The comparison of financial institutions, markets & instruments in China & US and the possibility to set up a deposit insurance system in China Fang Ji June 15, 2004

Introduction Differences between China and US in financial institutions, markets and instruments Differences between China and US in financial institutions, markets and instruments Deposit insurance system Deposit insurance system No deposit insurance company in China No deposit insurance company in China Is it necessary to set up a deposit insurance system in China? Is it necessary to set up a deposit insurance system in China? If necessary, what structure will fit? If necessary, what structure will fit?

Part I: Financial institutions Financial institutions are classified into in US: deposit taking and non-deposit taking institutions in US: deposit taking and non-deposit taking institutions in China: according to their status and function, in China: according to their status and function, central bank central bank policy-related banks and commercial banks policy-related banks and commercial banks non-bank financial institutions non-bank financial institutions foreign-funded and Chinese-foreign jointly run financial institutions foreign-funded and Chinese-foreign jointly run financial institutions

1. Central bank Name: People’s Bank of China (PBC) Name: People’s Bank of China (PBC) Main functions: Main functions: formulating and implementing monetary policies formulating and implementing monetary policies issuing renminbi, China’s currency, and managing its circulation issuing renminbi, China’s currency, and managing its circulation Regulating and supervising the establishment of financial institutions Regulating and supervising the establishment of financial institutions regulating the financial markets regulating the financial markets issuing rules and regulations concerning the operation of the financial industry issuing rules and regulations concerning the operation of the financial industry operating the state treasury operating the state treasury holding and managing national foreign exchanges and gold reserves holding and managing national foreign exchanges and gold reserves

2. Policy-related banks Founded by the government for the purpose of carrying out important industrial and local development projects Founded by the government for the purpose of carrying out important industrial and local development projects Not for profit Not for profit Sources of funds: Sources of funds: central bank loans central bank loans policy-related bonds policy-related bonds There are three such banks: There are three such banks: State Development Bank State Development Bank Agricultural Development Bank of China Agricultural Development Bank of China China Import and Export Bank China Import and Export Bank

3. Commercial banks Deposit-taking institutions Deposit-taking institutions Sources: borrowed funds, notice deposits and time deposits Sources: borrowed funds, notice deposits and time deposits Three categories: Three categories: State-owned commercial banks State-owned commercial banks Joint-stock commercial banks — business focus particularly on the coastal regions Joint-stock commercial banks — business focus particularly on the coastal regions City cooperation banks — serve for medium and small-sized enterprises City cooperation banks — serve for medium and small-sized enterprises

4. Non-bank financial institutions Insurance company — 54 insurance companies, and over 70,000 insurance agencies, supervised by the Insurance Regulatory Commission Insurance company — 54 insurance companies, and over 70,000 insurance agencies, supervised by the Insurance Regulatory Commission Rural credit cooperatives — scattered among small towns and rural villages Rural credit cooperatives — scattered among small towns and rural villages Trust company Trust company Finance company Finance company credit card vs. debit card credit card vs. debit card

Part II Financial markets and instruments

Financial markets Same market classification: Same market classification: capital market capital market money market money market Capital market: primary and secondary Capital market: primary and secondary

Instruments in money market Instruments in money market commercial paper commercial paper treasury bills treasury bills negotiable large certificate of deposit negotiable large certificate of deposit Repurchase Agreement Repurchase Agreement Instruments in capital market Instruments in capital market Stock — stock exchanges and over-the counter market Stock — stock exchanges and over-the counter market Bonds — government bonds, corporate bonds and bonds issued by financial institutions with special functions Bonds — government bonds, corporate bonds and bonds issued by financial institutions with special functions Instruments

Why differences Different economy systems -- planned economy vs. market- economy and developing country vs. developed country Different economy systems -- planned economy vs. market- economy and developing country vs. developed country The economic reform began in China from 1980, some markets such as the stock market and the securities sector already run on market-economy lines. To some extent, China is still having a planned economy The economic reform began in China from 1980, some markets such as the stock market and the securities sector already run on market-economy lines. To some extent, China is still having a planned economy More government intervention, regulations and protection. Until now, there is no private bank in China More government intervention, regulations and protection. Until now, there is no private bank in China Although the US is a developed country and its system is mature and has its obvious advantages, the current institutions and instruments in China are what fit into its current situation considering the lack of a credit system Although the US is a developed country and its system is mature and has its obvious advantages, the current institutions and instruments in China are what fit into its current situation considering the lack of a credit system Overall China is still in the process of economic reform and development, it will finally rely on market tools to manage the whole system instead of using planned method Overall China is still in the process of economic reform and development, it will finally rely on market tools to manage the whole system instead of using planned method

Part III Deposit insurance system in China No deposit insurance company in China No deposit insurance company in China Chinese Government is currently acting as the insurer for depositors’ savings in domestic banks. The insurance is based on the public’s confidence in national credit Chinese Government is currently acting as the insurer for depositors’ savings in domestic banks. The insurance is based on the public’s confidence in national credit This is no regulation or legislation to detail how depositors will be compensated if their banks go bankruptcy This is no regulation or legislation to detail how depositors will be compensated if their banks go bankruptcy

No need to set up a deposit insurance system Most banks are state-owned ones, government credit can guarantee the depositor’s account. If one bank is at the risk of going bankruptcy, government will use all resources or hidden ways to save the bank from bankruptcy Most banks are state-owned ones, government credit can guarantee the depositor’s account. If one bank is at the risk of going bankruptcy, government will use all resources or hidden ways to save the bank from bankruptcy Under such protection, depositors can not feel the risk of bank’s bankruptcy Under such protection, depositors can not feel the risk of bank’s bankruptcy If the bank really goes bankruptcy, the government will take the risk, even by using government reserves to protect depositor’s money If the bank really goes bankruptcy, the government will take the risk, even by using government reserves to protect depositor’s money

Is that opinion sound???

Setting up a deposit insurance system is a MUST No need to set up the system is a short-sighted view No need to set up the system is a short-sighted view currently 72 countries and regions have such a system currently 72 countries and regions have such a system Bankruptcy happened every year since 1998 in China, big burden to government treasury and commercial banks Bankruptcy happened every year since 1998 in China, big burden to government treasury and commercial banks More competition will lead to more bankruptcies: More competition will lead to more bankruptcies: Competition from future liberalization of banks’ interest rates Competition from future liberalization of banks’ interest rates Competition from the foreign-funded banks Competition from the foreign-funded banks Competition from the future introduction of private banks Competition from the future introduction of private banks Central government guarantying all deposits makes commercial banks pay less attention to loan risks Central government guarantying all deposits makes commercial banks pay less attention to loan risks

The system stimulates fair competition and urges banks to provide better services. The system stimulates fair competition and urges banks to provide better services. In china, household deposits are still the primary funds sources for commercial banks. Well-designed deposit- insurance system would formally and efficiently protect the interests of depositors, strengthen public’s confidence in banks, and guarantee the funds sources. In china, household deposits are still the primary funds sources for commercial banks. Well-designed deposit- insurance system would formally and efficiently protect the interests of depositors, strengthen public’s confidence in banks, and guarantee the funds sources. China has begun implementing market-oriented reforms in its fast-growing financial sector, and as a result, a market mechanism will gradually replace government-sponsored deposit protection. China has begun implementing market-oriented reforms in its fast-growing financial sector, and as a result, a market mechanism will gradually replace government-sponsored deposit protection.

When? The sooner China sets up the system, the earlier it will be prepared for the challenge which is brought by the market-economy reforms and the severe bank competition.

What system ? Institution: the insurance company shall be founded and managed by People’s bank of China instead of by the government Institution: the insurance company shall be founded and managed by People’s bank of China instead of by the government Function: insure the deposit accounts, supervise and prevent bank failures Function: insure the deposit accounts, supervise and prevent bank failures Each financial institution shall be subject to different premium rate regarding its business. Each financial institution shall be subject to different premium rate regarding its business. All deposit-taking institutions must join this system. All deposit-taking institutions must join this system.

Conclusion Each country has its own financial institutions and instruments which adapt to its own situation. Each country has its own financial institutions and instruments which adapt to its own situation. Developed countries have a relatively mature and well- developed financial system, developing countries can definitely learn something from them, but they can not copy everything Developed countries have a relatively mature and well- developed financial system, developing countries can definitely learn something from them, but they can not copy everything China has been performing market-economy reforms, from the development point of view, it is a must to develop a deposit insurance system. But it may take a while. China has been performing market-economy reforms, from the development point of view, it is a must to develop a deposit insurance system. But it may take a while.

Thank you! 谢谢 !