Tables 2.1 Objectives of the Economic System Reform in China 2.2 Steps for Establishing Major Financial Markets in China 12 3.1 Establishment of Asset Management Companies 3. 2 Definition of Five Categories Under the Guidelines on Risk-Based Loan Classification 3.3 NPL Ratios and Capital Adequacy Ratios of the SOCBs 3.4 China's Major WTO Commitments in the Financial-Service Sector 26 3. 5 Major Ar ments for the Structural Reform of SOCBs Since 2003 3.6 Performance Assessment Indicators for Recapitalized SOCBs 3.7 SOCBs Disposal of NPLs 3.8 Funding of SOCBs' Disposal of NPLs 3.9 Examples of Direct Investment in Chinese Banks by Foreign Strategic Investors 3.10 Changes in Number of Shares Through IPOs 3.11 Total Capital Increase by IPOs 3.12 Major Shareholders of the Listed SOCBs 69004 4.1 Total Assets of Major Commercial Banks 4. 2 Amounts of Tier 1 Capital and Capital Adequacy Ratios of major Commercial Banks 47 4.3 Profit and Indicators for Profitability of SOCBs 4.4 Share of Net Interest Profit and Net Fee and Commission Profit to Net Operating Profit 4.5 Year-on-Year Changes in Staff Costs of SOCBs 6.1 Estimated NPLs in the Chinese Banking System 5.2 Three Pillars for the Implementation of Basel II 5.3 Investments into Financial Institutions by Huijin
ix Tables 2.1 Objectives of the Economic System Reform in China ......................................... 6 2.2 Steps for Establishing Major Financial Markets in China .................................... 12 3.1 Establishment of Asset Management Companies.............................................. 21 3.2 Definition of Five Categories Under the Guidelines on Risk-Based Loan Classification ............................................................................... 22 3.3 NPL Ratios and Capital Adequacy Ratios of the SOCBs ................................... 24 3.4 China’s Major WTO Commitments in the Financial-Service Sector...................... 26 3.5 Major Arrangements for the Structural Reform of SOCBs Since 2003.................... 28 3.6 Performance Assessment Indicators for Recapitalized SOCBs............................... 29 3.7 SOCBs’ Disposal of NPLs........................................................................ 33 3.8 Funding of SOCBs’ Disposal of NPLs......................................................... 34 3.9 Examples of Direct Investment in Chinese Banks by Foreign Strategic Investors................................................................................. 36 3.10 Changes in Number of Shares Through IPOs ................................................. 39 3.11 Total Capital Increase by IPOs.................................................................. 40 3.12 Major Shareholders of the Listed SOCBs...................................................... 40 4.1 Total Assets of Major Commercial Banks ..................................................... 44 4.2 Amounts of Tier 1 Capital and Capital Adequacy Ratios of Major Commercial Banks ........................................................................ 47 4.3 Profit and Indicators for Profitability of SOCBs.............................................. 48 4.4 Share of Net Interest Profit and Net Fee and Commission Profit to Net Operating Profit .............................................................................. 49 4.5 Year-on-Year Changes in Staff Costs of SOCBs................................................ 49 5.1 Estimated NPLs in the Chinese Banking System ............................................. 53 5.2 Three Pillars for the Implementation of Basel II............................................... 55 5.3 Investments into Financial Institutions by Huijin............................................. 58
Abbreviations gricultural Bank of China ADB Asian Development Bank AMC asset management company BIS Bank for International Settlements BOC Bank of chin BOCOM Bank of communications Bank of Japan CBRC China Banking Regulatory Commission China Construction Bank CDB China Development Bank CFETS China Foreign Exchange Trading System CIRC China insurance regulatory Commission CNAPS China National Advanced Payment System COMECON Council for Mutual Economic Assistance CPC Communist Party of China CSRC China Securities Regulatory Committee DICJ Deposit Insurance Corporation of Japan Electric Interbank System foreign direct investment FEC foreign exchange certificate GATT General Agreement on Tariffs and Trado ICBC Industrial and Commercial Bank of China
xi Abbreviations ABC Agricultural Bank of China ADB Asian Development Bank AMC asset management company BIS Bank for International Settlements BOC Bank of China BOCOM Bank of Communications BOJ Bank of Japan CBRC China Banking Regulatory Commission CCB China Construction Bank CDB China Development Bank CFETS China Foreign Exchange Trading System CIRC China Insurance Regulatory Commission CNAPS China National Advanced Payment System COMECON Council for Mutual Economic Assistance CPC Communist Party of China CSRC China Securities Regulatory Committee DICJ Deposit Insurance Corporation of Japan EIS Electric Interbank System FDI foreign direct investment FEC foreign exchange certificate GATT General Agreement on Tariffs and Trade ICBC Industrial and Commercial Bank of China
xii Banking System Reform in China: The Challenges of Moving Toward a Market-Oriented Economy vernment bo testic pre International Finance Corporation International monetary Fund IPO initial public offering JSCB joint-stock commercial bank MOF ministry of Finance NPC NPL performing loan People's Bank of Chi PCBC People's Construction Bank of China FIl Qualified Foreign Institutional Investor rural credit cooperatives ROA return on assets ROE return on equity SAFE State Administration of Foreign Exchange SOCB state-owned commercial bank SOE SSF Social Security fund WTO World Trade organization
xii Banking System Reform in China: The Challenges of Moving Toward a Market-Oriented Economy GB government bond GDP gross domestic product IFC International Finance Corporation IMF International Monetary Fund IPO initial public offering JSCB joint-stock commercial bank MOF Ministry of Finance NPC National People’s Congress NPL nonperforming loan PBC People’s Bank of China PCBC People’s Construction Bank of China QFII Qualified Foreign Institutional Investor RCC rural credit cooperatives ROA return on assets ROE return on equity SAFE State Administration of Foreign Exchange SOCB state-owned commercial bank SOE state-owned enterprise SSF Social Security Fund WTO World Trade Organization
CHAPTER ONE Introduction The reform of the Chinese banking system has progressed favorably since 2002, supported by capital injections, tax exemptions, the introduction of foreign funds, the enhancement of dis closure rules, and other key government policy changes. The major Chinese commercial banks have improved their capital and asset structures remarkably. Four of the five biggest commer- cial banks have changed their ownership structure and have successfully been listed on stock exchanges. Medium-sized nationwide commercial banks have also developed their business aggressively, although a few of them are still facing serious deterioration in their balance sheets So far, the Chinese banking system has reduced fears that it will fall into serious disarray in the near future Based on confidence about the country's financial stability, the Chinese government opened much of the banking sector to foreign banks in December 2006(in accordance with its accession commitments to the World Trade Organization [WTOD by eliminating formerly strict restrictions on foreign banks' local currency business. However, these changes do not mean that the business foundation of Chinese banks has become completely stable. Compared to the worlds leading banks, major Chinese commercial banks are still very weak in terms of asset quality, business profitability, and the diversification of their services. More broadly, the Chinese banking system is not yet functioning as an effi- cient financial intermediary due to the banks' own weaknesses and to environmental problems such as the loose credit culture and widespread disregard for the rule of law. These problems are widely acknowledged by senior leaders in China. In January 2007, the State Council(the Cabinet)held a high-level meeting, the Third National Financial Work onference, to discuss main targets for financial-system reform in the coming years. The gov ernment plans to continue to introduce market-oriented mechanisms in the financial sector Major commercial banks are required to improve corporate governance and to push grass-roots level reforms in local branches. It may prove difficult for them to maintain a balance between social stability"and commercial profitability if the government and Communist Party do not produce a clear blueprint for the future design of the banking sector
1 CHAPTER ONE Introduction The reform of the Chinese banking system has progressed favorably since 2002, supported by capital injections, tax exemptions, the introduction of foreign funds, the enhancement of disclosure rules, and other key government policy changes. The major Chinese commercial banks have improved their capital and asset structures remarkably. Four of the five biggest commercial banks have changed their ownership structure and have successfully been listed on stock exchanges. Medium-sized nationwide commercial banks have also developed their business aggressively, although a few of them are still facing serious deterioration in their balance sheets. So far, the Chinese banking system has reduced fears that it will fall into serious disarray in the near future. Based on confidence about the country’s financial stability, the Chinese government opened much of the banking sector to foreign banks in December 2006 (in accordance with its accession commitments to the World Trade Organization [WTO]) by eliminating formerly strict restrictions on foreign banks’ local currency business. However, these changes do not mean that the business foundation of Chinese banks has become completely stable. Compared to the world’s leading banks, major Chinese commercial banks are still very weak in terms of asset quality, business profitability, and the diversification of their services. More broadly, the Chinese banking system is not yet functioning as an effi- cient financial intermediary due to the banks’ own weaknesses and to environmental problems such as the loose credit culture and widespread disregard for the rule of law. These problems are widely acknowledged by senior leaders in China. In January 2007, the State Council (the Cabinet) held a high-level meeting, the Third National Financial Work Conference, to discuss main targets for financial-system reform in the coming years. The government plans to continue to introduce market-oriented mechanisms in the financial sector. Major commercial banks are required to improve corporate governance and to push grass-roots level reforms in local branches. It may prove difficult for them to maintain a balance between “social stability” and commercial profitability if the government and Communist Party do not produce a clear blueprint for the future design of the banking sector