China Merchants Bank (CMB) opened its New York branch — the first Chinese bank branch opening in the U.S. after a decade — on October 8, 2008, just as Lehman Brothers was in throes of collapsing and the global economic crisis began escalating. Having witnessed the crisis from the eye of the storm on Wall Street, and then the huge credit release in China last year, Ma Weihua, the bank’s president, shares with China Knowledge at Wharton his thoughts on what lies ahead for his country’s fast-changing financial services sector. Ma, who has forged a reputation as one of China’s most charismatic business leaders since joining the then-fledgling Shenzhen-based bank in 1999, also discusses his leadership philosophy and what it takes to manage a company such as CMB — now one of the biggest players in its sector.


Below is an edited transcript of the conversation.


China Knowledge at Wharton: In terms of the record RMB 10 trillion (US$1.5 trillion) of new loans that were issued last year in China, do you expect the number of non-performing loans to increase?


Ma Weihua: Last year’s new loans were made under special circumstances. The country needed to escape the shadow of the financial crisis, so both fiscal and monetary measures were necessary to move China out of the crisis and restore confidence. Given the speed at which the loans are made, China’s ability to collect information on them, estimate project risk and implement guarantees is not on the same level as that of America. Concerns about these loans are well-founded, and people are becoming more aware of the risks involved.


As for the RMB 10 trillion of loans, my view is that the loans related to government platforms, real estate and loans to redundant infrastructure and overcapacity have more risk. However, a large-scale rise in new non-performing loans this year is unlikely. First of all, most of the loans aren’t due for another two to three years. Second, China’s economy has incredible potential. Over the next two to three decades, maintaining GDP growth of 8% should not be a problem. China’s industrialization and urbanization continue to make it one of the top destinations for foreign investment. On the other hand, the growing domestic economy and the change of people’s attitudes toward credit and consumption should also drive growth. Together, these factors should mitigate the emergence of non-performing loans [on a large scale]. So while I expect some losses, I don’t think we are facing systemic risk.


China Knowledge at Wharton: What made you decide to write your new book, Reflection on Wall Street: My Journey to the Center of the Financial Storm, which was published last August?


Ma: I wanted to write the book because Wall Street has faced some real challenges over the past five years. I’ve had the opportunity to meet many of the regulators and people on Wall Street and made quite a few friends, including [U.S. Treasury Secretary] Tim Geithner. I wrote the book because I personally experienced the crisis while at our New York branch. The opening day of the branch was on the eve of the crisis. When I attended the opening, it was [the beginning] of 10 of the toughest days of the crisis.


When I spoke with my friends on Wall Street, we discussed what was happening. During such turbulent times, everyone has different judgments, analysis and predictions. Six months later, looking back on everyone’s reactions was extremely interesting. Furthermore, the crisis was a real turning point for the future of many people, companies and even countries. It made regulatory reform a reality, and it redefined the future for many things. It also gave China a real wake-up call. If it hadn’t been for the crisis, China may still not have fully recognized the need to shift from an export-based economy to one driven by domestic consumption. Given the wide-ranging significance of the crisis, I thought it really merited a book.


China Knowledge at Wharton: What was the impact of the financial crisis on CMB’s growth?


Ma: The process of understanding the crisis helped us refine our plans for overseas expansion more carefully. It’s been an excellent learning experience and has made us more mature in terms of decision-making.

China Knowledge at Wharton: CMB acquired a 53.12% stake in Hong Kong-based Wing Lung Bank in 2008 and opened its New York branch around the same time. What do you expect for future global expansion?


Ma: The major challenge right now for us is to improve our management capabilities. Our recent strategic transformation … has been about improving our capabilities in market access, globalizing our business and information management. Although we have won a lot of recognition in the sector, there are still many weaknesses in our management mindset. When I go down to the “shop floor,” everyone is bursting with enthusiasm, and when the topic of growth is discussed, everyone is ready for us to keep doubling our size. No one understands that that capital is absolutely essential to growth, but acquiring capital isn’t so easy.


China Knowledge at Wharton: The media is a huge fan of your leadership style and charisma. How do you view your leadership style?


Ma: They like me probably because, despite having worked in many official positions prior to CMB, I don’t consider myself to be an appointed official anymore or that I am entitled to my position. When I arrived at CMB, I thought of myself as a professional manager, and as such, I knew that my responsibility was to use my authority to manage and promote [CMB] and grow the company properly. That means doing what a bank manager should do.


There are two other things that have inspired me over the years and driven me to focus on the mission at hand. The first is professional responsibility. As a banker managing more than RMB 2 trillions of assets, you have the trust of many customers. Furthermore, more than tens of thousands employees have trusted me with their livelihoods. I have responsibility to this society, my customers and employees. The second is my passion and interest in [the sector], because if my only driver was responsibility, I might lose my way.


However, I am extremely interested in what I do. I have been working with CMB throughout its transformation from a tiny seed to its present size with all my employees. The way I see it, real happiness is to do happy things with happy people. This might be one of the reasons why the media like me, and I am straightforward and frank in answering their questions as well.


China Knowledge at Wharton: The talent issue has been a daunting challenge for China’s banking sector as it’s growing rapidly while the talent pool is relatively small. What’s your view on that?


Ma: This has been our biggest challenge. CMB has grown from RMB 100 million in assets to RMB 2 trillion, its products and services have multiplied as well, and the complexity of the business has increased immensely. We’ve had to bring all sorts of people into the company, including top managers. [That’s because] the history of China’s banking sector has an extremely short one. Since the end of the planned economy until now, it hasn’t even been 30 years.


[As banking is] a developing sector, the supply of talent has been a real challenge. One thing we have done to face the challenge is that we’ve looked abroad, mainly in Asia for high-level management — in Taiwan, Hong Kong, and Singapore. This has been especially true for our credit card and private banking businesses. Mainland China doesn’t really have any experience with either of these businesses. The main reason I looked to Taiwanese managers is because they have already developed these businesses from the ground up, so they are able to do it here with fewer missteps. They’ve all received Western educations and have innovative mindsets. When Taiwan was under Japan’s control, a lot of Taiwanese companies got a lot of experience with Japan’s detail-oriented management style. Furthermore, they understand China’s culture, so this makes it much easier to communicate with them.


Second, we run a “future managers” program five times a year to recruit students at top universities in China and abroad. We put them on the floor and behind bank counter so they understand how our business is done at the most basic level. Afterwards, depending on their specialization, they receive more-focused training. After about two years, they take on a real leadership position and become a tour de force in the bank’s growth.


Third, for our employees who have been with us longer, we provide continuous training through our CMB University. We make use of overseas schools, including Singapore’s Nanyang School of Business, Britain’s Cambridge University as well as domestic schools, such as those in Peking and Qinghua, to train our managers…. There is tremendous competition for talent, and if you want to keep your best people, an optimal compensation system isn’t enough. You need to build your own culture.


Our employees really believe in our culture and love the bank. They are also excellent at execution and this has been one of our greatest strengths. Employee turnover is fairly low, and that has been a point of pride. Competitors have tried to woo away some of our talents, because they are the best. But at a good company, the loss of a few managers won’t bring down the whole business.


China Knowledge at Wharton: How do you manage to be a business leader who is constantly on top of the latest developments?


Ma: A lot comes from conversations, which are also a form of study. If you want to take a certain responsibility upon yourself, you have to study. You don’t become the head of a bank because you are a bureaucrat but because what you know is a little bit more than the next guy, including young people. You got to know as much Internet language and gossip as you possibly can if you want to keep up with your younger employees. That’s a must.


You have to know the trends in every sector, because we have every type of client. For example, in private banking in China, you must cultivate the wealthy as your clientele and to do so you need to know their tastes. Do you know what they’re wearing? What watches do they wear, what wine do they drink, what car do they drive, what type of art they enjoy, or literature and fine arts they fancy? Let’s say you are an actor and I don’t know what your best film was, you might get upset. Or let’s say you’re a singer [and I don’t know] how broke into the industry? You have to know all of this, and you have to build this day in and day out.


All we can do is rely on daily life to build that, especially now with the Internet, which is an incredible opportunity. If I’m not away on business, I go home at 11:30 pm every day — my house is very close to the office — and I read. Then I get on for an hour and check out both the mainstream news and the gossip. If workers understand that you share a common language with them, they feel you are close to them. You start to learn the Internet lingo [from bloggers and online events such as] Sister Furong and Yan Zhao Men. Also, when we travel on business and have meetings, there are a lot of opportunities to study. I am an adjunct professor at more than 20 universities in China and have lectured at Harvard, Cambridge and Columbia, which offered me opportunities to learn, prepare and interact with students there….


China Knowledge at Wharton: What are the biggest challenges for China’s banking sector?


Ma: China’s banking sector is flying high today and the contagion from the global financial crisis had a very limited effect on China. But you shouldn’t think our banking sector is strong just because the other side had big problems. Our task is to improve our own management ability. The biggest weakness for domestic Chinese banks is management. Management problems require a turnaround of the business mindset.


Chinese banks live and die by their loans. This will soon be difficult [continue]. A bank must find new growth points. That is quintessential wealth management. The challenges in the banking sector need to be met head on. The clients need more products and more service. But as long as your mind is open, innovative and keeps accepting new things, you can take charge. The overall management mindset is the biggest challenge in China’s banking sector and needs the most improvement. If your minds are not open and cannot be transformed, your products and services won’t go anywhere.


China Knowledge at Wharton: How important have the government’s interest rate adjustments been this year?


Ma: The Chinese government is indeed facing the expectation that interest rates will increase and the renminbi will be revalued, which are the major challenges for China’s regulators right now. Because of the massive investment in every country last year, plus China’s high foreign exchange reserves will demand it to issue new currency, there is abundant liquidity in the country. Although we are not seeing a hyper inflation right now, but there are some asset bubbles. Part of the reasons that China has high housing prices is that the public is expecting inflation to grow, but not necessarily all the [house buying] is being done as an investment or speculatively.


Most young people [think they] have to buy a house quickly or else they won’t be able to. Rising house prices in China will cause a lot of problems. Not only is the risk to the financial system higher, but also can lead to social conflicts because the other half of the population loses the right [to own a home]. The government may think of a way to make adjustments to reduce house prices. But they don’t want to let them fall too low all at once because it would cause all types of risks, including loan risks. I’m expecting it to fluctuate within a small band.


But behind house prices is a currency phenomenon with excess liquidity. To resolve the currency problem, you have to tighten liquidity by raising rates. But China is worried that if it raises rates, it will have a negative impact on the economic recovery and the government is trying to strike a balance between these two forces by making the best optimal choices. But I anticipate the rates will be slightly increased.


This brings you to the topic of the appreciation of the renminbi, which is a major issue at this stage of the opening up and reform process in China. The choice we are now facing is whether to appreciate [the value of the renminbi against the dollar] or to raise [interest] rates first. If you raise rates first, you may have more hot money flowing in anticipation of the appreciation. If you appreciate first, even on a small scale, you could induce even greater expectations. This is a really hard choice, but I believe the relevant parties will make a prescient decision.


China Knowledge at Wharton: What’s your view on the case of Goldman Sachs being sued by the Securities and Exchange Commission in the U.S. for alleged misconduct?


Ma: The Goldman Sachs case exposed the problems of Wall Street. The financial crisis was a result of Wall Street’s poor behavior. Behind the global financial crisis lie the failure of regulation, excessive [financial] innovation and most importantly, the absence of morality. This case will make everyone’s heads a bit clearer about what the rules of capital markets are. However, this event will not impact the innovation and development in China’s financial sector. And I do hope that more of these things will be publicly acknowledged.