Banking reforms in China Mak Chi Hong 09020535

The Background Before 1978, China managed the economy by the planning system. The government budget The state- owned enterprises(SOEs) The banking system passive The People’s Bank of China Not really a bank

The 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 1 (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 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 system The actual credit volume often exceeded the quota set by the government plan. Insufficient Competition Heavy policy burdens of the specialized banks Lage 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 2 (1994-1999) Objective: To differentiate the roles of state banks Commercialize the specialized banks Improve the regulation of the banking sector Enhance competition in the financial market

Commercialization of the specialized 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 specialized banks The 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 3 (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 injection 2)Shedding of f bad assets 3)Introducing strategic investors 4)Initial public offerings

Reason: the foregin investors could bring in 1)Capital 2)Improve the corporate governance of the banks 3)Provide management skill an business strategies 4)Reputations for raising more funds in the subsequent IPO

Conclusion 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