Banking in China - Reforms in The Banking Industry

Reforms in The Banking Industry

Years of government-directed lending has presented Chinese banks with large amounts of non-performing loans. According to the Central Bank’s report, non-performing loans account for 21.4% to 26.1% of total lending of China’s four big banks in 2002. In 1999, four asset management companies (AMC) were established to transfer the non-performing assets from the banks. The AMCs plan to repackage the non-performing loans into viable assets and sell them off to the investors.

PBOC has encouraged banks to diversify their portfolios by increasing their services to the private sector and individual consumers. In July 2000, a personal credit rating system was launched in Shanghai to be used to assess consumer credit risk and set ratings standards. This is an important move in developing China’s consumer credit industry, and increase bank loans to individuals.

The central government has allowed several small banks to raise capital through bonds or stock issues. Followed the listing of Shenzhen Development Bank and Pudong Development Bank, China Minsheng Bank, then the only private bank in China, was listed on the Shanghai Stock Exchange (A-Share) in December 2000. More Chinese banks are expected to list in the next two years in order to raise capital.

The reform of the banking system has been accompanied by PBOC’s decision to decontrol interest rates. Market-based interest rate reform is intended to establish the pricing mechanism of the deposit and lending rates based on market supply and demand. The central bank would continue to adjust and guide the interest rate development, which allows the market mechanism to play a dominant role in financial resource allocation.

The sequence of the reform is to liberalize the interest rate of foreign currency before that of domestic currency, lending before deposit, large amount and long term before small amount and short term. As a first step, the PBOC liberalized the interest rates for foreign currency loans and large deposits (US$3 million and over) in September 2000. Rate for deposits below US$3 million remain subject to PBOC control. In March 2002, the PBOC unified foreign currency interest rate policies for Chinese and foreign financial institutions in China. Small foreign exchange deposits of Chinese residents with foreign banks in China were included in the PBOC interest rate administration of small foreign exchange deposits, so that domestic and foreign financial institutions are treated fairly with regard to the interest rate policy of foreign exchange deposits.

As interest rate liberalization progressed, the PPOC liberalized, simplified or abandoned 114 categories of interest rates initially under control since 1996. At present, 34 categories of interest rates remain subject to PBOC control. The full liberalization of interest rates on other deposit accounts, including checking and saving accounts, is expected to take much longer. On the lending side, market-determined interest rates on loans will first be introduced in rural areas and then followed by rate liberalization in cities.