Transcript Snapshot of Chinese Banking Sector

Snapshot of Chinese Banking
Sector
SUN Tao
The People’s Bank of China
May 24,2005
Contents
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China’s financial structure
Features of China’s financial system
Financial reform since 1990s
Recent reform and development
Keys for the success of reform
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I.China’s financial structure
• Bank assets constitute the main part of
financial assets. Financial assets mainly include
currency in circulation, bank assets, shares and
bonds. In China, bank assets make up a majority
share.
• As of the end of 2004, currency in circulation,
deposits and loans of the financial institutions,
shares and bonds accounted for 3.9 percent, 79.7
percent, 6.7 percent and 9.3 percent respectively
of the total outstanding financial assets .
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贷款：82.9%
国债: 10.8%
企业债:1.1%
股票:5.2%
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Bank loan is the main channel of
financing.
• In 2004, the fund raised by the nonfinancial sector (enterprises and government)
through bank loans accounted for 82.9
percent.
• Of the total funds raised by the enterprises,
bank loans accounted for 92 percent.
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• Broad money (M2) as a percentage of
Gross Domestic Product (GDP) is high.
The ratio of M2 to GDP is an indicator of
the extent of a country’s financial deepening.
Generally speaking, the larger this ratio, the
higher the extent of monetization of the
economy.
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• Saving rate is high and has been rising
constantly. China has the highest saving
rate in the world. The rate was 34.3 percent
in 1985, 38 percent in 1990, 40.2 percent in
2001 and 44.6 percent in 2003.
• High saving rate is not a bad thing by itself,
but if it keeps rising, economic growth may
become too much dependant on investment.
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II.Features of China’s
financial system
• Banks not only play a predominant role in
the financial system but also accumulate
substantial risks.
• The financial markets are under-developed.
Much remains to be done to make the
markets deeper and broader.
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two major tasks remaining of the
Chinese financial authorities.
• First, to accelerate banking reform to further
strengthen the self-development capability
and risk control mechanisms of the banks.
• Second, to advance construction of the
financial market to further increase the
proportion of direct financing in the
economy to promote effective resource
allocation and mitigate financial risks.
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III.Financial system reform
since 1990s
• First,the functions of the central bank were
transformed. In late 1990’s, China Securities
Regulatory Commission and China Insurance
Regulatory Commission were created to take over
securities and insurance market regulatory
function from the PBC.
• In 1998, the PBC restructured its institutional setup by replacing provincial branches with 9 interprovincial regional branches.
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• Second, three policy banks, i.e. State
Development Bank, China Import and
Export Bank and Agricultural Development
Bank of China, were set up to separate
policy financing from the four state-owned
commercial banks, marking the first step in
the reform of state-owned commercial
banks.
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• Third, financial regulation was reformed to
help commercial banks transform their
operational mechanism with a view to turn
them into internationally competitive banks
operating on a truly commercial basis.
Measures taken in recently years include the
following:
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• Fourth, four AMCs, namely, Xinda, China
Orient, Greatwall, and Huarong, were
created to take over and dispose of NPLs
from the four big banks. In the past four
years, a total of RMB1.4 trillion yuan was
transferred to the AMCs. At end of 2004,
through open tender auction, joint equity
and business restructuring, registering a
cash recovery rate of around 20%.
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IV.Recent Reform and
development
• Initial success was made in the pilot jointstock reform of the state-owned commercial
banks.
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• On December 30, 2003, the Chinese
government recapitalized the Bank of China
and the China Construction Bank with
US$45 billion through a company called the
Central Huijin Investment Co. Ltd.,
marking the official start of the joint-stock
reform of the state-owned commercial
banks.
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• Breakthroughs were also made in the jointstock reform of the Bank of
Communications.
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• On June 30, 2004, the Bank of
Communications completed financial
restructuring, and on August 18 further
successfully concluded a deal with HSBC to
secure its strategic investment in the bank,
leading to an increase of capital adequacy
ratio, strengthening of financial viability
and profitability, and an improvement of
corporate governance arrangement.
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• Recently, the State Council has granted
approval for the share-holding reform
scheme of the Industrial and Commercial
Bank of China (ICBC) and the next-stage
working plan for the share-holding reform
of BOC and CCB. Subsequently, the focus
of the share-holding reform in China’s
banking industry will be shifted towards
improvement of corporate governance.
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• the Agricultural Bank of China has also
targeted joint-stock reform, with various
measures taken to strengthen internal
control and risk management, improve
business efficiency and asset quality, so as
to get itself prepared for the more profound
reform.
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Other banks’ reform
• Policy Banks
• RCC
• City commercial banks
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Policy Banks
• Direction:
-- Developing rather than policy dependency;
--market oriented;
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RCC
• Pilot program of recapitalization in eight
provinces, by PBC’s issuing of special
bonds,exchanging NPLs;
• Program enlarged to cover 21 provinces;
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City commercial banks
• Capitalization;
• Strategic investors;
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V. Keys for the success of reform
• Corporate governance;
• Financial ecology;
• Financial safety net
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Corporate governance
• Incentive structure
• Hard budget constraint
• competition
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Financial ecology
• Favorable legal environment is fundamental
infrastructure for the enterprises to establish
scientific internal control system, and
represents the basic safeguards for market
participants to be responsible for their own
management decisions, their own profits
and losses in the real sense.
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• beefing up efforts to promoting relevant
financial legislation;
• Accounting and transparency;
• Payment system;
• Credit;
• Investor protection.
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Financial safety net
• Prudential financial supervision
• LOLR
• Investors protection scheme
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Prudential financial supervision
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Supervision Objectives;
Supervision system;
Supervision Forebearance;
Supervision coordination.
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LOLR
• Systemic financial crisis prevention;
• Dealing with MH.
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Investors protection scheme
• Deposit insurance system;
• Security investors’ compensation scheme;
• Life insurance investor protection program.
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• Thank you!
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