Chinese Banking Industry


The Chinese Banking Industry

The banking industry in China is undergoing a generational reform program as it aims at being supportive and open to the surfacing of China as a global economic power. This is based on the fact that the country has to adapt a progressive economic policy as it abandons strict communism as well as state ownership. The implementation of the reform agenda commenced during the 1980s, and it has been in progress up to date (Podpiera & Leigh, 2006).

The Structure of the Chinese Banking Industry

The Chinese banking industry was initially monolithic. The People's Bank of China (PBC) was the main entity that was authorized to implement monetary strategies in the country. During the earlier part of the 1980s, Chinese authorities began to open up the industry in order to allow four of the state owned and specialized banks to conduct baking transactions, and especially by accepting deposits. The said specialized banks include the Industrial and Commercial Bank of China (ICBC), the Bank of China (BOC), the Chinese Construction Bank (CCB), as well as the Agricultural Bank of China (ABC) (Howie & Walter, 2012).

In 1994, the Government of China managed to establish three additional banks, and each of these banks was dedicated to a specified role. They are actually policymaking banking institutions, and they include the Chinese Development Bank (CDB), the Export and Import Bank of China, and the Agricultural Development Bank of China (ADBC). The first four banks have actually conducted their initial public offerings, a situation which has facilitated varying levels of public ownership. In spite of such IPOs, banks are majorly owned and controlled by the government of China (Lewis & Chiu, 2006).

The Chinese authorities have also allowed at least 12 joint stock and commercial banking organizations as well as over one hundred commercial banks in cities to operate within the country. Additionally, a number of Chinese banks base their operations in rural areas. This is aimed at facilitating a unified growth of the country. A number of foreign banking institutions have also been allowed to operate in China. These foreign banks have also been making strategic investments within several states controlled commercial institutions. However, the foreign institutions have to remain on the minority.

Chinese Structure vs Western Structure

In the west, the structure of banking is mainly composed of a mixture of both publicly-traded and privately owned institutions. The institutions vary in size. They range from a single branch banking institutions within small towns to international behemoths which trade and control assets worth trillions of dollars.

During and soon after the 2007-2008 recession and financial crisis, most Western treasuries availed capital worth billions of dollars to their respective financial institutions in an endeavour to revive them. Governments ended up taking up ownership stakes within several financial institutions in manner which closely resembles the management and control of financial institutions in China. Indeed, the actions ended up blurring the distinction which existed between private and state ownership. Nonetheless, the most significant difference is that in the West governments move with speed towards the restoration of ownership in the hands of private investors as soon as the sector stabilizes (Aoki & Wu, 2012).

Numbers in Chinese Banking

By the end of 2010, the entire value of the assets associated with the Chinese banks stood at 94.35 trillion RMB. This was approximately $14.40 trillion: a significant figure, considering that China is still an emerging economy whose baking policy is still yet to stabilize. By then, four of the specialized banking institutions were in control of about 46 trillion RMB, which was approximately 48 per cent of all the assets in the industry. Comparing these figures with those of the American banking industry indicates that in the U.S., the concentration of assets was higher. This is due to the $13.3 trillion asset base, four of the largest banks held 56 per cent. Fifty six per cent of those assets represented a total of $7.6 trillion. The American banks in question included the Bank of America, JP Morgan, Citigroup, as well as Wells Fargo (Lessambo, 2013).

Chinese Banking Regulation

China Banking Regulatory Commission (CBRC), acts as the overseer of the Chinese banking industry. It is tasked with the preparation of rules and regulations which govern the banking institutions in China. The CBRC examines and oversights banks for the purpose of collecting and publishing statistics relating to the industry. It also approves the establishment and expansion of institutions as well as resolves potential solvency, liquidity, or any other problem that may emerge as individual banks exercise their mandate (Walter, 2009).

The People's Bank of China is allowed to exercise a considerable level of authority over banking institutions. In addition to the central bank’s responsibility for designing and monitoring the implementation of the monetary policy, the People’s Bank of China represents the country and the industry at international forums. Other roles include the reduction of overall risks as well as the promotion of stability within the financial industry. The PBC also regulates foreign exchange and lending amongst the banks. It also supervises payments as well as settlement systems within the country (Podpiera, 2006).

The Banking Industry’s Deposit Insurance

In China, deposit insurance facilitates the protection of depositors against losses of funds. They also eliminate the chances of "run on banks", especially whenever rumours about failure spread across the industry. Since the beginning of 2011, at least 107 countries around the world have provided deposit insurance in an endeavour to facilitate the cushioning of depositors. This observation is supported by the International Association of Deposit Insurers (IADI). While deposits are not directly insured in China, IADI is of the view that the country, as well as at least 23 others, has instituted systems which are geared towards the designing and implementation of deposit insurance. Indeed, Hong Kong (a special administrative territory under the sovereign authority of China) has not come up with deposit insurance (Zhang, 2011).

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The above scenario is different from other markets such as the U.S. where bank deposits happen to be insured under the FDIC. The FDIC is the one that runs the Deposit Insurance Fund. Even though there is a conventional wisdom that the American government, and in that case the people/taxpayers are responsible for the funding as well as the payment of claims relating to the two funds. In order to achieve such levels of banking success in China, the Chinese banking industry is undertaking steps aimed at reforming and transforming the system. Stakeholders feel that there is a need to transfer ownership to the private ownership as the government attempts the transformation of the economy into capitalism (Roland, 2008).

The Current Performance of Chinese Banks

Continuing Evolution of the Banking Industry

The Chinese banking industry has been evolving gradually from the centralized state owned and controlled loans provider into a market which is increasingly competitive. In the Chinese market, a variety of banks, including some base in the U.S., have been striving to avail a number of financial services. Indeed, just three Chinese banks remain in total state control. The rest of the banking institutions have evolved into accommodating what is commonly referred to as mixed ownership. In mixed ownership, the central/local government agencies tend to represent major equity holders (Cousin, 2007).

The primary objective of the Chinese financial industry has been to facilitate the undertaking of the commercially driven operations in the same manner as they are undertaken in the Western capitalist economies. Nonetheless, the central Government of China continues to exert significant influence on most of the banking operations. This is primarily meant to be accomplished by the China Banking Regulatory Commission (CBRC), the People’s Bank of China (PBOC), as well as the Chinese Ministry of Finance (MOF) (Pei, 2009).

Performance Estimates

The academic and private sector estimates provide a general view of the banking sector in China, and especially the standing of the four largest state banks. Nevertheless, just a few comprehensive studies have been undertaken in an endeavour to evaluate the root causes of the Chinese banking challenges. In that case, empirical gaps have not been appropriately filled so that to facilitate the understanding of significant sections of the banking industry, i.e. the commercial banks in cities.

China's four largest banking institutions rank among the most prolific lenders in the world. Of late, investors have been gauging the health of these banks as per their half earnings, and not necessarily on the basis of the profits they make at the end of a financial year. Another key measure is a sign of heightening bad debt. This has actually been an important measure of the manner in which Chinese companies fare amid their slowest rate of growth since 2008 when there was a global financial crisis in 2008 (Yu, 2010).

Government Intervention

Since the launching of the sweeping economic reforms in China, the Government’s level of intervention in the economy as banking has reduced significantly. Nonetheless, several recent studies, such as that conducted by Lessambo (2013), indicate that the Government continues to dominate the financial sector. High levels of Government intervention result in huge non-performing loan ratios. These ratios vary from the officially approved rate of 20 per cent to the Western estimates of between 40 and 50 per cent.

Officials of local governments have also been accused of attempting to exert influence on the operations of financial institutions. Indeed, there have been allegations of inappropriate or unfair competition, and this is in spite of the remarkable financial reforms which have been taking place in the recent past. Some observers have maintained that Chinese banks have largely remained under the tight Government control. Some even argue that Government agencies and officials use banking institutions for the purpose of providing inappropriate assistance and subsidies a selected number of Chinese organizations. There are additional claims that Chinese banking institutions are accorded preferential treatment and, according to the observers, this gives them an edge over several foreign banks which try to enter the China’s financial industry (Yan, 2009).

Chinese Banks Faced with Possible Recession

Overview of the Possibility of Recession

As some observers query what has been characterized being state sanctioned unfair competition, others express their concerns that several Chinese banking institutions may actually be insolvent. Some go ahead to predict a major financial crisis in China if the situation is not resolved soon. According to such commentators, the perceived and overly-rated efforts towards the resolution of accumulation serious non-performing loans (NPLs) do only disguise the underlying challenge (Yan, 2009).

The Chinese NPL situation could have become worse as from November 2008. This is especially due to the stimulus program as well as the emergence of the platforms that have been used by local governments to fund institutions. The program has actually cost the local government at least $1.7 trillion in debt. For instance, a major financial crisis which took place in Wenzhou city revealed that there had been an underappreciated risk which had not been identified. The risk was associated with unconventional banking activities (Peng, 2007).

According to a number of analysts, sharp declines in the Chinese property values may tend to precipitate into a financial crisis which may actually affect such other markets as the U.S. and major economies in the European Union. The Chinese banking sector is associated with two major issues. These issues may be of interest to a number of stakeholders, including those outside China as a jurisdiction. For instance, the United States’ Congress considers the developments in China as those which need careful consideration (Guo, 2012).

Intervention Strategy

Firstly, the Congress may opt to go ahead with the examination of the allegations of a series of inappropriate banking subsidies to a number of major financial institutions in China. Indeed, such examinations may be focused majorly on state-owned enterprises or those enterprises where the government has significant stakes. Secondly, according to the accession agreements of the WTO, China has to facilitate an access into its local financial industry by those foreign banks which may express interest towards investing in that formerly communist economy (Tong, 2011).

The United States’ Congress has hinted the intention to review the Chinese compliance with international trade agreements. This is among the measures being taken by a number of economies with the intention of averting the major financial crisis. It has to be appreciated that with the current level of interconnectedness of economies, destabilization in China may trigger financial woes in several countries around the world. In conclusion, it has been noted that an overview of various banking industries has disclosed that the financial environment is set to retain its complexity as well as risky and over-changing characteristic (Liao, 2009).

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