Fang Ji June 15, 2004

1. The comparison of financial institutions, markets & instruments in China & US and the possibility to set up a deposit insurance system in China Fang Ji June 15, 2004

2. Introduction • Differences between China and US in financial institutions, markets and instruments • Deposit insurance system • No deposit insurance company in China • Is it necessary to set up a deposit insurance system in China? • If necessary, what structure will fit?

3. Part I: Financial institutions Financial institutions are classified into • in US: deposit taking and non-deposit taking institutions • in China: according to their status and function, • central bank • policy-related banks and commercial banks • non-bank financial institutions • foreign-funded and Chinese-foreign jointly run financial institutions

4. 1. Central bank • Name: People’s Bank of China (PBC) • Main functions: • formulating and implementing monetary policies • issuing renminbi, China’s currency, and managing its circulation • Regulating and supervising the establishment of financial institutions • regulating the financial markets • issuing rules and regulations concerning the operation of the financial industry • operating the state treasury • holding and managing national foreign exchanges and gold reserves

5. 2. Policy-related banks • Founded by the government for the purpose of carrying out important industrial and local development projects • Not for profit • Sources of funds: • central bank loans • policy-related bonds • There are three such banks: • State Development Bank • Agricultural Development Bank of China • China Import and Export Bank

6. 3. Commercial banks • Deposit-taking institutions • Sources: borrowed funds, notice deposits and time deposits • Three categories: • State-owned commercial banks • Joint-stock commercial banks — business focus particularly on the coastal regions • City cooperation banks — serve for medium and small-sized enterprises

7. 4. Non-bank financial institutions • Insurance company — 54 insurance companies, and over 70,000 insurance agencies, supervised by the Insurance Regulatory Commission • Rural credit cooperatives — scattered among small towns and rural villages • Trust company • Finance company • credit card vs. debit card

8. Part IIFinancial markets and instruments

9. Financial markets • Same market classification: • capital market • money market • Capital market: primary and secondary

10. Instruments • Instruments in money market • commercial paper • treasury bills • negotiable large certificate of deposit • Repurchase Agreement • Instruments in capital market • Stock — stock exchanges and over-the counter market • Bonds — government bonds, corporate bonds and bonds issued by financial institutions with special functions

11. Why differences • Different economy systems -- planned economy vs. market-economy and developing country vs. developed country • The economic reform began in China from 1980, some markets such as the stock market and the securities sector already run on market-economy lines. To some extent, China is still having a planned economy • More government intervention, regulations and protection. Until now, there is no private bank in China • Although the US is a developed country and its system is mature and has its obvious advantages, the current institutions and instruments in China are what fit into its current situation considering the lack of a credit system • Overall China is still in the process of economic reform and development, it will finally rely on market tools to manage the whole system instead of using planned method

12. Part IIIDeposit insurance system in China • No deposit insurance company in China • Chinese Government is currently acting as the insurer for depositors’ savings in domestic banks. The insurance is based on the public’s confidence in national credit • This is no regulation or legislation to detail how depositors will be compensated if their banks go bankruptcy

13. No need to set up a deposit insurance system • Most banks are state-owned ones, government credit can guarantee the depositor’s account. If one bank is at the risk of going bankruptcy, government will use all resources or hidden ways to save the bank from bankruptcy • Under such protection, depositors can not feel the risk of bank’s bankruptcy • If the bank really goes bankruptcy, the government will take the risk, even by using government reserves to protect depositor’s money

14. Is that opinion sound???

15. Setting up a deposit insurance systemis a MUST • No need to set up the system is a short-sighted view • currently 72 countries and regions have such a system • Bankruptcy happened every year since 1998 in China, big burden to government treasury and commercial banks • More competition will lead to more bankruptcies: • Competition from future liberalization of banks’ interest rates • Competition from the foreign-funded banks • Competition from the future introduction of private banks • Central government guarantying all deposits makes commercial banks pay less attention to loan risks

16. The system stimulates fair competition and urges banks to provide better services. • In china, household deposits are still the primary funds sources for commercial banks. Well-designed deposit-insurance system would formally and efficiently protect the interests of depositors, strengthen public’s confidence in banks, and guarantee the funds sources. • China has begun implementing market-oriented reforms in its fast-growing financial sector, and as a result, a market mechanism will gradually replace government-sponsored deposit protection.

17. When? The sooner China sets up the system, the earlier it will be prepared for the challenge which is brought by the market-economy reforms and the severe bank competition.

18. What system ? • Institution: the insurance company shall be founded and managed by People’s bank of China instead of by the government • Function: insure the deposit accounts, supervise and prevent bank failures • Each financial institution shall be subject to different premium rate regarding its business. • All deposit-taking institutions must join this system.

19. Conclusion • Each country has its own financial institutions and instruments which adapt to its own situation. • Developed countries have a relatively mature and well-developed financial system, developing countries can definitely learn something from them, but they can not copy everything • China has been performing market-economy reforms, from the development point of view, it is a must to develop a deposit insurance system. But it may take a while.

20. Thank you! 谢谢!