China’s Banking and Financial System Xingmin Yin China Center for Economic Studies Fudan University
Contents • Introduction • Financial and banking system • Financial markets • Regulation of the financial system • Performance analysis • Non-performing loans and the reform of banking system • Reform progress: Recapitalization • New Policies for the reform of banking system: Strategic investors • Conclusions • Questions and Problems
1. Introduction • Overview of banking industry in China. • The banking industry has been growing at an average annual rate of more than 19% in assets for the past two decades. • Total banking sector assets reached 37.5 trillion yuan in 2005, or 209% of GDP, one of the highest in the world, for example, 140% of GDP in Japan, 146% in Germany, and 297% in UK. • China today boasts one of the largest banking industries in the world.
The state-owned commercial banks dominated the banking system. • In recent years, the reform of state-owned banks has been pushed forward steadily due to the pressures imposed by many new issues in the globalization of economy. • The objective of state-owned bank reform is to transform these banks into modern financial institutions with good governance and operations, clear business targets and sound financial performance.
A. New Development of China’s Financial Industry • Chinese economy is distinguished with the manufacturing power in development, but tertiary industry gradually increased its share in GDP, from 32.8 percent in 1996 to 40 percent in 2005, and financial industry accounted for 3.4 percent. • Financial sector development helps economic growth through more efficient resource allocation and productivity growth rather than the scale of investment or saving mobilization. • What is the major function of financial industry?
Countries with better developed financial system experience faster economic growth, measures of financial development, such as the ratio of M2 to GDP yield similar results. • Credit to GDP is a standard measure of financial intermediary development and in the ratio of claims by deposit money and other financial institutions on the domestic non-financial sector to GDP.
Financial Development More savings for economy growth.
Discussion • More savings contributed to China’s economic development in the past 20 years. • Is it possible for China to continue its investment growth in the support of high saving rate?
B. Household Savings in China • What is the feature of household savings? • High level of household savings, which increased from 7.38 trillion yuan in 2001 to 22.5 trillion yuan by end-2008. • Discussion on the Chinese Saving Puzzle and the Life-cycle Hypothesis by Franco Modiglian and Shi Larry Cao, Journal of Economic Literature, March 2004.
Year-on-Year Increases Billion yuan
The situation with bank deposits increasing amount has continued to decrease since 2006, although total deposits with the system in December 2007 still keep its rising level, but small numbers with 1.1 trillion yuan in comparison with 2.15 trillion yuan in 2005. • In 2008, households increased their saving amount of 4.75 trillion yuan, accounting for 92.22% of net increases of GDP (5.15 trillion yuan). • What direction for the year of 2009?
Discussion on “Global Savings Glut” • Federal Reserve Chair Ben Bernanke called: the global savings glut: the enormous financial surpluses realized by certain countries. • Chinese households save an astonishing 40 percent of their incomes. Why? • Different views on this issue……
2.Financial and Banking Systems A.People’s Bank of China B. Policy banks C. Depository institutions (commercial banks) • State-owned commercial banks • Joint-stock commercial banks • Regional commercial banks • Urban and rural credit cooperatives • Joint-venture Banks and foreign-funded banks
D. Contractual Saving Institutions (Insurance Companies) • Domestic funded insurance corporations • Joint-venture insurance corporations E. Investment intermediaries • Securities firms • Finance companies • Credit and investment companies • Investment funds
A. People’s Bank of China: PBC • The unified function of the central bank and commercial bank. • The State Council issued the policy on the function of PBC as the Central Bank in September 1983. • The People Congress issued The Law of PBC in March 1995. • The PBC set up its 9 regional PBC Branch-Banks throughout the country, which is regarded as the action to follow the Fed System of the USA.
The Functions of the PBC • To promote economic growth • To stabilize the price • To supervise the financial system • To make monetary policy under the leadership of the State Council • How independent is the PBC in special reference to other countries?
B. Policy Banks • Suggestions from the World Bank. • Practically all developing countries possess specialized public sector: financial institutions such as a variety of development banks. • These development banks have been established to attract foreign resources, to mobilize domestic savings (in part by developing capital markets), and to allocate investable funds efficiently. • Three policy banks provide policy lending functions on behalf of the central government.
Breakdown of Policy Banks Unit: billion yuan.
Debating on Policy Banks • The development banks were viewed and acted as tools of development policy, channeling resources to publicly promoted or state-owned enterprises and to priority sectors which commercial lenders were unwilling to finance. • Different views on the establishment of the development banks: • The development banks are no panacea for solving the basic problem of credit allocation. • The specialized financial institutions set up to support a problem sector of the economy itself becomes a problem institution.
C.Depository Institutions • Structure of Banking Industry. • There are 133 domestic banking institutions operating at national and regional level, offering deposits and loan products to retail and corporate customers. • The four tiers of banking industry may be classified in China: state-owned banks, joint-stock banks, regional and local banking institutions, and foreign-funded banks.
Four Tiers of Banking industry 1. Four state-owned commercial banks dominate the banking industry, in spite of the decreasing shares in deposits and loans business. 2. Joint-stock banks…… 3. Regional and local banking institutions such as urban commercial banks, rural commercial banks and rural credit cooperatives, and postal saving banks…… 4. Foreign banks, after 25 years of Greenfield development committed by foreign banks, the foreign banks activity in China still accounted for a paltry 1.3% of total assets and liabilities in 2003.
Commercial Banks • Banks are financial intermediaries in the business of earning profits. • In China, four large state-owned commercial banks dominate the banking industry, while in the United States there are on the order of 9000 commercial banks.
Joint-Stock Commercial Banks CITIC: China’s International Trust & Investment Co. . Unit: billion yuan.
Regional Commercial Banks A few of regional banks have been established in the past five years. Unit: billion yuan.
Discussion • What will the structure of the Chinese banking industry look like in the future? • Are private banks good things for the development of the Chinese banking industry? • Is it a long-term trend of separation of the banking and securities industries? • An imitation of the Glass-Steagall Act? • More choices? • Future Prospects……
Effects of Financial Crisis on China’s Banking System • China is little affected by the crisis, and its entire financial system plays a relatively small role in its economy, and it apparently has no exposure to the toxic assets. • However, the Chinese government attitudes to financial innovation have changed to be much cautious in the short and medium term.
D. Contractual Savings Institutions • Insurance is a growing industry in China. • The annual revenues of insurance companies exceeded 400 billion yuan and 703.6 billion yuan in 2004 and 2007, and further to 978.4 billion yuan in 2008. • Special business opportunity and the emergence of foreign-funded insurance companies.
Insurance Companies • Insurance companies are considered financial intermediaries for several reasons: • They receive investment funds from their customers. • They place their money in a variety of money-earning investments. • So they take in funds from one sector and invest it in another.
Economic Indicators of Life Insurance Companies (2004, 2007) Unit: billion yuan.
Discussion on the Case of China • Why do people pay for insurance when they know that over the lifetime of their policy, they will probably pay more in premiums than the expected amount of any loss they will suffer? • How to explain the behavior of ordinary people in China: • Everyone knows that the insurance company would help if an emergency occurred, but almost everyone would prefer to setting aside reserves for emergency case. • So these reserves could not be invested long-time but would have to be kept in an extremely liquid form- Household Savings: How to resolve this paradox in China?
Fund Use of Insurance Co. Unit: billion yuan.
Discussion • Regulations on the fund use of insurance companies. • Changes of regulations……
E. Investment Intermediaries • In the last fifteen years, the profitability of the securities business became evident, and the securities industry expanded so dramatically. • Many securities firms engage in all three securities market activities, acting as brokers, dealers, and investment bankers in China. • Finance companies. • New phenomenon: Investment funds.
3. Financial Markets • The Money Markets. • Inter-Bank Market. • Bill Market. • Repurchasing Bond Market. • The Capital Markets. • Stock Market. • Bond Market. • The Future Markets. • The Mortgage Markets. • The Foreign Exchange Market.
Brief Discussion on Money Market • The money market’s prime function is to assist banks in their treasury operations—that is the management of their cash, short-term assets and short-term liabilities. • Commercial paper is a much less important asset and, it is mainly held outside the banking system.
The money markets have been active since the early 1990s, and become more important than 1990s. • The money markets will be much more important for the coming years due to indirect manipulation of monetary policy by the PBC.
Money market securities have three basic characteristics in common: • They are usually sold in the large denominations. • They have low default risk. • They mature in one year or less from their original issue date. Most money market instruments mature in less than 120 days.
Money Market Instruments,2004 Unit: billion yuan.
A. The Inter-Bank Borrowing Market • The inter-bank market started in operation on 3rd January, 1996 • The number of participants (financial institutions) increased from 96 in 1997 to 918 in 2003.
B. The Repurchase Bond Market • Repurchase Agreements (repos) • A firm can sell Treasury securities in a repurchase agreement whereby the firm agrees to buy back the securities at a specified future date. • Most repos have a very short term, the most common being for 3 to 14 days. There is a market, however, for one-to three-month repos.
Open market operation of the PBC • The PBC uses repos in conducting monetary policy. • The conduct of monetary policy typically requires that the PBC adjusts bank reserves on a temporary basis. To accomplish this adjustment, the PBC will buy or sell Treasury bonds in the repo market.