Banking reforms in ChinaBanking reforms in ChinaMak Chi Hong 09020535

The BackgroundThe BackgroundBefore 1978, China managed the

economy by the planning system.The government budget The

state-owned enterprises(SOEs)The banking system passiveThe People’s Bank of China

Not really a bank

The BackgroundThe Background

After 1978, China changed the capital supply system for SOEs.

It had to borrow money from bank or raise funds in other financial channels.

3 stage of Banking Reforms

Banking reforms Stage 1Banking reforms Stage 1(1979-1993)(1979-1993)objective: establish a two-tier

banking system to replace mono-bank system

First tier: People’s Bank (serving as the central bank)

The re-establishment of the The re-establishment of the four specialized banksfour specialized banks

The re-establishment of the four specialized banks

1979-Agricultural Bank of China was re-establisded-Bank of China was detached from People’s Bank of China-Peopl’s Bank of Construction was detached from Ministry of Finance. It was later renamed as Bank of Construction

1983-Setting up Industrial and Commercial Bank to perform the commercial functions of the Peoples’s Bank of China-Assigning People’s Bank of China as the central Bank

Problems of the banking Problems of the banking systemsystemThe actual credit volume often

exceeded the quota set by the government plan.

Insufficient CompetitionHeavy policy burdens of the specialized

banksLage amount of non-performing loans

e.g. at the end of 1997, the share of non-perfoming loans in total loans was 29.2%in the four big specialized state banks

Banking reforms Stage 2Banking reforms Stage 2(1994-1999)(1994-1999)Objective:To differentiate the roles of state

banksCommercialize the specialized

banksImprove the regulation of the

banking sectorEnhance competition in the

financial market

Commercialization of the Commercialization of the specialized banksspecialized banks

The 4 state-owned specialized banks were renamed as state-owned commercial banks

9 regional branceds were established to replace the province branches of People’s Bank

The credit quota system for state bank was abandoned.

Commercialization of the Commercialization of the specialized banksspecialized banksThe central bank stared to

strengthen the regulation of the banks-to ensure that 4 banks fulfilled the requirement in capital asequacy ratio-To change the loan classification syste, to one that are based on riskiness

Banking reforms Stage 3Banking reforms Stage 3(2000-present)(2000-present)

The government has paid more attetion to the financial stability of the banking sector.

Set up four asset management companies to take over a total of Rmb 1400 billion of the non-performing loans.

However, it was found 2 years later that the 4 big stated banks still had Rmb 2000billion of non-performing loans

The government has followed the strategy

1)Capital injection2)Shedding of f bad assets3)Introducing strategic investors4)Initial public offerings

Reason:the foregin investors could bring in

1)Capital2)Improve the corporate

governance of the banks3)Provide management skill an

business strategies4)Reputations for raising more

funds in the subsequent IPO

ConclusionConclusion

China’s financial sector has been deepened but still narrow

Financial deepening: an increase in the ratio of fiancial asset to naitonal income, which is a measure of the extent to which past saving has been trasformed into investment through the intermediation of financial institutions.

Financial broading: an increase in the variety of financial institutions and instruments

Financial broading