The Chinese Financial System
15 - April - 2007 | 0Issue 2/ April-May 2007
By Javier Guerra
The present article aims to be a brief introduction to the Chinese financial system, structure and the features of a system that has experienced substantial changes in the last years; being the most radical change the total opening of the banking market in December 2006 in accordance with the agreements of China with the WTO.
History of the Chinese Bank
The banking sector in China began in 1948 when the People’s Bank of China was created. In 1949 the Bank of China was created, born from the People’s Bank of China that acts such as Central Bank of China. The Chinese banking system was a copy of the system of the old Soviet Union, a system of planned central economy, where private property does not exist. Following this premise, the Chinese government was reconstructing for three years private banks and other institutions left by the previous government (non-communist) led by Jiang Kai-shek. During the first five-year plan (1955-1959), the People’s Bank of China was gradually taking the control of private banks and private participations therefore they were gradually vanishing until disappearing absolutely.
Before 1978 the banking system was isolated from the world, international and financial markets. In 1978 a series of important structural reforms in China began resulting in substantial changes in the structure of the Chinese banking system.
The bank reform of 1978 was designed for the efficiency of management of risk in the granting of credits, as well as for positioning of capital through financial intermediation. This management of risk has been the stumbling block of the sector in the last three decades.
The reforms carried out during this stage were the later establishment of the system of commercial bank in China. This not only constituted a base for powerful financial intermediaries, but also released the Central Bank from tasks, thus it was only centred on monetary policy.
Despite a good beginning, there were important failures in the new system because the old banking system left ‘bad debts’ or NPL (non performing loans) that were around 50% in the balance of some banks in the beginning of the 80’s. In fact, many banks had gone bankrupt according to Western standards, because the percentage of paid loans caused the fall of net value of some banks. Nevertheless, they improved the management of loans and the development of Chinese economy was promoted.
In 1993 the modern Chinese banking system began, the Central Bank recognized the importance of the control policy of the interest rate such as a viable tool within monetary policy. Since the reforms carried out between 1993 and 1997, the Chinese banking system enjoyed a greater consistency. The most important changes were the separation of the ‘Policy banks’ from the commercial banks, thus reducing the pressures on credits controlled by the State; the separation of the commercial banks from the Central bank led to transparency in financial intermediation, as well as a greater concentration of the Central Bank in the regulation of monetary policy. Finally, the separation of investment banks and commercial banks was carried out so as to avoid conflicts of interests.
In 1997 the Asian financial crisis affected the confidence in the whole continent; nevertheless, China escaped from this crisis and stayed in a quite stable position during the period of the Asian crisis (July 1997-Spring 1999).
In 2001 there was a substantial change in the financial system (as well as in the whole Chinese economy) due to the entrance in the WTO. In fact, the banking sector had a calendar of implantation very specific aiming to release the market in December of 2006.
Structure of the Chinese bank
After successive reforms the structure of the Chinese banking system was the following:
1. Central Bank (the People’s Bank of China): Their functions are (among others) to formulate and to implement monetary policies, to emit currency and to manage its circulation as well as to approve the establishment of financial institutions.
2. National Commercial Bank, integrated by the four main banks: Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB) and Agricultural Bank of China (ABC). Since 1994 the four banks have been distanced from their original tasks, when the government created ‘policy banks’. However, despite this change of direction, the legacy of the NPL (Non performing loans) is still blight for profits, and their ratios of return on assets are below the rest of Chinese banking institutions. Because they are state companies, the management committee of the banks is designated in a political way. The change to a corporative culture in these four banks will be laborious and slow because most shareholders are controlled by the government.
3. Policy Banks. They manage policies of loans and subsidies in designated areas; they were created in 1994 by the government so as to alleviate the four main banks regarding work in loans. The main Policy Banks are the State Development Bank of China, the Agricultural Development Bank and the Export-Import Bank of China. These banks finance themselves mainly by bond emissions, but they also accept some deposits.
4. National Commercial Bank or ‘Shareholding Banks’. They are mainly located in the coastal areas. They are structured as local companies and they provide a large number of banking and financial services. There are two main ‘Shareholding banks’: the Bank of Communications and the CITIC Industrial Bank.
These banks have developed a lot in the last years, and they have been the favourites of foreign banks for establishing joint-ventures, due to the small size and because they do not withstand the direct presence of the government. They have mainly developed with Chinese loans to small and medium Chinese enterprises (SMEs) and they tend to be more profitable.
5. Other Financial Institutions such as Cooperatives of credits, International Trust and Investment Companies (ITICs) and Asset Management Companies. The companies of Asset Management were introduced in 1999 in order to eliminate the bad debts (NPL – Non Performing Loans) of the four main banks. They aimed to make these banks more competitive. The objective was to convert all debt to capital by bond emission. Some foreign organizations have entered the Chinese market acquiring these NPL.
6. Foreign banking institutions. In 1979 China allowed the opening of offices of foreign banks in China, but since 1982 this regional restriction was partially left. In 2000 foreign banks had a total of 34.6 trillion of USD in assets, which was between 1% and 2% of the total of the banking assets in China. Foreign banks have raised profits in China in the last five years, and they aim to reach more than 2 trillion of dollars of familiar savings in China. Alliances with local banks are essential due to their office network and clients. The 30th of June 2006 the four Chinese main banks had around 70,000 offices, whereas the foreigners had 214.
Javier Guerra
Investment Executive for the investment fund GSF Capita
Global Affairs is not liable for author’s opinion
