BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

China's overall CBBER is 70.8. The equivalent figures for the USA and the eurozone are 84.8 and 81.4, respectively. China's CBBER is higher than most other countries in the Asia-Pacific region, with the exception of Australia, Hong Kong, Japan, Singapore and South Korea. Within the CBBER, the most important aspect is the banking market structure element of the limits of potential returns. This element accounts for 42% of the overall CBBER. China's rating for this element – 90.0 – is very high by both regional and international standards. It is also far higher than the the country structure element of the limits of potential returns (48.0). Additionally, the total assets of China's banking sector relative to those of other countries, and the absolute growth in total assets and client loans during the 2007-2012 forecast period are very high.

Nevertheless, the CBBER highlights what the factors that are holding back China's banking sector. One is the relatively low level of per-capita GDP (which is exacerbated by the uneven distribution of income). Another is bureaucracy. However, the most important constraint is the volatility of the economy over the long-term.

China's economic momentum is expected to be slow as the authorities increase efforts to cool the economy. GDP data for Q307 showed that while growth slowed from Q207's 12-year high of 11.9% year-on-year (y-o-y), it nonetheless remained high at 11.5%. This puts China on course to reach its highest level of growth since 1993 in 2007, and this will prompt policymakers to move more swiftly to slow the economy's expansion. As such, we forecast real GDP expansion of 10.4% in 2008 (down from an anticipated 11.5% in 2007), with a further slowdown to 9.7% in 2009.

In light of recent GDP data, it appears likely that further monetary tightening is on the cards. Inflation remains a key problem in China, and despite slowing to 6.2% y-o-y in September 2007, down from the August's 11-year high of 6.5%, price growth still remains far in excess of the government's 3.0% target. While the structural bottleneck concerning pork supply – which has in large part been responsible for the recent spike in food inflation – is likely to resolve itself, inflationary pressures will persist. With global crude oil prices high and liquidity growth in China likely to remain strong, we expect the central bank to retain a hawkish stance, with further tightening measures likely in 2008.