP growth against 6.5%. Do you have numbers to support your Phoenix plan in terms of cost-to-income, return on equity (ROE), and growth?

HQ: The GDP and other indexes are more comprehensive, so the question is where to draw the line. For example, to achieve 15% to 20% economic growth, we just take a look at profits, income, and NPL ratios. We have to put more efforts into the return on equity, because if we want to get a specific ROE, we may take a lot of factors into consideration, such as the risks, the costs and income. The industry where you put your money in is also a part of risk control.

ED: So do you have ROE goals?

HQ: We maintain a leading position in terms of ROE, but it doesn’t mean that the higher the ROE, the better. Returns should be kept sustainable and we have the top two or three position for ROE among Chinese banks.

ED: The index will always be read against the performance of the bank itself. The industry perception will always be that, ‘Minsheng Bank is very close to the small business, so why did the NPLs go up so quickly’. I’ve also noticed that in China, businesses actually pay more for credit than the official credit rate (interest rate costs).

HQ: The interest rates for SMEs are higher due to higher risks associated with the SMEs business. From a commercial point-of-view while carrying social responsibility, we must make profits.

ED: But when you charge more, non-banks can also charge more, so you put yourself in competition with many other types of players, not just the banks.

HQ: The SME demand volume in China is very big, so the servicing of the SME sector cannot be fully done by banks. It should be the responsibility of the society, banks, and the government to meet the demands of the SME sector.

ED: Thank you.