Dream of the red financial supermarket: the gradual emergence of integrated financial services provision in China in the 21st century

Abstract

While the current regulatory trend in the area of banking scope regulation favours integrated financial services provision, China continues to restrict commercial banks’ permissible range of business activities via its 1995 Commercial Bank Law. In this article, we propose an analytical framework that explicitly incorporates the sophistication-level constraint of a country's financial system into the regulatory trade-off calculation between banks’ need for new growth opportunities and an increased risk of financial instability. Applying this framework to China, we first discuss the episode of financial instability that led policy-makers to re-segment the financial industry in 1995 and then analyse the rationale behind China's recent, gradual movement back towards integrated financial services provision. While improved risk management capabilities mean that China may now be ready for a more liberal banking scope regulatory regime, we find that a financial crisis could still derail this important element of China's financial sector reform strategy.

Keywords:

• financial regulation
• integrated financial services
• banking
• China

JEL Classifications:

• E44
• G28
• K23
• L51

Acknowledgements

The authors would like to thank Damian Tobin, Richard Whitley, Sanzhu Zhu and an anonymous reviewer for their valuable comments and suggestion. The findings, interpretations, and conclusions in the paper are entirely those of the authors and do not necessarily reflect the views of the Boston Consulting Group and its Executives.

Notes

Notes

1. Given the complexity of banking scope regulation, it is obvious that the two dimensions of ‘degree of organizational integration’ and ‘activity scope’ are highly stylized within Figure 1 and cannot do complete justice to reality (cf. Jackson 1998, 19–24). Hence, countries’ banking systems do not actually fit neatly into the depicted boxes but rather tend to fall in between different categories.

2. Note that, in the following discussion, the focus will be on the extent to which banks are allowed to offer non-bank financial services. Bank involvement in commerce (as well as commercial firms’ involvement in banking) will not be considered here. For a discussion of salient issues in this regard, see for example the discussion provided by Borio and Filosa (1994, 13–15, 19–24).

3. More liberal banking scope regulatory regimes do not necessarily imply that successful financial institutions nowadays need to be active across the entire financial services value chain. Rather, such regimes entail that financial institutions are free to ‘manufacture’ and/or distribute their favoured portfolio of financial services. A particularly popular strategy here appears to be the bundling of commercial banking and investment banking functions. Compare The Economist, 20 May 2006 and 19 May 2007: ‘A survey of international banking’.

4. The Economist, 15 April 1999, p. 3: ‘On a wing and a prayer’.

5. See The Economist, 19 May 2007: ‘A survey of international banking’.

6. The Economist, 20 May 2006, p. 6: ‘A survey of international banking’.

7. 1995 also saw the adoption of China's Central Bank Law and Insurance Law.

8. Compare the optimistic commentary in China Daily, 30 December 1995, p. 4: ‘A 1995 retrospection’.

9. On the non-performing loan and recapitalization issue, see Bonin and Huang (2001), Bottelier (2002), and Lo (2004) among others.

10. Also see Business Week, 31 October 2005, p. 18: ‘Betting on China's banks’; The Economist, 29 October 2005, p. 93: ‘A great big bank gamble’.

11. See Zhu (2000) on the provisions of the Securities Law, and Green (2004) on its adoption process.

12. An interview partner in Shanghai pointed out that state-owned commercial banks’ partial non-compliance with the Commercial Bank Law may technically have been legal: Article 2 of the Commercial Bank Law states that the law applies to those Chinese commercial banks that are enterprise legal persons ‘in accordance with this law [the Commercial Bank Law] and the Company Law of the PRC.’ According to the interview source–a Chinese corporate lawyer–it was debatable whether or not Chinese state-owned commercial banks in 1995 actually fell under the Company Law. If not, the new bank law would not have applied to them. Interview with corporate lawyer in Shanghai, 24 November 2006.

13. Interview with Bank of China investor relations executive in Shanghai, 16 November 2006.

14. Far Eastern Economic Review, 7 December 2000, p. 78: ‘Bank of China thinks global’.

15. See the bank's website at http://www.icbc.com.cn. Accessed 25 January 2007.

16. China Daily, 12 March 1995, ‘Business Weekly’, p. 1: ‘Cheney visits as Morgan Stanley envoy’ and 12 August 1995, p. 3: ‘China's first world investment bank opens’.

17. Also China Daily, 28 May, ‘Business Weekly’, p. 3: ‘CITIC makes plans to extend reach’.

18. Following the adoption of the Commercial Bank Law, the People's Bank of China had repeatedly stressed the importance of continuing to separate different financial businesses. See Cai (1998) and Huang and Xu (2000).

19. Interviews with financial sector professionals in Shanghai, November 2006.

20. CFO Asia, November 2006, p. 42: ‘In the country of next moves’.

21. South China Morning Post, 30 November 2007: ‘Ping An acquires key stake in Fortis’. Available at http://www.scmp.com. Accessed 16 December 2007.

22. Wall Street Journal Europe, 27 February 2006, p. 21: ‘Vying for China's bank IPOs’.

23. China Daily, 30 October 2006, p. 4: ‘Roadmap for finance’.

24. See China Daily, 9 August 2004: ‘Segregation of 3 financial branches should remain’. Available at http://www.chinadaily.com.cn. Accessed 15 May 2007.

25. China Daily, 29 December 2003: ‘Bank watchdog gets new teeth’. Available at 26 http://www.chinadaily.com.cn. Accessed 10 October 2007.

26. Xinhua news agency, 28 October 2005: ‘Top legislature adopts amended securities law’. Available at http://www.china.org.cn. Accessed 12 October 2007.

27. Compare Law of the People's Republic of China on Commercial Banks (Article 43) and Securities Law of the People's Republic of China (Article 6). Available at http://www.china.org.cn. Accessed 5 October 2007.

28. Speech by People's Bank of China governor Zhou Xiaochuan at the Bank of Communications/HSBC forum on 15 June 2006: ‘Switch to a new way of thinking and steadily experiment with cross-sector operation in the financial industry’. On these financial holding companies, see Lin 2003. Also, interviews with financial sector professionals in Shanghai, November 2006. According to CITIC's former president and vice chairman Qin Xiao, CITIC's application for financial holding company status was approved by the State Council in November 2001. See Xiao (2004, 163).

29. Wall Street Journal Europe, 12 June 2006, p. 19: ‘China will let banks establish insurance arms’ and 5 September 2006, p. 5: ‘China's insurers push into the banking sector.’

30. Interviews with financial sector professionals in Shanghai, November 2006.

31. Wall Street Journal Europe, 12 June 2006, p. 19: ‘China will let banks establish insurance arms.’

32. See China Daily, 30 October 2006, p. 4: ‘Roadmap for finance’.

33. This is certainly also the view of a number of influential foreign analysts. Compare Boston Consulting Group (2002 and 2006).

34. Foreign financial groups may also benefit from being able to establish financial holding companies in China. For example, the China head of America's AIG group was quoted in 2004 as ‘waiting for a change of [Chinese] law to allow for the application of building a financial holding company in China’ to integrate the company's numerous financial assets in the country. See China Daily, 9 August 2004: ‘Segregation of 3 financial branches should remain’. Available at http://www.chinadaily.com.cn. Accessed 15 May 2007.

35. Interview with a director in Taiwan's Financial Supervisory Commission in Taipei, June 2005.