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The frantic scrambling for more capital from early in 2010, however, suggests otherwise. The CEO of ICBC, Yang Kaisheng, has written a uniquely direct article analyzing the challenges facing China’s banks. 7 In it, he describes China’s financial system:
In our country’s current level of economic development, we must maintain a level of macroeconomic growth of around eight percent per annum and this will inevitably require a corresponding level of capital investment. Our country’s financial system is primarily characterized by indirect financing (via banks); the scale of direct financing (via capital markets) is limited.
    This statement of fact says two important things about China’s banking system. First, there is an overall economic goal of eight percent growth per year that requires “capital investment.” Second, the source of capital in China relies mainly on the banks. In other words, bank lending is the only way to achieve eight percent GDP growth.
    With estimates of loan growth, profitability and dividend payout ratios, Yang then states that the Big 3 banks plus the Bank of Communications will, over the next five years, need RMB480 billion (US$70 billion) in new capital. 8 Yang is saying “raised over five years,” but these banks are trying to raise this amount in just one year, 2010. Putting aside ABC’s proposed US$29 billion IPO goal, by April 2010, the other banks had already announced plans to raise RMB287 billion (US$42.1 billion), as shown in Table 2.3 .
    TABLE 2.3 Reported capital-raising plans by the Big 5 banks, May 2010
    Source: Annual and interim bank reports, Bloomberg; industry estimates as of May 2010

    This is an astounding amount, coming as it does only four to five years after their huge IPOs in 2005 and 2006 had raised a total of US$44.4 billion. Yang goes on to say that if market risk, operating risk, and increasingly stringent definitions of capital requirements are considered, then the capital required will be even greater. What he doesn’t mention, though, is the risk of bad loans. It would seem that Yang’s point in citing these facts is that China’s current Party-led banking arrangements do not work, in spite of the picture presented to the outside world. It is a defense of the model put forward by Zhu Rongji in 1998.
    The experience of the past 30 years shows that China’s banks and their business model is extremely capital-intensive. The banks boomed and went bust with regularity at the end of the 1970s, 1980s and 1990s. Now another decade has gone by and the banks have run out of capital again. Even though they appear healthy and have each announced record profits and low problem-loan ratios for 2009, the Tier 1 capital ratios of the Big 3 are rapidly approaching nine percent, down from a strong 11 percent just after their IPOs in 2005 and 2006. Of course, the lending spree of 2009 was the proximate cause. As an analyst at a prominent international bank commented: “The growth model of China banks requires them to come to the capital markets every few years. There’s no way out and this will be a long-term overhang on the market.” 9 But it is not just the lending of 2009 or even their business model that drives their unending thirst for capital; it is also their dividend policies.
    The data in Figure 2.7 show actual cash dividends paid out by the Big 3 banks over the period 2004–2008, during which each was incorporated and then listed in Hong Kong and Shanghai. The figure also shows the funds raised by these banks from domestic and international equity investors in their IPOs. The money paid out in dividends, equivalent to US$42 billion, matches exactly the money raised in the markets. What does this mean? It means international and domestic investors put cash into the listed Chinese banks simply to pre-fund the dividends paid out by the banks largely to the MOF and Central SAFE Investment. These dividends represented a transfer of real third-party cash from the