China's Banking Reform: The Remaining Agenda

Abstract

Since 1994, China has endeavoured to establish a banking system that works more closely to commercial principles by transforming the specialized banks (SBs) into state-owned commercial banks (SOCBs). However, lending decisions of the SOCBs were still determined by state directives instead of profitability consideration. This paper argues that although the post-WTO banking reforms have accomplished staggering results, China's SOCBs need an overhaul of ownership structure if China aims to develop a full-fledged market-based banking system. It also argues that the current banking reforms are not comprehensive enough to sustain China's long-term economic development because there still remain noticeable capital constraints facing small- and medium-sized private enterprises, particularly those in rural areas.

Keywords:

• Chinese banks
• state-owned commercial banks (SOCBs)
• banking reform
• ownership reform
• rural finance

Notes

1. For example, China produced 58 million tons of extra capacity in the first half of 2009 when global demand was estimated to decline by 14.9%. “Overcapacity exacerbated by recession” (China Daily, 12 April 2010), Available at http://www.chinadaily.com.cn/bizchina/2010-04/12/content_9714677.htm (accessed 2 March 2011).

2. The Central Committee Plenum on 14 November 1993 endorsed a document, “Decisions on some questions relating to the setting up of a system of socialist market economy”. It is stated in the document that: “…even if State property remains the main base of the national economy, all forms of property – State, collective and private – will have to be used in developing the economy”. See Fabbri (2006).

3. Author's calculation based on National Bureau of Statistics of China (formerly State Statistical Bureau), Zhongguo Tongji Nianjian 1985 (ZGTJNJ hereafter, China Statistical Yearbook 1985), (Beijing: Zhongguo Tongji Chubanshe), p. 581.

4. Author's calculation based on the data from National Bureau of Statistics of China 2003, pp. 313 and 704.

5. The three policy lending banks are the Agricultural Development Bank of China, Export–Import Bank of China and the State Development Bank of China.

6. For example, the State Development Bank sold 77.5 billion yuan of financial bonds to beef up its capital, 42.9 billion yuan was sold to the SOCBs (Lardy, 1998).

7. At end of 2005, the CARs of BOC, CCB and ICBC were 10.42%, 13.75% and 10.26%, respectively.

8. Available at http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID=2007051774830DBD1F20010BFFD7F4A6791F6F00 (accessed 7 January 2008).

9. It is a further refinement of the five-tier loan classification (i.e. performing loans, special mention loans, sub-standard loans, doubtful loans and loss loans). For each tier of loans, it is further subdivided into several levels (in general, from one to four levels) to better reflect the loan quality.

10. Standard Chartered subscribed US$0.5 billion of the share issued by ABC (Hu & Zhang, 2010).

11. Some analysts pinpoint that the short service term of the foreign bankers in China's SOCBs may be due to the culture shock in management style. It is difficult to verify the validity of this view, but recent reports, at least, provide anecdotal evidence to support this view. See “Chan quits top BOCHK post after two months”, South China Morning Post, 5 March 2008, B8.

12. Wen made this statement before the H-share listing of BOC on 1 June 2006. Quoted from “Chinese PM says state must control reform of state-owned bank”, Available at http://www.redorbit.com/modules/news/tools.php?tool=print&id=427198 (accessed on 29 November 2010).

13. “China defends foreign bank ownership limit at WTO” Available at http://www.news.alibaba.com/article/detail/trade/100193619-1-china-defends-foreign-bank-ownership.html (accessed 13 December 2010).

14. “China to extend lockup for banks’ foreign owners” Available at http://www.reuters.com/article/idUSSHA25281320090401 (accessed 29 November 2010).

15. For the impact of 1994 banking reform on rural enterprises, see Kwong and Lee (2005).

16. See “China to improve rural bank access” Available at http://www.ft.com/cms/s/0/fa33053a-bc0a-11de-9426-00144feab49a.html#axzz1AitAFvH7 (accessed 11 January 2010) and “Agricultural Bank of China's micro-credit loan program in rural areas expands rapidly” Available at http://www.english.people.com.cn/90001/90778/7070266.html (accessed 11 January 2011).

17. See also “China Postal Savings Bank wins approval to distribute insurance” Available at http://www.forbes.com/feeds/afx/2008/08/06/afx5297723.html (accessed 9 June 2010).

18. Calculated based on the data from Agricultural Bank of China 2010 Third Quarter Annual Report, p. 3 and CBRC 2009 Annual Report, p. 122.

19. He (2008) indicates that average loan amount to rural households in low income province, such as Guizhou, was only 4612 yuan according to a survey conducted in Guizhou in 2005.

20. Credit information of 74 million rural household was recorded by 2007, which was about one-third of China's rural households (See Gale, 2009). The proportion of households is calculated based on the data from ZGTJNJ CD-ROM 2007 (Tables 3–14).

21. Since 2003, the government has allowed the RCCs to charge interest rate 2.3 times higher than the benchmark rate set by the PBOC while the new rural financial institutions, such as rural commercial banks, have been allowed to charge up to four times of the benchmark rate (Gale, 2009).