1. The Reform of State-Owned Commercial Banks in China
Yan Li and Yumin Zhuang
ASEAN+3 Workshop on Reform and Development of Banking System in China
May 24-26, 2005, Shanghai China

2. Contents Overview of China’s state-owned commercial banks
The history of state-owned commercial banks
The process of reform
Conclusion

3. Overview of China’s state-owned commercial banks (SOCBs)
The history of state-owned commercial banks
The progress of reform
Conclusion

4. Overview of China’s SOCBs
Framework of China’s banking system
People’s Bank of China
Big four
Industrial and commercial
bank of China
(ICBC)
Agricultural Bank of China
(ABC)
Bank of China
(BOC)
Construction Bank of China
(CBC)
Joint-stock banks
(12 banks)
Urban credit
cooperatives
(709 banks)
Rural credit
cooperatives
(33,586 banks)
Policy banks
(3 banks)
City commercial
banks
(112 banks)
Foreign banks
(119 operation branches
216 representative offices)

5. The dominance of banks over capital market

6. The dominance of big four over other banks

7. The dominance of big four over all other
financial institutes

8. Overview of China’s SOCBs (continue)
Conclusion:
Financial institutes are dominated by banks
Banks are dominated by SOCBs
China’s fragile financial system means China’s fragile SOCBs
Financial reform = SOCBs reform

9. Overview of China’s state-owned commercial banks
The history of state-owned commercial banks
The progress of reform
Conclusion

10. The history of SOCBs
SOCBs were born in 1979—the first stage of financial reform
One bank and dual role
Central bank and commercial bank
Only source of loans and the center of disturbing investment and operating funds to SOEs
Confliction of dual function
SOCBs are from Peoples Bank of China
ABC—a rebirth from PBC
BOC—a separation of PBC’s foreign exchange division
CCB—transferred from PBC (1983)
ICBC—transferred from PBC (1984)

11. The history of SOCBs (continue)
SOCBs is the products of financial reform in China
Problems left in SOCBs
Loan to inefficient SOEs
Government agency but “genuine bank”
Non-profit orientation
Bureaucratism and Corruption
Monopoly on specified areas
Competition was not allowed among big four
No risk consciousness
Accumulation of Bad loans

12. Performance Comparison of BOCBs with the Top 10 in 2004 (Million Dollars)

13. Overview of China’s state-owned commercial banks
The history of state-owned commercial banks
The progress of reform
Conclusion

14. The progress of reform
Phase I ( ): the forming of framework of modern banking system
Phase II ( ): transition from specialized bank to commercial bank
Phase III (since 2000): SOCBs Comprehensive Reform

15. The progress of reform (cont 1)
Phase II ( ): transition from specialized bank to commercial bank
1994, recast Big Four as commercial banks
Creating 3 policy banks to divorce Big Four from “policy loan” dictated by government
China Agriculture Development Bank
China Development Bank
China Import and Export Bank
1995, pass the Commercial Bank Law
Enabling Big Four to become genuine commercial banks
Segregating business operations of banks, securities firms and insurance companies

16. The progress of reform (cont 2)
Asia financial crisis in 1997 speed up the reform of SOCBs in 1998
Highly concentrated supervision power in PBOC was separated into 3 parts:
PBOC
China Securities Regulatory Commission
China Insurance Regulatory Commission
Injecting $33 billion of capital into the Big Four to strengthen their ability of anti-risk

17. The progress of reform (cont 3)
1999, Establishing four asset-management companies, one for each of the banks
AMCs absorbed $169 billion in non-performing loans
By the end of 2003 they had disposed of $61.5 billion in bad loans, recovering some $12 billion

18. The progress of reform (cont 4)
Phase III (since 2000): SOCBs Comprehensive Reform
A compressed timeframe of reform
China’s WTO entrance requires all banks (domestic and foreign) compete under the same conditions by the end of 2006
Problems faced by SOCBs

19. The progress of reform (cont 5)
High non-performing loan ratio
Source: database from People’s Bank of China
A fragile banking system

20. The progress of reform (cont 6)
Low profitability
Source: China Financial Yearbook,

22. The progress of reform (cont 7)
Capital inadequacy
Source: Annual report of Big Four
Capital adequacy ratio had been reached 8% after Ministry of Finance injecting $33 billion in SOCBs in But the ratio kept declining after that

23. The progress of reform (cont 8)
Reason of capital inadequacy:
Few ways of increasing capital
Low profitability
Rapid extension of credit
Poor corporate governance mechanism
The principles of corporate governance mechanism (codified by OECD) include:
Independent board of directors
Treatment of minority shareholders
Coordinating the interests of capital owners and business managers.

24. The progress of reform (cont 9)
Banks operate on a commercial basis with modern corporate governance should have:
Independent boards of directors
Sound internal control and risk management
Comprehensive external audits
Foreign strategic investors
SOCBs have poor corporate governance mechanism
Close relation with government. Bankers are government officers but not business men.
Weak incentives to support business operating
Weak internal control and risk management

25. The progress of reform (cont 10)
Resolutions
Improve the supervision and regulation environment
Creating China Banking Regulation Commission
Narrowing the focus of PBC on monetary policy
Increase capital adequacy and writing-off NPLs
Injecting capital into SOCBs
$45 billion into BOC and CBC in 2003;
$15 billion into ICBC in May 2005
Issuing subordinated bonds RMB 49.4 billion by BOC and CBC in 2004

26. The progress of reform (cont 11)
Improve legal environment
Passing three banking laws
Transfer from wholly state-owned bank to joint-stockholding bank
BOC and CBC as the pilot of test suppose to go to public in 2005
ICBC suppose to go to public in 2006
Improve corporate governance mechanism
BOC and CBC have established the General Meeting of Shareholders, the Board of Directors, the Board of supervisors
Under the board of directors, five committees are set up, including Strategy Committee, Risk Management Committee, Audit Committee, Nomination & Remuneration Committee, Related Transaction Committee

27. The progress of reform (cont 12)
All efforts made to achieve the goals:
Strengthen risk management & internal control
Reform of the Human Resources Management
Create prudential Accounting System
Increase transparency
Establish Huijin company
A government agency
Function
A representative of state stock holder
Supervise the business operating of SOCBs

28. The progress of reform (cont 13)
Problems in joint-stock holding reform of SOCBs
Who select the top manager of bank?
A dilemma of state control and shareholder’ s interest
Government doesn't want to give up control
How to attract strategic investors?
The average equity size SOCBs is about RMB 150 billion, take 20% of equity need RMB 30 billion. It is a huge number for most potential investors

29. Overview of China’s state-owned commercial banks
The history of state-owned commercial banks
The progress of reform
Conclusion

30. Conclusion
Reform is slowly but steady during the past quarter of century
Spin of commercial operating from people’s bank of China into separated commercial banks
Strengthen the rule of law in financial system
Fight against NPLs
Improving the governance of banks
It is a long way but a bright way

31. THANKS!