CHAPTER TWO A Brief History of Banking-System Reform in China Through the Mid-1990s The Gradual Implementation of Reform Currently, the Chinese financial system consists of a variety of institutions, most of which are defined as commercial business entities (with the exception of a few institutions such as policy banks and asset management companies)(see Figure 2.1). While this framework may seem similar to ones in many developed market-oriented economies, two characteristic differences are obvious: (1)the bank loans are heavily weighted toward funding the nonfinancial sectors (see Figure 2.2)and (2) the banking sector is dominated by state-owned commercial banks (SOCBs)and joint-stock commercial banks (SCBs)(see Figure 2.3) Although there is no standard balance between direct finance and indirect finance, it is widely recognized that an unbalanced financial system often retards the efficiency of fund allocation In China, the commercial banks had become overburdened, which degraded their balance sheets to the point where they were failing to provide appropriate loans to profitable business sectors with a large potential for growth. This outcome resulted from the government policy on economic-system reform from the late 1970s to the 1990s The reforms to the Chinese economic system implemented after the Third Plenum of the Eleventh Central Committee of the Communist Party of China(CPC) in December 1978 which decided to shift the focus of the Party's work to socialist modernization, have been car- ried out gradually and pragmatically. At first there was no clearly defined goal, and the reform objectives have been cautiously readjusted step by step to move the country from the "planned economy supplemented with some market elements"to the "socialist market economy, gradu ally becoming more market-oriented, differentiated, and cosmopolitan in accordance with the economic development and social acceptability of the country(see Table 2.1) During the last 28 years, China has been one of the worlds fastest growing economies, with a 9.7 nt aver nnual i domestic product(GDP) from 1978 to 2006. It has become the world's fourth largest economy in terms of the nominal gDp(in U.S. dollars), the third largest trading country, and it was the third largest recipient of foreign direct investment(FDI in 20051. The gradual nature of Chinas reform process has ensured I International Monetary Fund, World Economic Outlook Database, April 2006, World Trade Organization, World Trade port, 2006, United Nations, World Investment Report, 2006
3 CHAPTER TWO A Brief History of Banking-System Reform in China Through the Mid-1990s The Gradual Implementation of Reform Currently, the Chinese financial system consists of a variety of institutions, most of which are defined as commercial business entities (with the exception of a few institutions such as policy banks and asset management companies) (see Figure 2.1). While this framework may seem similar to ones in many developed market-oriented economies, two characteristic differences are obvious: (1) the bank loans are heavily weighted toward funding the nonfinancial sectors (see Figure 2.2) and (2) the banking sector is dominated by state-owned commercial banks (SOCBs) and joint-stock commercial banks (JSCBs) (see Figure 2.3). Although there is no standard balance between direct finance and indirect finance, it is widely recognized that an unbalanced financial system often retards the efficiency of fund allocation. In China, the commercial banks had become overburdened, which degraded their balance sheets to the point where they were failing to provide appropriate loans to profitable business sectors with a large potential for growth. This outcome resulted from the government policy on economic-system reform from the late 1970s to the 1990s. The reforms to the Chinese economic system implemented after the Third Plenum of the Eleventh Central Committee of the Communist Party of China (CPC) in December 1978, which decided to shift the focus of the Party’s work to socialist modernization, have been carried out gradually and pragmatically. At first there was no clearly defined goal, and the reform objectives have been cautiously readjusted step by step to move the country from the “planned economy supplemented with some market elements” to the “socialist market economy,” gradually becoming more market-oriented, differentiated, and cosmopolitan in accordance with the economic development and social acceptability of the country (see Table 2.1). During the last 28 years, China has been one of the world’s fastest growing economies, with a 9.7–percent average annual increase in real gross domestic product (GDP) from 1978 to 2006. It has become the world’s fourth largest economy in terms of the nominal GDP (in U.S. dollars), the third largest trading country, and it was the third largest recipient of foreign direct investment (FDI) in 20051. The gradual nature of China’s reform process has ensured 1 International Monetary Fund, World Economic Outlook Database, April 2006, World Trade Organization, World Trade Report, 2006, United Nations, World Investment Report, 2006
4 Banking System Reform in China: The Challenges of Moving Toward a Market-Oriented Economy Figure 2.1 Structure of Financial Institutions in China, May 2007 Government (State Council) Central Bank People's Bank of China(PBo) State Administration of Foreign Exchange Regulatory Organizations H china Banking Regulatory Commission(CBRO),China Securities Regulatory Commission(CSRC), China Insurance Regulatory Commission(CIRO) Government InvestmentCompanyHcentral Huijin Investment Co. trial Commercial Bank of china State-Owned Commercial Banks (5) hina Construction Bank Deposit Money Banks Joint Stock Commercial Banks(12) Agricultural Bank of China Rural Cooperative Banks(80.) hanghai Pudong Development Bank China Mingsheng Banking Corporation rporated in foreign countries 74*) Shenzhen Development Bank Urban Credit Cooperatives(245+") Rural Credit Cooperatives (about 24,000-0I evelopment Bank Finance Companies (79) ing Commercial Bank Bohai Bank ks(3) pecific Depository China Development Bank FinancialLeasing Companies(12") China Export &Import Bank Agricultural Development Bank of China rities Investment Fund Managing Companies(50*), Securities Futures Dealin Companies(187), Securities Investment Consulting Agencies(92*) ups(6*), Life Insurance Companies(46") Non-life Insurance Companies(52*), Reinsurance Companies (5*) Asset Management Companies (AMC, state-owned 5), Security AMC(3), Insurance AMC(9*) larke Infrastructure, etc.H Shanghai Security Exchange, Shenzhen Security Exchange, Credit Rating Agencies. Accounting firms SOURCES: PBC, CBRC, CSRC, CIRC, China Banking Association, China Trustee Association, China National Association of Finance Companies, Securities Association of China NOTES: 1. Figures in parentheses are institutions existing as of the end of May 2007, except those followed by *are as of the end of 2006 and those followed by **are as of the end of october 2006 2. In 2007, CBRC made the bank of Communications an SoCB (from a joint-stock commercial 3. The Agricultural Development Bank of China, a policy bank, is defined as a deposit-money bank when the central bank compiles the monetary statistics 4. In rural areas, 5 village banks, 3 loan companies, and 6 mutual finance companies were also established
4 Banking System Reform in China: The Challenges of Moving Toward a Market-Oriented Economy Figure 2.1 Structure of Financial Institutions in China, May 2007 State Administration of Foreign Exchange Government (State Council) Government Investment Company Central Huijin Investment Co. Central Bank People’s Bank of China (PBC) Regulatory Organizations Deposit Money Banks Listed: Industrial & Commercial Bank of China Bank of China China Construction Bank Bank of Communications Non-listed: Agricultural Bank of China Listed: China Merchants Bank China CITIC Bank Shanghai Pudong Development Bank China Mingsheng Banking Corporation Industrial Bank Huaxia Bank Shenzhen Development Bank Non-listed: Everbright Bank Guangdong Development Bank Evergrowing Bank Zhejiang Commercial Bank Bohai Bank Foreign Banks (incorporated in China 14*, incorporated in foreign countries 74*) Joint Stock Commercial Banks (12) City Commercial Banks (113) Rural Commercial Banks (13*) Rural Cooperative Banks (80*) China Development Bank China Export & Import Bank Agricultural Development Bank of China China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), China Insurance Regulatory Commission (CIRC) Security Companies (112*), Securities Investment Fund Managing Companies (50*), Securities Futures Dealing Companies (187*), Securities Investment Consulting Agencies (92*) National Interbank Funding Center, China Foreign Exchange Trading System, Shanghai Security Exchange, Shenzhen Security Exchange, Credit Rating Agencies, Accounting Firms Insurance Holding Companies/Groups (6*), Life Insurance Companies (46*), Non-life Insurance Companies (52*), Reinsurance Companies (5*) State-Owned Commercial Banks (5) Urban Credit Cooperatives (245**) Auto Finance Companies (8*) Money Brokerage Firms Security Business Institutions Insurance Companies Trust & Investment Companies (53) Financial Leasing Companies (12*) China Postal Savings Bank Finance Companies (79) Rural Credit Cooperatives (about 24,000**) Policy Banks (3) Specific Depository Institutions Market Infrastructure, etc. Asset Management Companies (AMC, state-owned 5), Security AMC (3*), Insurance AMC (9*) SOURCES: PBC, CBRC, CSRC, CIRC, China Banking Association, China Trustee Association, China National Association of Finance Companies, Securities Association of China. NOTES: 1. Figures in parentheses are institutions existing as of the end of May 2007, except those followed by * are as of the end of 2006 and those followed by ** are as of the end of October 2006. 2. In 2007, CBRC made the Bank of Communications an SOCB (from a joint-stock commercial bank). 3. The Agricultural Development Bank of China, a policy bank, is defined as a deposit-money bank when the central bank compiles the monetary statistics. 4. In rural areas, 5 village banks, 3 loan companies, and 6 mutual finance companies were also established. RAND OP194-2.1
A Brief History of Banking-System Reform in China Through the Mid-1990s 5 gure 2 2 Structure of the nonfinancial Business sectors Liabilities a Bank loans. 68.6 FDL,17.8 Bonds, 1.2 Equities, 6.8 United quities, 55.1 Others, 15.3 States 10.3 Bank loans FDI, 3.5 Japan Bank loans, 33.4 Bonds Others. 21.3 30% 50 SOURCES: PBC, Federal Reserve Board, Bank of Japan, The Flow of Fund Statistics. NOTES: 1. The data for China are on the flow base(average of 2000-2004), while both of those of the United States and Japan are on the stock base(for the United States, as of the end of 2005; for Japan, as of the end of march, 2005) 2. The flow data for China shown here only reflect the liability side and do not include the movement of the nonfinancial business sectors deposit. According to the world Banks analysis, about 0 percent of corporate investment is financed by its own savings, mainly coming from its profit( Kuijs, Figure 2.3 Asset Distribution of Deposit-Taking Institutions, March 200 City Commercial Banks, 5.8% SOCBs, 55.2% Others, 26.6% JSCBs, 12.4% Total assets outstanding RMB 45.9 trillion(USS 5.9 trillion) SOURCE: CBRO
A Brief History of Banking-System Reform in China Through the Mid-1990s 5 Figure 2.2 Structure of the Nonfinancial Business Sectors’ Liabilities 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Bank loans, 33.4 Bank loans, 68.6 Equities, 36.1 Equities, 55.1 FDI, 17.8 Others, 21.3 Others, 15.3 Bank loans, 15.8 Bonds, 10.3 Bonds, 9.2 Bonds, 1.2 Equities, 6.8 FDI, 3.5 Others, 5.6 Japan United States China SOURCES: PBC, Federal Reserve Board, Bank of Japan, The Flow of Fund Statistics. NOTES: 1. The data for China are on the flow base (average of 2000–2004), while both of those of the United States and Japan are on the stock base (for the United States, as of the end of 2005; for Japan, as of the end of March, 2005). 2. The flow data for China shown here only reflect the liability side and do not include the movement of the nonfinancial business sector’s deposit. According to the World Bank’s analysis, about 50 percent of corporate investment is financed by its own savings, mainly coming from its profit (Kuijs, 2005). RAND OP194-2.2 Figure 2.3 Asset Distribution of Deposit-Taking Institutions, March 2007 SOURCE: CBRC. RAND OP194-2.3 Total assets outstanding: RMB 45.9 trillion (US$ 5.9 trillion) City Commercial Banks, 5.8% JSCBs, 12.4% SOCBs, 55.2% Others, 26.6%
6 Banking System Reform in China: The Challenges of Moving Toward a Market-Oriented Economy Table 2.1 Objectives of the Economic System Reform in China Time Key Characterizations of Reform Objectives 1978-0ct.1984 Planned economy supplmented with some market elements oct.1984oct.1987 Planned commodity economy oct.1987-une1989 The state controls the market, and the market guides enterprises June1989-1991 Organic integration of planned economy and market regulations A share-holding system and a security market can function under socialism oct.1992 Socialist market economy 1994 Corporatization of state-owned enterprises(SOEs) and reform of property rights Developing the state sector together with all kinds of ownership rasping the large Soes while letting small ones go to the market July 200 Three representative functions of the Party: permission for owners of private and individual enterprises to be Party members; further development of various ownership forms SOURCES: Fan(2002, 2003) economic stability thus far, despite some volatility in the economy in late 1980s and mid-1990s (see Figure 2.4) However, the cost of these reforms is not negligible. One of the serious problems with Chinas economy is the relatively inefficient allocation of funds throughout the financial system, which has been largely dominated by the state-owned banks Before 1978, the Chinese banking system was a Soviet-style mono-banking system During the Cultural Revolution(1966-1976), most Chinese financial institutions were closed or incorporated into the PBC or the Ministry of Finance(MOF); the PBC became virtually the only bank in China. The curtailment of other banks was influenced by denunciations of bourgeois rights"and by assertions that commercial activity was useless. Loans shrank, and the country's financial business shrank substantially 2. Even the head office of the PBC was merged with the MOF in 1969; it acted as an accountant and cashier for the government rather than a bank. Beginning in the mid-1970s, the central government tried to strengthen the role in January 1978, the PBC separated from the mOF to function as a bank entral control, and of the PBC in order to restore the financial system while keeping it under central control, and Looking back on the primitive nature of the system at the starting point of the reform effort, the changes in the Chinese banking sector over the past three decades should be regarded as remarkable; however, they have fallen short of creating modern financial institutions that efficient and sustainable economic growth in China. Banking reforms, as well reforms to SOEs and government administrations, have been much slower than reforms in other sectors hang, 2000
6 Banking System Reform in China: The Challenges of Moving Toward a Market-Oriented Economy Table 2.1 Objectives of the Economic System Reform in China Time Key Characterizations of Reform Objectives 1978–Oct. 1984 Planned economy supplmented with some market elements Oct. 1984–Oct. 1987 Planned commodity economy Oct. 1987–June 1989 The state controls the market, and the market guides enterprises June 1989–1991 Organic integration of planned economy and market regulations 1992 A share-holding system and a security market can function under socialism Oct. 1992 Socialist market economy 1994 Corporatization of state-owned enterprises (SOEs) and reform of property rights 1997 Developing the state sector together with all kinds of ownership Grasping the large SOEs while letting small ones go to the market July 2001 Three representative functions of the Party; permission for owners of private and individual enterprises to be Party members; further development of various ownership forms SOURCES: Fan (2002, 2003). economic stability thus far, despite some volatility in the economy in late 1980s and mid-1990s (see Figure 2.4). However, the cost of these reforms is not negligible. One of the serious problems with China’s economy is the relatively inefficient allocation of funds throughout the financial system, which has been largely dominated by the state-owned banks. Before 1978, the Chinese banking system was a Soviet-style mono-banking system. During the Cultural Revolution (1966–1976), most Chinese financial institutions were closed or incorporated into the PBC or the Ministry of Finance (MOF); the PBC became virtually the only bank in China. The curtailment of other banks was influenced by denunciations of “bourgeois rights” and by assertions that commercial activity was useless. Loans shrank, and the country’s financial business shrank substantially2. Even the head office of the PBC was merged with the MOF in 1969; it acted as an accountant and cashier for the government rather than a bank. Beginning in the mid-1970s, the central government tried to strengthen the role of the PBC in order to restore the financial system while keeping it under central control, and in January 1978, the PBC separated from the MOF to function as a bank. Looking back on the primitive nature of the system at the starting point of the reform effort, the changes in the Chinese banking sector over the past three decades should be regarded as remarkable; however, they have fallen short of creating modern financial institutions that will ensure efficient and sustainable economic growth in China. Banking reforms, as well as reforms to SOEs and government administrations, have been much slower than reforms in other sectors. 2 Shang, 2000