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Title: China


1
Chinas Banking and Financial System
  • Xingmin Yin
  • China Center for Economic Studies
  • Fudan University

2
Contents
  1. Introduction
  2. Financial and banking system
  3. Financial markets
  4. Regulation of the financial system
  5. Performance analysis
  6. Non-performing loans and the reform of banking
    system
  7. Reform progress Recapitalization
  8. New Policies for the reform of banking system
    Strategic investors
  9. Conclusions
  10. Questions and Problems

3
1. Introduction
  • Overview of banking industry in China.
  • The banking industry has been growing at an
    average annual rate of more than 19 in assets
    for the past two decades.
  • Total banking sector assets reached 37.5 trillion
    yuan in 2005, or 209 of GDP, one of the highest
    in the world, for example, 140 of GDP in Japan,
    146 in Germany, and 297 in UK.
  • China today boasts one of the largest banking
    industries in the world.

4
  • The state-owned commercial banks dominated the
    banking system.
  • In recent years, the reform of state-owned banks
    has been pushed forward steadily due to the
    pressures imposed by many new issues in the
    globalization of economy.
  • The objective of state-owned bank reform is to
    transform these banks into modern financial
    institutions with good governance and operations,
    clear business targets and sound financial
    performance.

5
A. New Development of Chinas Financial Industry
  • Chinese economy is distinguished with the
    manufacturing power in development, but tertiary
    industry gradually increased its share in GDP,
    from 32.8 percent in 1996 to 40 percent in 2005,
    and financial industry accounted for 3.4 percent.
  • Financial sector development helps economic
    growth through more efficient resource allocation
    and productivity growth rather than the scale of
    investment or saving mobilization.
  • What is the major function of financial industry?

6
  • Countries with better developed financial system
    experience faster economic growth, measures of
    financial development, such as the ratio of M2 to
    GDP yield similar results.
  • Credit to GDP is a standard measure of financial
    intermediary development and in the ratio of
    claims by deposit money and other financial
    institutions on the domestic non-financial sector
    to GDP.

7
Financial Development
M2/GDP Deposits/GDP Loans /GDP
1990 81.92 62.38 81.24
2001 144.36 130.97 141.24
2006 163.89 159.08 106.87
2007 2008 163.16 157.81 157.49 151.83 106.67 106.31
More savings for economy growth.
8
Financial Development

9
Discussion
  • More savings contributed to Chinas economic
    development in the past 20 years.
  • Is it possible for China to continue its
    investment growth in the support of high saving
    rate?

10
B. Household Savings in China
  • What is the feature of household savings?
  • High level of household savings, which increased
    from 7.38 trillion yuan in 2001 to 22.5 trillion
    yuan by end-2008.
  • Discussion on the Chinese Saving Puzzle and the
    Life-cycle Hypothesis by Franco Modiglian and Shi
    Larry Cao, Journal of Economic Literature, March
    2004.

11
Comparison on Saving Amount
China 2001 2006 2007 2008
Household saving, RMB billion 7376.2 16158.7 17253.4 22200.0
USD, billion 891.17 2026.99 2268.99 3248.18
Gross saving, RMB USD, billion 47800.0 6993.83
USA, billion Q.2, 2008
Gross saving 1657.6 2038.5 1956.0 1672.9
12
Year-on-Year Increases
Billion yuan
13
  • The situation with bank deposits increasing
    amount has continued to decrease since 2006,
    although total deposits with the system in
    December 2007 still keep its rising level, but
    small numbers with 1.1 trillion yuan in
    comparison with 2.15 trillion yuan in 2005.
  • In 2008, households increased their saving amount
    of 4.75 trillion yuan, accounting for 92.22 of
    net increases of GDP (5.15 trillion yuan).
  • What direction for the year of 2009?

14
Discussion on Global Savings Glut
  • Federal Reserve Chair Ben Bernanke called the
    global savings glut the enormous financial
    surpluses realized by certain countries.
  • Chinese households save an astonishing 40 percent
    of their incomes. Why?
  • Different views on this issue

15
2. Financial and Banking Systems
  • A. Peoples Bank of China
  • B. Policy banks
  • C. Depository institutions (commercial banks)
  • State-owned commercial banks
  • Joint-stock commercial banks
  • Regional commercial banks
  • Urban and rural credit cooperatives
  • Joint-venture Banks and foreign-funded banks

16
  • D. Contractual Saving Institutions (Insurance
    Companies)
  • Domestic funded insurance corporations
  • Joint-venture insurance corporations
  • E. Investment intermediaries
  • Securities firms
  • Finance companies
  • Credit and investment companies
  • Investment funds

17
A. Peoples Bank of China PBC
  • The unified function of the central bank and
    commercial bank.
  • The State Council issued the policy on the
    function of PBC as the Central Bank in September
    1983.
  • The People Congress issued The Law of PBC in
    March 1995.
  • The PBC set up its 9 regional PBC Branch-Banks
    throughout the country, which is regarded as the
    action to follow the Fed System of the USA.

18
The Functions of the PBC
  • To promote economic growth
  • To stabilize the price
  • To supervise the financial system
  • To make monetary policy under the leadership of
    the State Council
  • How independent is the PBC in special reference
    to other countries?

19
B. Policy Banks
  • Suggestions from the World Bank.
  • Practically all developing countries possess
    specialized public sector financial institutions
    such as a variety of development banks.
  • These development banks have been established to
    attract foreign resources, to mobilize domestic
    savings (in part by developing capital markets),
    and to allocate investable funds efficiently.
  • Three policy banks provide policy lending
    functions on behalf of the central government.

20
Breakdown of Policy Banks
Institution Established Time Capital Assets (2002) Sources of Funds
National Development Bank March 1994 50 1041.71 Bonds, Loans
Export-Import Bank of China April 1994 3.38 110.18 Bonds
Agricultural Development Bank of China November 1994 20 764.47 Bonds, Loans
Unit billion yuan.
21
Debating on Policy Banks
  • The development banks were viewed and acted as
    tools of development policy, channeling resources
    to publicly promoted or state-owned enterprises
    and to priority sectors which commercial lenders
    were unwilling to finance.
  • Different views on the establishment of the
    development banks
  • The development banks are no panacea for solving
    the basic problem of credit allocation.
  • The specialized financial institutions set up to
    support a problem sector of the economy itself
    becomes a problem institution.

22
C. Depository Institutions
  • Structure of Banking Industry.
  • There are 133 domestic banking institutions
    operating at national and regional level,
    offering deposits and loan products to retail and
    corporate customers.
  • The four tiers of banking industry may be
    classified in China state-owned banks,
    joint-stock banks, regional and local banking
    institutions, and foreign-funded banks.

23
Market Structure(billion yuan)
Assets Liabilities
Banking industry 26729.5 96.7 25805.8 97.1
Policy banks 2124.7 7.7 2029.1 7.6
State-owned banks 15194.1 55.0 14576.2 54.9
Joint-stock banks 3817.0 13.8 3683.1 13.9
Urban commercial B. 1609.0 5.8 1558.7 5.9
Rural credit coop. 2689.3 9.7 2702.6 10.1
Postal savings bank 898.4 3.3 898.4 3.4
Foreign-funded banks 396.9 1.4 357.7 1.3
Non-banking industry 910.0 3.3 768.3 2.9
Total 27639.5 100.0 26574.1 100.0
24
Four Tiers of Banking industry
  • 1. Four state-owned commercial banks dominate the
    banking industry, in spite of the decreasing
    shares in deposits and loans business.
  • 2. Joint-stock banks
  • 3. Regional and local banking institutions such
    as urban commercial banks, rural commercial banks
    and rural credit cooperatives, and postal saving
    banks
  • 4. Foreign banks, after 25 years of Greenfield
    development committed by foreign banks, the
    foreign banks activity in China still accounted
    for a paltry 1.3 of total assets and liabilities
    in 2003.

25
Commercial Banks
  • Banks are financial intermediaries in the
    business of earning profits.
  • In China, four large state-owned commercial banks
    dominate the banking industry, while in the
    United States there are on the order of 9000
    commercial banks.

26
State-owned Commercial Banks
Banks Assets (2002) Share of Total Assets () 2002 2007
Industrial and Commercial Bank of China (ICBC) 4734.24 24.03 18.33
Agricultural Bank of China (ABC) 2976.57 15.11 14.28
Bank of China (BOC) 2905.71 19.82 14.15
Construction Bank of China (CBC) 3083.20 15.65 15.57
Sub-total 13699.72 74.61 62.33
27
Joint-Stock Commercial Banks
Banks Assets (2002) Share of Total Assets() 2002 2007
Bank of Communications 766.87 3.89 4.96
CITIC Industrial Bank 335.16 1.70 2.39
China Everbright Bank 328.34 1.67 1.74
China Minsheng Bank 246.28 1.25 2.17
China Huaxia Bank 178.15 0.90 1.40
China Merchants Bank 371.66 1.89 3.09
Sub-total 2136.46 11.3 15.75
CITIC Chinas International Trust Investment
Co. . Unit billion yuan.
28
Regional Commercial Banks
Assets (2002) Share of Total Assets() 2002 2007
Shanghai Pudong Development Bank 279.30 1.42 2.16
Guangdong Development Bank 219.32 1.11 1.03
Fujian Industrial Bank 178.28 0.90 2.01
Shenzhen Development Bank 166.17 0.84 0.83
Yantai Housing Savings Bank 15.66 0.08 /
Sub-total 858.73 4.35 6.03
A few of regional banks have been established in
the past five years. Unit billion yuan.
29
Discussion
  • What will the structure of the Chinese banking
    industry look like in the future?
  • Are private banks good things for the development
    of the Chinese banking industry?
  • Is it a long-term trend of separation of the
    banking and securities industries?
  • An imitation of the Glass-Steagall Act?
  • More choices?
  • Future Prospects

30
Effects of Financial Crisis on Chinas Banking
System
  • China is little affected by the crisis, and its
    entire financial system plays a relatively small
    role in its economy, and it apparently has no
    exposure to the toxic assets.
  • However, the Chinese government attitudes to
    financial innovation have changed to be much
    cautious in the short and medium term.

31
D. Contractual Savings Institutions
  • Insurance is a growing industry in China.
  • The annual revenues of insurance companies
    exceeded 400 billion yuan and 703.6 billion yuan
    in 2004 and 2007, and further to 978.4 billion
    yuan in 2008.
  • Special business opportunity and the emergence of
    foreign-funded insurance companies.

32
Insurance Companies
  • Insurance companies are considered financial
    intermediaries for several reasons
  • They receive investment funds from their
    customers.
  • They place their money in a variety of
    money-earning investments.
  • So they take in funds from one sector and invest
    it in another.

33
Growth of Premium, Claim and Payment in Insurance
Companies
Billion yuan
34
Technical Indicators of Property Insurance
Companies (2004, 2007)
Item 2004 2007 Premium Pre. CP 2004 CP
Enterprise Property Insurance 13.4 11.91 18.7 10.1 6.9 11.92
Motor Vehicle Insurance 74.5 66.22 148.4 79.0 41.6 71.85
Freight Transport Insurance 4.6 4.09 6.3 2.3 1.6 2.76
Agriculture Insurance 5.3 3.0
Accident Injure Insurance 7.4 2.3
Other Insurance 15.1 14.85 208.7 5.4 10.36
Total 112.5 100 57.9 100.0
35
Economic Indicators of Life Insurance Companies
(2004, 2007)
Item Premium Percentage() Claim payment Percentage()
Life Insurance, 2007, 285.1 446.3 89.26 90.12 30.8 106.4 72.30 88.59
Health Insurance 2007, 25.7 37.0 8.05 8.8 3.0 20.66
Unforeseen Human Injury Insurance 2007 8.6 11.6 2.69 3.0 10.7 7.04
Total 2007 319.4 494.9 100 100 42.6 120.1 100 100
Unit billion yuan.
36
Discussion on the Case of China
  • Why do people pay for insurance when they know
    that over the lifetime of their policy, they will
    probably pay more in premiums than the expected
    amount of any loss they will suffer?
  • How to explain the behavior of ordinary people in
    China
  • Everyone knows that the insurance company would
    help if an emergency occurred, but almost
    everyone would prefer to setting aside reserves
    for emergency case.
  • So these reserves could not be invested long-time
    but would have to be kept in an extremely liquid
    form- Household Savings How to resolve this
    paradox in China?

37
Fund Use of Insurance Co.
year Fund Uses Deposits G-Bonds Financial Bonds Co. Bonds Invest.Funds
2004 1077.82 507.11 261.84 102.63 63.97 66.63
2005 1409.27 516.55 359.07 180.47 120.46 110.70
2006 1778.54 598.91 364.70 257.53 212.16 91.21
2007 2672.19 100.00 651.63 24.39 396.11 14.82 493.77 18.48 280.17 10.49 253.05 9.47
2008 3340.00 808.76
Unit billion yuan.
38
Discussion
  • Regulations on the fund use of insurance
    companies.
  • Changes of regulations

39
E. Investment Intermediaries
  • In the last fifteen years, the profitability of
    the securities business became evident, and the
    securities industry expanded so dramatically.
  • Many securities firms engage in all three
    securities market activities, acting as brokers,
    dealers, and investment bankers in China.
  • Finance companies.
  • New phenomenon Investment funds.

40
General Information on Investment Funds
2002 2003 2004 2007
Number of Securities Investment Funds 71 95 161 346
Capital of Securities Investment Funds (Billion yuan) 131.89 161.47 330.88 2234
Turnover of Securities Investment Funds (Billion yuan) 116.66 68.27 72.86 862
41
Imitation Learning By Doing, 2004
Number
Balanced Funds 16
Bond Funds 11
Value Funds 2
Growth Funds 7
Growth and Income Funds 3
Index Funds 3
Other Kind of Funds 10
42
3. Financial Markets
  • The Money Markets.
  • Inter-Bank Market.
  • Bill Market.
  • Repurchasing Bond Market.
  • The Capital Markets.
  • Stock Market.
  • Bond Market.
  • The Future Markets.
  • The Mortgage Markets.
  • The Foreign Exchange Market.

43
Brief Discussion on Money Market
  • The money markets prime function is to assist
    banks in their treasury operationsthat is the
    management of their cash, short-term assets and
    short-term liabilities.
  • Commercial paper is a much less important asset
    and, it is mainly held outside the banking
    system.

44
  • The money markets have been active since the
    early 1990s, and become more important than
    1990s.
  • The money markets will be much more important for
    the coming years due to indirect manipulation of
    monetary policy by the PBC.

45
  • Money market securities have three basic
    characteristics in common
  • They are usually sold in the large denominations.
  • They have low default risk.
  • They mature in one year or less from their
    original issue date. Most money market
    instruments mature in less than 120 days.

46
Money Market Instruments,2004
Amount Percentage
Market loans (deposits) 19949 44
Treasury bonds 5042 11.1
Repurchasing agreements 15900 35.1
Commercial paper 4450 9.8
Unit billion yuan.
47
A. The Inter-Bank Borrowing Market
  • The inter-bank market started in operation on 3rd
    January, 1996
  • The number of participants (financial
    institutions) increased from 96 in 1997 to 918 in
    2003.

48
Volume of the Inter-Bank Market
49
B. The Repurchase Bond Market
  • Repurchase Agreements (repos)
  • A firm can sell Treasury securities in a
    repurchase agreement whereby the firm agrees to
    buy back the securities at a specified future
    date.
  • Most repos have a very short term, the most
    common being for 3 to 14 days. There is a market,
    however, for one-to three-month repos.

50
Open market operation of the PBC
  • The PBC uses repos in conducting monetary policy.
  • The conduct of monetary policy typically requires
    that the PBC adjusts bank reserves on a temporary
    basis. To accomplish this adjustment, the PBC
    will buy or sell Treasury bonds in the repo
    market.

51
The Future of Repo Market
  • From the conduct of monetary policy to the
    multiple function of repos.
  • To increase the primary money market players
  • Commercial Banks
  • Businesses
  • Investment Funds
  • To expand the dealing scope between financial and
    non-financial institutions.

52
C. Commercial Paper Market
  • Commercial paper securities are unsecured
    promissory notes, issued by corporations that in
    no more than 270 days. Because these securities
    are unsecured, only the largest and most
    creditworthy corporations issue commercial paper.
  • The interest rate the corporation is charged
    reflects the firms level of risk.
  • Most commercial paper actually matures in 20 to
    45 days.
  • Most commercial paper issued on a discounted
    basis.
  • The interest rate of rediscount is an important
    instrument for the conduct of PBC monetary
    policy.

53
D. New Trends of Money Market
  • The reform measure for interest-determination
    should be based on the market.
  • 1.Foreign currencies and domestic currency
  • 2.Laons and deposits
  • 3.Long-term and short-term loans and
    deposits
  • 4.Large amount loans and small amount loans.
  • Money market funds
  • Money broker firms joint-stock firms 5149
    percentage in August 2005.
  • More and more reform measures

54
4. Regulation of the Financial System
  • The financial system is among the most heavily
    regulated sectors of the Chinese economy.
  • The government regulates financial markets for
    these main reasons
  • To increase the information available to
    investors.
  • To ensure the soundness of the financial system.
  • To improve control of monetary policy.

55
Principal Regulatory Agencies of the Chinese
Financial and Banking Systems
Regulatory Agency Subject of Regulation Nature of Regulations
Peoples Bank of China All depository institutions Examines the books of commercial banks, sets reserve requirements for all banks.
Banking Supervisory Commission State-chartered depository institutions Character and examine the books of state-chartered banks, impose restrictions on assets they can hold, and impose restrictions on branching.
Insurance Supervisory Commission State-chartered insurance institutions Character and examine the books of insurance companies, impose restrictions on assets they can hold.
Securities Supervisory Commission Organized exchanges and financial markets Requires disclosure of information restricts insider trading.
56
Discussion
  • Single (China) or multiple regulatory agencies
    (USA).
  • From the PBC to CBRC (China Banking Regulatory
    Commission) Political issue in the central
    government.
  • Political economy in China

57
5. Performance Analysis
  • Banks play such a major role in channeling funds
    to borrowers with productive investment
    opportunities, they are important in ensuring
    that financial system and the economy run
    smoothly and efficiently.
  • In China, state-owned commercial banks hold about
    two-thirds of the assets in the banking industry.
  • Banks make profits by charging an interest rate
    on their holdings of securities and loans that is
    higher than expenses on their liabilities.

58
  • Top four state-owned commercial banks dominated
    the Chinese banking system, with more than 60 of
    market share in deposits and loans, and 62 of
    total financial institution assets.
  • The target of the central government is to
    conduct joint-stock reform of the state-owned
    commercial banks and establish a modern banking
    system.

59
  • The objective of state-owned bank reform is to
    transform these banks into modern financial
    institutions with good governance and operations,
    clear business targets and sound financial
    performance.
  • In recent years, the reform of state-owned
    commercial banks has been pushed forward steadily
    due to the pressures imposed by many new issues
    and new phenomenon in the emergence of private
    sectors.

60
Structure of Commercial Banking4CR,
Loans Profits Deposits Assets Income
2003 79.22 85.24 72.36 68.78 80.41
2004 59.64 89.80 64.26 65.59 78.10
2005 60.75 80.21 62.98 63.95 76.03
2006 60.41 78.31 61.18 62.50 76.33
2007 62.91 74.38 59.35 62.32 73.14
61
Market Shares of Top Five Banks, 2007
Deposits () Loans ()
ICBC 18.64 18.36
Agriculture Bank of China 14.39 16.15
Bank of China 11.89 13.22
China Construction Bank 14.43 15.18
Bank of Communication 4.20 5.12
Total 63.55 68.03
62
Market Shares for Small Banks, 2007
Deposits () Loans ()
CITIC Industrial Bank 2.13 2.67
Everbright Bank 1.51 1.94
Huaxia Bank 1.81 1.42
Minsheng Bank 1.81 2.54
Guangdong Development Bank 0.95 1.12
Shenzhen Development Bank 0.76 1.03
Merchants Bank 2.55 3.04
Fujian Industrial Bank 1.37 1.86
Pudong Development Bank 2.06 2.56
Henfeng Bank 0.18 0.21
Total 15.13 18.39
63
Discussion on Rural Credit Cooperatives
  • Financial system in Chinas rural area.
  • Basic policy for rural financial sectors.

64
Comments on Performance
  • Scale of bank assets US 350-600 billion for
    state-owned commercial banks.
  • A basic measure of bank profitability that
    corrects of the size of the bank is the return on
    assets (ROA). ROA is a useful measure of how well
    a bank manager is doing on the job because it
    indicates how well a banks assets are being used
    to generate profits.
  • It is reported that global banking institutions
    recorded a 1.2 overall return on assets, while
    the figure for Chinese banks was 0.4 of ROA in
    2004.
  • Normal level of capital adequacy ratio is 10 for
    international banks.
  • NPL is less than 5 of loans.

65
Indicators of Economic Performance
Item ICBC ABC BOC CCB
Profit after tax 6.53 2.90 9.45 4.30
Profit per person 111 21 299 76
Profit per branch 2.03 0.29 4.32 1.42
Return on assets () 3.7 2.1 4.3 4.0
NPL () 25.43 36.63 22.49 15.17
Capital adequacy ratio 5.54 / 8.15 6.91
Unit of profit after tax billion yuan Unit of
profit per person thousand yuan Unit of profit
per branch million yuan. Based on official
data.
66
Bank Capital Requirements
  • Banks also hold capital because they are required
    to do so by regulatory authorities.
  • It is estimated that the four state-owned
    commercial banks should, at least, increase
    their capital of 340 billion yuan in order to
    meet the standard of capital requirements issued
    by the Basel Committee in July 1992.
  • New progress with the government now busy
    vacuuming up nonperforming assets and throwing in
    new capital, insolvency is no longer even an
    issue for top four state-owned commercial banks.

67
Income Statement
  • Operating income from interest rate accounted for
    more than 90 of total profits in four
    state-owned commercial banks as well as other
    kind of commercial banks.
  • Non-interest income accounted for small share for
    most commercial banks in China.
  • Of course, Chinese banks will gradually learn to
    generate more fee-based income, but keep in mind
    that margins on regular lending operations are
    currently propped up at artificially high levels
    because of state-controlled deposit rates.

68
Off-Balance-Sheet Activities
  • Banks have been aggressively seeking out profits
    by engaging in off-balance-sheet activities.
  • Off-balance-sheet activities involve trading
    financial instruments and generating income from
    fees and loan sales, activities that affect bank
    profits but do not appear on bank balance sheets.
  • This activity is called income from middle-man
    and service business in China.

69
Ratio of Non-Interest Income to Total Income for
Some Commercial Banks
Bank Non-Interest Income Bank Non-Interest Income
Bank of China 19 CCB 12.5
ICBC 5 Minsheng B. 1.1
Merchants B. 5.9 Huaxia Bank 3.0
Pudon Dev.B. 2.1 Shenzhen Dev.B. 2.5
Singapore B. 36.9 Hong Kong B. 28.9
Unit Percentage.
70
6. Non-Performing Loans and the Reform of Banking
System
  • The accumulation of nonperforming loans is
    generally attributable to a number of factors,
    including economic downturns and macroeconomic
    volatility, high interest rates, insider lending
    and moral hazard.
  • The problem of NPL in china was widely reported
    in international media, particularly in the
    period 1998-2002.

71
  • Causes of NPL in banking system.
  • Reform measures for NPL.
  • What will be done for NPLs?

72
Causes of NPL in State-Owned Commercial Banks
  • Institutional factor
  • Fragmentation of market state-owned sector and
    private sector
  • Corporate governance
  • Short of social credit
  • Others

73
Breakdown of NPL in Commercial Banks
First Quarter 2005 Amount Second Quarter 2005 Amount
NPL 1827.45 12.4 1275.94 8.71
Main Commercial banks 1712.84 12.7 1163.73 8.79
State-Owned 1567.05 15.0 1013.47 10.12
Joint-Stock 145.79 4.9 150.26 4.66
Urban commercial banks 107.38 11.5 103.89 10.43
Rural commercial banks 3.62 6.1 4.50 6.38
Foreign banks 3.60 1.2 3.81 1.14
Unit billion yuan. Percentage refers to NPL
ratio to total loans of commercial banks.
74
Ratios of NPL in Commercial Banks
  • The occurrence of banking crises has often been
    associated with a massive accumulation of
    nonperforming loans which accounted for a sizable
    share of total assets of insolvent banks and
    financial institutions, especially during
    episodes of systemic crises.
  • Ratio of NPL for state-owned commercial banks was
    20.36 on average in end-2003.
  • Ratio of NPL in the first half of in 2003 9.34
    for 11 joint-stock commercial banks, 15.8 for
    112 urban commercial banks.
  • And high ratio for rural commercial banks in
    2003.
  • What can commercial banks do it?

75
Reform Measures for NPL asset Management
Companies
  • The reform of state-owned commercial banks has
    been pushed forward steadily.
  • In 1998, given the low capital adequacy ratio and
    high ratio of nonperforming loans, the State
    Council decided to recapitalize the solely
    state-owned commercial banks by issuing special
    treasury bond of RMB 270 billion yuan.
  • In 1999, four asset management companies were
    established, which took over a portion of
    non-performing assets owned by the solely
    state-owned commercial banks, laying a foundation
    for further reforms. This is the solution with
    Chinese characteristics.
  • What are major ways for AMC to deal with NPL?

76
NPL Processing by Asset Management Co.
2005 First Quarter Second Quarter Third Quarter
Total 688.55 717.42 736.66
By Cash 140.89 148.46 155.03
Processing () 54.95 57.28 58.71
Asset Back () 25.50 25.55 25.62
Cash Back () 20.46 20.69 21.04
Unit billion yuan.
77
7. Reform Progress Recapitalization
  • Central Huijin Investment Co. Ltd was established
    on December 16, 2003. The company recapitalized
    the Bank of China, CCB with US45 billion at the
    end of the year and fulfilled its rights and
    obligations as a shareholder on behalf of the
    state.
  • From the end of 2003 through the first half of
    2004, the Bank of China and CCB strengthened
    their disposal of non-performing assets. They
    wrote off loss loans with their original capital,
    profits of 2003 and provisions, sold doubtful
    loans in market-based ways.

78
  • At the end of June, capital adequacy ratios of
    these two banks both exceeded 8 and their
    non-performing assets ratio fell below 6.
  • Thus, insolvency is no longer even an issue for
    four state-owed banks.

79
Towards Corporate Governance
  • On August 26 and September 21 of 2004, the Bank
    of China Co. Ltd and China Construction Bank Co.
    Ltd were established respectively.
  • Both corporations established the shareholders
    meeting, Board of Directors and Supervisory Board
    in accordance with the principles of modern
    corporate governance.
  • Special committees and business management and
    risk control mechanism were set up.
    Administrative official titles of their employees
    were cancelled and market-based pricing of human
    resources was introduced.
  • Reform of ICBC and ABC is also being advanced in
    2004.

80
Case One Reform of ICBC
  • ICBC is the largest commercial bank in China.
  • Origin of ICBC.
  • Based on the experiences attained in the
    joint-stock reform process of BOC and CCB, on
    April 22, 2005, the Central Huijin Investment
    Company recapitalized the ICBC with foreign
    reserves totaling US15 billion, bringing the
    ICBCs core capital adequacy ratio up to 6.
  • The pilot reform of the BOC and CCB also
    progressed smoothly.

81
Case Two Reform of the Rural Credit Cooperatives
  • At end-2005, PBC, together with CBRC, following
    strict assessment and examination, made 8
    issuance of special bills worth 156 billion yuan
    in 2263 counties aimed at reforming the rural
    credit cooperative on a pilot basis.
  • Recapitalization and equity increases speeded up,
    leading to a rapid increase of the capital
    adequacy ratio. The capital adequacy ratios of
    the rural credit cooperatives, rural cooperative
    banks, and rural commercial banks were raised to
    8.03, 12.93, and 8.78 respectively.

82
Rural Financial Development
  • The contents and steps for the reform of rural
    financial sector are as follows 1. to establish
    corporate governance 2. to transfer the
    management of rural credit cooperatives to the
    provincial governments and 3. to provide strong
    support for rural credit cooperatives such as
    issuing special bills and some subsidies.
  • By end-2007, 17 rural commercial banks, 113 rural
    cooperative banks, and 1824 rural credit
    cooperatives (under county unit) have been
    established and reorganized respectively.

83
Is it Better Banking Environment?
  • The banking environment has changed radically
    over the past 10 years, with better regulation
    and supervision, better macroeconomic policy
    making, better internal controls and better
    borrowers.
  • Wont banks get right back into trouble in the
    coming years, with a flood of new NPLs
    overwhelming the system?

84
What Will be Done for NPL?
  • The amount of all bank assets reached 40 trillion
    yuan by April 2006, according to a recent report.
  • It is estimated that the bad assets have been
    accumulated 2.4 trillion yuan for top four
    state-owned commercial banks.
  • It is estimated that the magnitude of new NPL
    flows will be much manageable than in the past.

85
8. New Policies for the Reform of Banking System
Strategic Investors
  • The joint-stock reform of state-owned commercial
    banks has been taking smoothly.
  • To strengthen corporate governance.
  • To put in place an independent internal control
    system and risk prevention system.
  • To encourage product innovation.
  • New policy was advertised for strategic
    investors.

86
  • Pioneer programs from the IFC involving Chinese
    local commercial banks in the later 1990s Bank
    of Shanghai, Bank of Beijing, Fujian Industrial
    Bank, Minsheng Bank, Nanjing City Commercial Bank
    and Xian City Commercial Bank.
  • More strategic investors

87
Banks On Sale
Strategic Investors Shares Amount
2005 BOC Royal B. of Scotland 10 3.1 bill.
CCB Temasek, Singapore 2.5 bill.
Bohai Bank Standard Chartered 20
Jinan Bank Federal B. of Australia 11
Hangzhou Bank Federal B. of Australia 19.9
ICBC Bank of Comm. Goldman Sachs HSBC 10 19.9 10 bill. 2.25 bil
2006 June CCB Bank of America 9 3 bill.
88
Strategic Investors from OverseasMega-transaction
s
  • HSBC bought a 19.9 stake in Bank of
    Communication for a total cost of US2.25
    billion.
  • Bank of America announced its US3 billion
    investment in CCB in June 2005
  • Huge profits for strategic investors

89
More Transactions
  • Royal Bank of Scotland agreed to take a 10 share
    of BOC for US3.1 billion Singapores Temasek
    took a similar stake for the same price.
  • Temasek also committed US2.5 billion to invest
    in CCB.
  • Standard and Chartered Bank 20 share of Bohai
    Commercial Bank.
  • Federal Bank of Australia 11 share of Jinan
    Commercial Bank and 19.9 share of Hangzhou
    Commercial Bank.
  • A Goldman Sachs-led group signed an agreement to
    lay down US 3 billion for 10 share of ICBC.
  • More strategic investors

90
Debate on the Great Chinese Bank SaleNow
Open-Door Policy for Banking Industry
  • At this pace, by the close of 2007 foreign banks
    and other foreign investors could conceivably
    control more than one-sixth of the entire Chinese
    banking system.
  • It seems the only brake on the process is the 25
    ceiling on cumulative foreign ownership of
    individual banks a restriction likely to be
    eased in the near future.
  • Strong criticism to this kind of sale to foreign
    investors from a couple of sides private sector
    and public opinion
  • It seems to be un-reversible for this trend

91
A Win-Win Situation?
  • China does benefit from having foreign investors
    buy in, and foreign investors benefit from being
    there.
  • Can overseas investors provide a one-stop shop
    for Chinese enterprise reform?
  • In most cases, the result has been
    better-managed, more profitable and transparent
    companies, and this is exactly what China is now
    hoping to achieve by selling off stakes in the
    large banks.
  • What do foreign investors get? How much?

92
IPOs for the State-owned Banks
  • CCB was listed on the Hong Kong stock market on
    October 27, 2005 and issued 30.5 billion new
    shares at HK2.35 per share, raising HK71.58
    billion (or US9.23 billion).
  • BOC continued to transform its management
    mechanism and created favorable conditions for
    its listing June 1, 2006. BOC was listed in HK
    stock market (June 2006), and in SSE (July 2006).
  • ICBC was incorporated on October 28, 2005, with
    registered capital of 248 billion yuan. The
    Ministry of Finance and Central Huijin Co. each
    hold 50 of its shares.
  • ICBC was listed in SSE and HK stock market in
    October 2006.

93
  • Bank of Communication was listed in HK (June
    2005), and in SSE (May 2007).
  • ABC is working on a joint-stock reform plan in
    line with the reform of agricultural financial
    system
  • How many commercial banks will follow this
    pattern of reform?

94
Financial Liberalization?
  • A great growth story in Chinese banking
    industry
  • More competition is needed for the performance
    improvement of banking industry
  • More reform policies and measures will be
    issued
  • More discussion on the way of financial
    liberalization.
  • Will China follow Latin American story, or take
    different tack?

95
More Competition
  • Today, the 200-odd foreign commercial banks
    active in China mainland still accounted for a
    paltry 2.73 of total loans and deposits, and a
    total capital commitment of no more than a few
    billion dollars.

96
Balance Sheet of Financial Institutions (billion
yuan), 2007
Financial Institutions Foreign-funded Banks FFB/ Total
Funds Resources 45427 Total assets 1239.1 2.73
Total Deposits 38937 Various Claims 908.96
Funds Uses 45427 Total Liabilities 1239.1 2.73
Total Loans 26169

97
RMB Business for Foreign-Funded Banks
  • China formally eliminated the limitations on RMB
    business for foreign-funded banks in December 11,
    2006.
  • China, as a transitional economy, takes many
    transitional steps for reform processing,
    including in the regulation of a transitional
    process for foreign-funded banks to be a new kind
    of local commercial banks.

98
The Localization of Foreign-Funded Banks
  • The list of nine localized foreign-funded banks
    that are permitted to operate RMB business
  • By end-2006, Citigroup, HSBC, Standard and
    Chartered, total nine foreign-funded banks
    registered in Shanghai, namely, these banks can
    called local legal person entities
  • More and more policies will be issued for the
    globalization of Chinas financial and banking
    sectors in the coming years, so keep your eyes on
    it.

99
More Challenges for China
  • How about tomorrow?
  • More overseas strategic investors
  • More IPOs
  • More reform policies and measures
  • Will China follow Latin American story, or take
    different tack?
  • Will more international banks do their business
    in China?

100
9. Conclusions
  • It is hardly to change the structure of Chinese
    banking industry rapidly, which is distinguished
    with the dominance of the state-owned banks.
  • Non-state banking institutions will increase
    their market shares year by year, clearly, more
    competition will improve the performance of
    Chinese banking industry.
  • Gradualism is a major feature in Chinese banking
    reform procedure, which has shown a direction
    towards the diversification of ownership in
    banking industry.

101
10. Questions and Problems
  • What kind of challenges is raised by Chinese
    economic development to the banking system?
  • The commercial banking industry in China is less
    efficiency due to the market dominated by four
    state-owned commercial banks. Is this statement
    true, or false? Explain your answer.
  • How to resolve the issue of non-performing loans
    in the context of Chinas financial regulations?
  • Which role will be played by overseas investors
    in Chinese banking reforms?
  • Is it really a win-win situation for strategic
    investors and the Chinese government in Chinas
    banking restructuring?

102
  • Thank You!
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