Financial Development and
Regulatory Reform in China
HUANG Ying
China Institutes of Contemporary International Relations
Joint workshop on
Financial Evolution, Regulatory Reform and Cooperation
IDEAs – SNU Center for Social Sciences – SNU Political
Economy and Social Policy RC
17-18 May, 2013
Structural shifts in financial sector
•
•
•
•
•
Commercial banks
Non-bank financial institutions
Shadow banking sector
Capital markets
Local government debts
By the end of March 2013, the commercial banks
expanded their assets to 141.3 trillion RMB,
equivalent to 270% of its GDP.
150
100
50
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
0
assets
debts
The top ten profit-making banks in
the world in 2011
rank
bank
Profits（billion dollars）
1
Industrial and Commercial Bank of
China
43.2
2
Construction Bank of China
34.8
3
Bank of China
26.8
4
JP Morgan Chase & Co
26.7
5
Agricultural Bank of China
25.1
6
Wells Fargo
23.3
7
HSBC
21.9
8
Mitsubishi UFJ Financial Group
17.6
9
Citibank
14.6
10
BNP Paribas
12.5
Expansion of non-bank financial
institutions by the end of 2010
Financial
institutions
Securities
company
Fund
management
company
Insurance
company
bank
Total assets
Change from
(trillion RMB)
2006 (%)
2.24
530
2.51
332
4.9
120
92
116
Mushrooming of the non-financial
institutions
Non-financial institutions with financial
functions by the end of 2011,
• 4,282 small-scale loan companies
• 5,237 pawn companies
• 8,402 financing guarantee companies
Rise of Alternative Financing
Local government debts by the end
of 2010 (roughly 25 percent of GDP)
Shifts in Financial Structure
Expansion of M2 in China (trillion RMB)
High risks in the rapid expansion of
the banking sector
• (1) Property price bubble
• (2) Local government debts
• How healthy is banking sector in China?
• How to reform it to create a more equitable
competitive and resilient banking sector?
Commercial Banks’ Performances
in 2011
bank
Capital
adequacy ratio
(%)
Nonperformance
loan ratio (%)
Net profits
(billion yuan)
Industrial Commercial
Bank of China
13.2
0.94
208
Agricultural Bank of
China
11.9
1.55
122
Bank of China
12.9
1.00
130
Construction Bank of
China
13.7
1.09
169
Bank of Communications
12.4
0.86
51
All commercial banks
12.7
0.96
1040
Financial reform
• Narrow sense:
•
interest rate reform
•
•
•
private capital’s entry into financial sectors
capital market development
more open to foreign investments
• Broad sense
•
exchange rate formation mechanism reform
•
•
capital account opening
internationalization of RMB
Interest rate reform
• Why reform:
• (1) the negative deposit rates help foster the
shadow banking sector, which is a destabilizing
factor (various trust products; questionable
wealth management products; interaction
between the banks and non-bank entities).
• (2) the big gap between deposit and loan rates
raised the question why the banks are allowed
to make money so easily.
• (3) believed to make the banks more competitive
in the markets and more responsibility for their
own choices.
Interest rate reform
• Liberalizing the interest rates mainly means increasing
the lending rates and reducing the deposit rates.
• In June 2012, PBC announced that commercial banks
will be allowed to set the interest rates charged on their
loans at or above 80 percent of the government’s
benchmark rate, down from the previous 90 percent. The
central bank also gave them permission to set deposit
rates at or less than 1.1 times the government
benchmark rates.
• Later, PBC further lowered the lending rates from 80
percent of the benchmark rates to 70 percent.
Three financial reform pilot zones
(1) Wenzhou: transparency of private
lending.
(2) Zhujiang Delta: for internationalization of
its financial services.
(3) Quanzhou: to better service the real
economy.
Measures to develop capital
markets
Future reforms as identified by the China Financial Stability
Report 2012:
(1) Expand the direct finance.
(2) Encourage a multi-layered capital market system, to
diversify Banking system’s risks
(3) Actively promote the securitization of credit assets
guided by the principles of simplicity, transparency and
reasonable share of risk costs.
(4) Encourage the commercial banks to set up fund
management companies in an orderly way, to support
the healthy development of capital markets.
Exchange rate formation
mechanism reform
Reasons for pursue this reform
(1) conform to the international mainstream
practice under the great external pressures
(especially from US).
(2) Believed that a more resilient exchange rate
system can dampen the speculative attacks on
its currency, Which is against the experiences
of many floating exchange-rate countries.
China’s Current Account Surplus
Capital account opening
• Capital account opening has always been
connected with the need to internationalize RMB.
However, the link between the two is
questionable.
• Historical experiences by Britain and America
were clearly different.
• Japan’s efforts were fruitless.
• EU has never actively pursued it.
• For China, to promote the use of RMB is
necessary, but opening the capital account may
not be helpful.
Financial regulation system and
reform
• China’s financial regulation system is modeled
on America’s.
• China’s financial supervision system consists of
“one bank and three commissions”. One bank
refers to the Central Banks, and the three
commissions are Banking Supervisory
Commission, Securities Supervisory
Commission and Insurance Supervisory
Commission.
• As China moves to universal bank system, this
supervision system will be less effective.
Some observations:
• Chinese government’s mind is occupied by the
needs to liberalize the financial sector for
various reasons, not to revamp its regulatory
system.
• China successfully withstood the two big
financial crises, not because it had sound
financial system.
• China also thinks that the western banking
practices, including the new BASEL rules are
more advanced than its own. It’s still in the
phase of “learn and adapt”.