China (PRC) and Its “Long March” Toward a Modern Banking System Prof. Joseph Norton SJD., DPhil., LLD  Dedman School of La...
I. Primary Points To Be Made <ul><li>China in fact has had a long experience with banking, albeit in differing and largely...
I. Primary Points To Be Made (Cont.) <ul><li>The quest for a robust and open, but safe and stable banking system inherentl...
II. Brief History of China Banking System <ul><li>1845 - 1896 A Foreign Dominated Banking System </li></ul><ul><li>1896 - ...
1845 – 1896 A Foreign Dominated Banking    System <ul><li>The Oriental Bank Corporation, which was a British bank, opened ...
1896 – 1949 A Mixed But Undeveloped  Modern Banking System <ul><li>In 1896 the China Merchants Bank, the first Chinese mod...
1949 -1978 A Typical Socialist Banking  System <ul><li>During this period, only three state-owned banks existed in the who...
1978 – Present A Gradually Reforming Banking  System <ul><li>Under background of the “reformation and opening” policy, Chi...
III. Reform Process of the Banking System   <ul><li>A. Reconstruction of the Central Bank </li></ul><ul><li>B. Emergence o...
A. Reconstruction of the Central Bank <ul><li>Since 1949, the People’s Bank of China (PBC) has been the central bank. But ...
B. Emergence of Different Types of Banks <ul><li>Current Structure of China Banking System </li></ul><ul><li>- 4 State-own...
C. Opening the Domestic Banking Market to    Foreign Competitors <ul><li>According to the commitment China made when it ac...
Foreign Investment in Chinese Banks (Some Examples) 2.5% 2.5% Development Bank Bank of Nova Scotia IFC 85% takeover of Gua...
IV. Restructuring of State-owned Commercial Banks <ul><li>A. Brief Introduction of the “Big Four” </li></ul><ul><li>B. Inf...
A. Brief Introduction of the “Big Four” <ul><li>Bank of China  </li></ul><ul><li>Advantage: overseas network and internati...
B. Influence of Evolving International Standards <ul><li>Modern international banking standards, especially those issued b...
C. Optimization of Capital Structure <ul><li>Striping Off the NPL From the “Big Four”  </li></ul><ul><li>- In 1999, four a...
D. Reformation of the Ownership <ul><li>China Construction Bank (CCB) </li></ul><ul><li>- In 2004, the original 100% state...
E. Public Listing in Overseas Stock Market <ul><li>On October 27 2005, China Construction Bank Share-Holding Corporation g...
V. The Banking Regulatory System <ul><li>A. Three Pillars of the Legal Framework </li></ul><ul><li>B.  Division of CBRC an...
A. Three Pillars of the Legal Framework <ul><li>Law of People’s Republic of China on People’s Bank of China (promulgated i...
B. Division of CBRC and PBC's Responsibilities <ul><li>Responsibilities of China Banking Regulatory Commission (CBRC) </li...
B. Division of CBRC and PBC's Responsibilities (Cont.) <ul><li>Responsibilities of People’s Bank of China (PBC) </li></ul>...
C. Coordination between CBRC and PBC  <ul><li>PBC may recommend CBRC to inspect and supervise banking financial institutio...
D. Strengthened Regulation of Commercial Banks <ul><li>The amended Commercial Banking Law has strengthened regulation of c...
D. Strengthened Regulation of Commercial Banks  (Cont.) <ul><li>- Clarifying the establishment of procedures and  organiza...
VI. Challenges in the Banking Reform <ul><li>A. Non-performing Loans  </li></ul><ul><li>B. Lack of Deposit Insurance Syste...
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Jn Iowa China Banking Slides Pwpt

  1. 1. China (PRC) and Its “Long March” Toward a Modern Banking System Prof. Joseph Norton SJD., DPhil., LLD Dedman School of Law Southern Methodist University
  2. 2. I. Primary Points To Be Made <ul><li>China in fact has had a long experience with banking, albeit in differing and largely underdeveloped contexts. </li></ul><ul><li>China well-recognizes that its move toward a robust “socialist market economy” on a sustainable basis will require a modern international banking system. </li></ul><ul><li>A modern international banking system requires substantial compliance with evolving and heightened international prudential, operational, and anti-money laundering/terrorism financial standards, along with the liberalization/openness engendered by the move toward a more market-oriented economy and the embrace of the WTO/GATS requirements. </li></ul>
  3. 3. I. Primary Points To Be Made (Cont.) <ul><li>The quest for a robust and open, but safe and stable banking system inherently entails various substantial tensions and possible conflicts that will challenge China’s policymakers, lawmakers, enforcers and market participants. </li></ul><ul><li>Additional substantial pressures will be brought by China’s historic, ongoing (but fragile) economic growth rates; by the inevitable evolution of the Chinese Yuan into a major international currency; and by increasingly complex developmental demands and disparities. </li></ul><ul><li>China’s overall approach has been incremental and measured, but also forward-looking and internationally-oriented. </li></ul>
  4. 4. II. Brief History of China Banking System <ul><li>1845 - 1896 A Foreign Dominated Banking System </li></ul><ul><li>1896 - 1949 A Mixed But Undeveloped Modern Banking System </li></ul><ul><li>1949 - 1978 A Typical Socialist Banking System </li></ul><ul><li>1978 - Present A Gradually Reforming Banking System Influenced By International Standards </li></ul>
  5. 5. 1845 – 1896 A Foreign Dominated Banking System <ul><li>The Oriental Bank Corporation, which was a British bank, opened its Canton branch in 1845. It is the first modern banking institution in China. </li></ul><ul><li>Since then, European and American Banks had set up branches in China. Some Western banks even started business directly in China. </li></ul><ul><li>- For example, Hong Kong Shanghai Banking Corporation (HSBC) was established in 1865 to finance the growing trade between China and Europe. Recently has moved its headquarters back to London from Hong Kong. </li></ul>
  6. 6. 1896 – 1949 A Mixed But Undeveloped Modern Banking System <ul><li>In 1896 the China Merchants Bank, the first Chinese modern bank, was established in Shanghai by China Merchants Group which was a governmental business entity. </li></ul><ul><li>From that time, a mixed modern banking system began to develop. This system was composed of state-owned banks, private banks and foreign banks. </li></ul>
  7. 7. 1949 -1978 A Typical Socialist Banking System <ul><li>During this period, only three state-owned banks existed in the whole country, namely, People’s Bank of China, China Construction Bank, and Bank of China. </li></ul><ul><li>In the centrally planned economy, there is no demarcation between the central bank and commercial banks. All the three banks were tools for the implementation of economic and monetary policies/planning. </li></ul><ul><li>These banks were also vehicles for the deposit of domestic sav- ings. </li></ul>
  8. 8. 1978 – Present A Gradually Reforming Banking System <ul><li>Under background of the “reformation and opening” policy, China banking system has undertaken significant changes since 1978. </li></ul><ul><li>Besides the restructuring of the state-owned banking sector, main measures in the banking reform process include: reconstruction of the central bank; cultivating a range of banking institutions to activate the banking sector; and, gradually opening the domestic banking market to foreign competitors. </li></ul>
  9. 9. III. Reform Process of the Banking System <ul><li>A. Reconstruction of the Central Bank </li></ul><ul><li>B. Emergence of Different Types of Banks </li></ul><ul><li>C. Opening the Domestic Banking Market to Foreign Competitors </li></ul>
  10. 10. A. Reconstruction of the Central Bank <ul><li>Since 1949, the People’s Bank of China (PBC) has been the central bank. But before 1984, PBC also took deposits and granted loans. The reform of PBC started at the end of 1970s and was completed by three main steps: </li></ul><ul><li>- In 1979, part of PBC became Agricultural Bank of China, a govt-owned commercial bank serving the rural areas. </li></ul><ul><li>- In 1984, the rest commercial banking sector of PBC became the govt-owned Industrial and Commercial Bank of China. </li></ul><ul><li>- In 2003, the China Banking Regulatory Commission was established to take charge of the banking regulation: bank supervision/regulation was moved from the central bank. </li></ul>
  11. 11. B. Emergence of Different Types of Banks <ul><li>Current Structure of China Banking System </li></ul><ul><li>- 4 State-owned Commercial Banks, 1 of which got listed in HK. </li></ul><ul><li>- 3 State Policy Banks </li></ul><ul><li>- 12 Share-holding Commercial Banks, 6 got listed </li></ul><ul><li>- 120 Urban Commercial Banks </li></ul><ul><li>- 11 Rural Commercial Banks </li></ul><ul><li>- 48 Rural Cooperative Banks </li></ul><ul><li>- Thousands of Urban and Rural Credit Cooperatives </li></ul><ul><li>- Other Banking Institutions (12 financial leasing companies, 59 trust and investment companies, 74 finance companies, etc.) </li></ul><ul><li>- Foreign Banks </li></ul>
  12. 12. C. Opening the Domestic Banking Market to Foreign Competitors <ul><li>According to the commitment China made when it acceded into WTO in November 2001, foreign banking institutions are to enjoy the full access to the Chinese banking market by the end of 2006. </li></ul><ul><li>Now there are 238 subsidiaries or branches of 71 banks from 20 countries; 238 representative offices of 173 banks from 40 countries. </li></ul>
  13. 13. Foreign Investment in Chinese Banks (Some Examples) 2.5% 2.5% Development Bank Bank of Nova Scotia IFC 85% takeover of Guangdong Xi’an City Commercial Bank Note: See also recent CitiGroup consortium 19.9% ING Group Bank of Beijing 8% 7% HSBC IFC Bank of Shanghai 19.9% Citibank Shanghai Pudong Development Bank 19.9% HSBC Bank of Communications 10% Consortium led by Royal of Scotland Bank of China 9% 5.1% Bank of America Temasek Holding China Construction Bank Share Percentage Foreign Bank Chinese Commercial Bank
  14. 14. IV. Restructuring of State-owned Commercial Banks <ul><li>A. Brief Introduction of the “Big Four” </li></ul><ul><li>B. Influence of Evolving International Standards </li></ul><ul><li>C. Optimization of Capital Structure </li></ul><ul><li>D. Reformation of the Ownership </li></ul><ul><li>E. Public Listing in Overseas Stock Market </li></ul>
  15. 15. A. Brief Introduction of the “Big Four” <ul><li>Bank of China </li></ul><ul><li>Advantage: overseas network and international experiences </li></ul><ul><li>Industrial and Commercial Bank of China </li></ul><ul><li>Advantage: the largest scale of financial assets and domestic RMB business </li></ul><ul><li>Agricultural Bank of China </li></ul><ul><li>Advantage: the most extensive rural network </li></ul><ul><li>China Construction Bank </li></ul><ul><li>Advantage: the first “Big Four” bank publicly listed overseas </li></ul>
  16. 16. B. Influence of Evolving International Standards <ul><li>Modern international banking standards, especially those issued by the Basel Committee, have great influence on China’s banking reforms. This is purely a voluntary commitment of the PRC government. </li></ul><ul><li>One of the reasons to restructure the “Big Four” is to make them satisfy the 8% capital adequacy requirement in Basel Accord I. </li></ul>
  17. 17. C. Optimization of Capital Structure <ul><li>Striping Off the NPL From the “Big Four” </li></ul><ul><li>- In 1999, four asset management companies were established to take over the non-performing loans from the “Big Four”. </li></ul><ul><li>- Since 1999, over 1,400 billion RMB non-performing loans have been stripped off from the “Big Four”. </li></ul><ul><li>Capital Injection From the Foreign Exchange Reserves </li></ul><ul><li>- In December 2003, 22.5 billion U.S. dollars were injected to the capital funds of China Construction Bank and another 22.5 billion to that of Bank of China. </li></ul><ul><li>- In April 2005, 15 billion U.S. dollars were injected to Industrial and Commercial Bank of China. </li></ul>
  18. 18. D. Reformation of the Ownership <ul><li>China Construction Bank (CCB) </li></ul><ul><li>- In 2004, the original 100% state-owned CCB was restructured into a share-holding corporation. Huijin, a special-purpose government entity, became the controlling shareholder with an 85.23% stake. </li></ul><ul><li>- Foreign strategic investors are introduced. In 2005, Bank of America paid 3 billion U.S. dollars to purchase 9% stake in CCB. Temasek Holdings acquired 5.1%. </li></ul><ul><li>Bank of China (BOC) </li></ul><ul><li>- In 2004, the old BOC was restructured into a share- holding corporation also controlled by Huijin. </li></ul><ul><li>- In 2005, A consortium led by Royal Bank of Scotland got approval to buy a 10% stake in BOC. </li></ul>
  19. 19. E. Public Listing in Overseas Stock Market <ul><li>On October 27 2005, China Construction Bank Share-Holding Corporation got listed on Hong Kong Stock Exchange. It was the first “Big Four” bank listed overseas. </li></ul><ul><li>According to the ambitious schedule of the Chinese government, Bank of China will be listed in 2006 and Industrial and Commercial Bank of China and Agricultural Bank of China in 2007 or 2008. </li></ul>
  20. 20. V. The Banking Regulatory System <ul><li>A. Three Pillars of the Legal Framework </li></ul><ul><li>B. Division of CBRC and PBC's Responsibilities </li></ul><ul><li>C. Coordination between CBRC and PBC </li></ul><ul><li>D. Strengthened Regulation of Commercial Banks </li></ul>
  21. 21. A. Three Pillars of the Legal Framework <ul><li>Law of People’s Republic of China on People’s Bank of China (promulgated in 1995, amended in 2003) </li></ul><ul><li>Law of People’s Republic of China on Banking Regulation and Supervision (promulgated in 2003) </li></ul><ul><li>Law of People’s Republic of China on Commercial Banking (promulgated in 1995, amended in 2003) </li></ul>
  22. 22. B. Division of CBRC and PBC's Responsibilities <ul><li>Responsibilities of China Banking Regulatory Commission (CBRC) </li></ul><ul><li>- Examining and approving the establishment, dissolution, business scope and any change in the constitution of banking institutions. </li></ul><ul><li>- Regulating business activities of these institutions and verifying the sources of funds and credibility of major shareholders. </li></ul><ul><li>- Supervising banking financial institutions and imposing sanctions for non-compliance. </li></ul><ul><li>- Examining financial and accounting records. </li></ul>
  23. 23. B. Division of CBRC and PBC's Responsibilities (Cont.) <ul><li>Responsibilities of People’s Bank of China (PBC) </li></ul><ul><li>- Formulating and implementing monetary policies and taking measures to avoid and minimize risks in the financial market and to stabilize RMB. </li></ul><ul><li>- Overseeing and promoting the development of the financial markets from a macro perspective. </li></ul><ul><li>- Regulating the inter-bank lending market, the inter- bank bond market, the inter-bank foreign exchange market, the gold market, and directing and deploying anti-money laundering measures. </li></ul>
  24. 24. C. Coordination between CBRC and PBC <ul><li>PBC may recommend CBRC to inspect and supervise banking financial institutions to ensure their operations are in line with monetary policies. </li></ul><ul><li>The amended Commercial Banking Law distinguishes situations where each PBC and CBRC may penalize commercial banks who have acted in violation of laws. </li></ul><ul><li>The State Council will establish a financial supervisory and reconciliation mechanism to facilitate the information sharing between the two regulatory agencies. </li></ul>
  25. 25. D. Strengthened Regulation of Commercial Banks <ul><li>The amended Commercial Banking Law has strengthened regulation of commercial banks by: </li></ul><ul><li>- Requiring commercial banks to establish a sound risk management and internal control system </li></ul><ul><li>- Adjusting certain requirements relating to the operation of commercial banks </li></ul><ul><li>- Extending the time requirement on commercial banks with their disposal of immovable properties or equity interests obtained through enforcement </li></ul>
  26. 26. D. Strengthened Regulation of Commercial Banks (Cont.) <ul><li>- Clarifying the establishment of procedures and organizational structure of commercial banks, the protection mechanism for depositors as well as some basic lending principles </li></ul><ul><li>- Outlining rules on finance and accounting, takeover and termination of commercial banks </li></ul><ul><li>- Removing the wholly state-owned banks’ obligation to provide loans to projects specifically approved by the State Council </li></ul>
  27. 27. VI. Challenges in the Banking Reform <ul><li>A. Non-performing Loans </li></ul><ul><li>B. Lack of Deposit Insurance System </li></ul><ul><li>C. Management of On-going Internationalization and Openness under WTO/GATS </li></ul><ul><li>D. Regulation of Financial Conglomerates </li></ul><ul><li>E. Reconciliation of Modern Commercialization with Significant Development Needs </li></ul><ul><li>F. Accommodation of An Impending Major International Currency and One of World’s Largest Economies with Global Trading & Investment Links ( US, Canada, EU, Latin America, SE Asia, Indian Subcontinent, Africa, ME) </li></ul>

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