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○CCAS|○NAL PAPER Banking System Reform in china The challe alleges of Moving lowara a market-Oriented Economy Kumiko okazaki RAND NATIONAL SECURITY RESEARCH DIVISION
NATIONAL SECURITY RESEARCH DIVISION Banking System Reform in China The Challenges of Moving Toward a Market-Oriented Economy Kumiko Okazaki
The research described in this report was conducted within RANDs National Security Research Division and was made possible by sponsorship of the Bank of Japan. The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. RAND's publications do not necessarily reflect the opinions of its search clients and RAND is a registered trademark All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND Published 2007 by the RAND Corporation Street, P O. Box 2138, Santa Monic 1200 South Hayes Street, Arlington, VA 22202-5050 4570 Fifth Avenue, Suite 600, Pittsburgh, PA 15213-2665 RandUrl:http://www.rand.org To order rand documents or to obtain additional in formation. contact Distribution Services: Telephone: (310)451-7002; Fax:(310)451-6915; Email: order@rand. org
The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. R® is a registered trademark. © Copyright 2007 Kumiko Okazaki All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2007 by the RAND Corporation 1776 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 4570 Fifth Avenue, Suite 600, Pittsburgh, PA 15213-2665 RAND URL: http://www.rand.org To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: order@rand.org The research described in this report was conducted within RAND's National Security Research Division and was made possible by sponsorship of the Bank of Japan
Preface This paper briefly reviews the history of Chinese banking-system reform since the late 1970s and examines recent government reform efforts in detail, mainly focusing on the reform of state-owned commercial banks, which are handling more than half of the deposits and loans administered by banks in China. It also analyzes the current condition of major commercial banks using a simple international comparison and considers issues and challenges presented by further reforms to increase financial stability and provide for the sustainable economic development of China The author is an International Visiting Fellow at the raNd Corporations Center for Asia Pacific Policy, seconded by the Bank of Japan. She benefited from profound and construc tive reviews of earlier drafts by Pieter Bottelier, Senior Adjunct Professor of China Studies at Johns Hopkins University; Charles Wolf, Jr, Senior Economic Adviser and Corporate Fellow in International Economics at the RAND Corporation; and William H. Overholt, Director of the Center for Asia Pacific Policy. She is very grateful for their assistance She also appreciates the many fruitful discussions she has had regarding China during her study visit with colleagues at the RAND Corporation and the Bank of Japan and with Chinese government officials and scholars. However, the views expressed in this paper are her own and do not necessarily reflect the views of these institutions
iii Preface This paper briefly reviews the history of Chinese banking-system reform since the late 1970s and examines recent government reform efforts in detail, mainly focusing on the reform of state-owned commercial banks, which are handling more than half of the deposits and loans administered by banks in China. It also analyzes the current condition of major commercial banks using a simple international comparison and considers issues and challenges presented by further reforms to increase financial stability and provide for the sustainable economic development of China. The author is an International Visiting Fellow at the RAND Corporation’s Center for Asia Pacific Policy, seconded by the Bank of Japan. She benefited from profound and constructive reviews of earlier drafts by Pieter Bottelier, Senior Adjunct Professor of China Studies at Johns Hopkins University; Charles Wolf, Jr., Senior Economic Adviser and Corporate Fellow in International Economics at the RAND Corporation; and William H. Overholt, Director of the Center for Asia Pacific Policy. She is very grateful for their assistance. She also appreciates the many fruitful discussions she has had regarding China during her study visit with colleagues at the RAND Corporation and the Bank of Japan and with Chinese government officials and scholars. However, the views expressed in this paper are her own and do not necessarily reflect the views of these institutions
Contents Preface Fig Tables Abbreviations CHAPTER ONE Introduction CHAPTER TWO A Brief History of Banking-System Reform in China Through the Mid-1990s The Gradual Implementation of Reform The First Stage of Reform(Establishing Various Kinds of Banks) The Second Stage of Reform(Implementing Market-Oriented Policies) CHAPTER THREE Further Reform for a Market-Oriented Economy Changes in the Economic Environment Surrounding China Concerns About the WTo accession The asian financial crisis Formal Participation in the BIS First National Financial Work Conference Abolishment of the Credit Plan apital Injection by the Government Establishment of AMCs and the Disposal of NPLs Improvement of the Accounting System Results of reform WTO Commitments Moving Toward a Market-Oriented Banking System Second Capital Injection by the Government Disposal of NPLs Using Market Mechanisms Introduction of Foreign Strategic Investors Tax Exemptions Organizational Restructuring Public Listing
v Contents Preface ........................................................................................................... iii Figures ........................................................................................................... vii Tables ............................................................................................................ ix Abbreviations................................................................................................... xi CHAPTER ONE Introduction ..................................................................................................... 1 CHAPTER TWO A Brief History of Banking-System Reform in China Through the Mid-1990s.................... 3 The Gradual Implementation of Reform...................................................................... 3 The First Stage of Reform (Establishing Various Kinds of Banks)......................................... 7 The Second Stage of Reform (Implementing Market-Oriented Policies)................................. 13 CHAPTER THREE Further Reform for a Market-Oriented Economy ....................................................... 17 Changes in the Economic Environment Surrounding China ............................................. 17 Concerns About the WTO Accession...................................................................... 17 The Asian Financial Crisis ................................................................................... 18 Formal Participation in the BIS............................................................................. 18 First National Financial Work Conference .................................................................. 19 Abolishment of the Credit Plan ............................................................................. 19 Capital Injection by the Government ...................................................................... 19 Establishment of AMCs and the Disposal of NPLs ..................................................... 20 Improvement of the Accounting System .................................................................. 23 Results of Reform............................................................................................ 23 WTO Commitments.......................................................................................... 23 Moving Toward a Market-Oriented Banking System ...................................................... 25 Second Capital Injection by the Government ............................................................ 27 Disposal of NPLs Using Market Mechanisms ............................................................ 31 Introduction of Foreign Strategic Investors............................................................... 34 Tax Exemptions ............................................................................................... 35 Organizational Restructuring ............................................................................... 35 Public Listing.................................................................................................. 35
vi Banking System Reform in China: The Challenges of Moving Toward a Market-Oriented Economy CHAPTER FOUR The Current Situation of Major Commercial Banks Size of assets Quality of Assets Capital Adequat 46 Profitability CHAPTER FIVE Issues and Challenges in the Further Development of the Chinese Banking System A Large volume of NPls Implementation of Basel Inefficient Allocation of Fund Resources Enhancement of Corporate Governance Establishment of Laws and Regulations Fraud and Corruption The Deregulation of Financial Markets Competition with Foreign Bar Merger and Closure of Fragile Deposit-Taking Institutions Information Sharing SI Conclusion Bibliography
vi Banking System Reform in China: The Challenges of Moving Toward a Market-Oriented Economy CHAPTER FOUR The Current Situation of Major Commercial Banks................................................... 43 Size of Assets.................................................................................................... 44 Quality of Assets ................................................................................................ 45 Capital Adequacy .............................................................................................. 46 Profitability ..................................................................................................... 46 CHAPTER FIVE Issues and Challenges in the Further Development of the Chinese Banking System ............ 51 A Large Volume of NPLs....................................................................................... 51 Implementation of Basel II.................................................................................... 54 Inefficient Allocation of Fund Resources.................................................................... 56 Enhancement of Corporate Governance..................................................................... 57 Establishment of Laws and Regulations...................................................................... 59 Fraud and Corruption ......................................................................................... 60 The Deregulation of Financial Markets ..................................................................... 60 Competition with Foreign Banks ............................................................................. 61 Merger and Closure of Fragile Deposit-Taking Institutions ............................................... 63 Information Sharing ............................................................................................ 63 CHAPTER SIX Conclusion ...................................................................................................... 65 Bibliography .................................................................................................... 67
Fiqures 2.1 Structure of Financial Institutions in China, May 2007 2.2 Structure of the Nonfinancial Business Sectors Liabilities 2.3 Asset Distribution of Deposit-Taking Institutions, March 2007 2.4 Changes in the Real GDP Growth and CPI 2.5 Share of SOEs in Industrial Production and Employment 8 2.6 Outline of the Banking-System Reform in China 2. 7 The Money Supply(M2 base) and Its Ratio to the gDP 11 3.1 Changes in Balance Sheets of AMCs, PBC, and SOCBs as to NPL Disposal During 1999-2000 3.3 Trend of Oficial Foreign Exchange Reserves in AT CBs 3. 2 Changes in Balance Sheets of SAFE, Huijin, and SO 3.4 Number of Branches and Employees of SOCBs 3.5 Trend of Shanghai Stock Exchange Composite Index 4. 1 NPL Ratios of Major Commercial Banks 5.1 Amount of NPLs and NPL Ratio at Major Commercial Banks..... 5.2 Movement of RMB Exchange Rate to U.S. Dollars
vii Figures 2.1 Structure of Financial Institutions in China, May 2007 ...................................... 4 2.2 Structure of the Nonfinancial Business Sectors’ Liabilities.................................... 5 2.3 Asset Distribution of Deposit-Taking Institutions, March 2007 ............................. 5 2.4 Changes in the Real GDP Growth and CPI .................................................... 7 2.5 Share of SOEs in Industrial Production and Employment .................................... 8 2.6 Outline of the Banking-System Reform in China.............................................. 9 2.7 The Money Supply (M2 base) and Its Ratio to the GDP ..................................... 11 3.1 Changes in Balance Sheets of AMCs, PBC, and SOCBs as to NPL Disposal During 1999–2000..................................................................... 21 3.2 Changes in Balance Sheets of SAFE, Huijin, and SOCBs ................................... 29 3.3 Trend of Official Foreign Exchange Reserves in Asia ......................................... 31 3.4 Number of Branches and Employees of SOCBs .............................................. 38 3.5 Trend of Shanghai Stock Exchange Composite Index ........................................ 39 4.1 NPL Ratios of Major Commercial Banks ...................................................... 45 5.1 Amount of NPLs and NPL Ratio at Major Commercial Banks............................. 52 5.2 Movement of RMB Exchange Rate to U.S. Dollars........................................... 61
