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
Contents
Overview of China’s state-owned
commercial banks
 The history of state-owned commercial
banks
 The process of reform
 Conclusion

Overview of China’s state-owned
commercial banks (SOCBs)
 The history of state-owned commercial
banks
 The progress of reform
 Conclusion

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)
Policy banks
(3 banks)
Rural credit
cooperatives
(33,586 banks)
City commercial
banks
(112 banks)
Foreign banks
(119 operation branches
216 representative offices)
The dominance of banks over capital market
CORPORATE
BONDS
OUTSTANDING
1%
BANK ASSETS
76%
GOVERNMENT
BONDS
OUTSTANDING
8%
STOCK MARKET
CAPITALIZATIO
N
15%
SIZE AND COMPOSITION OF CHINA'S FINANCIAL
SYSTEM-2002
The dominance of big four over other
banks
Rural Credit
Cooperatives
10%
Urban Credit
Cooperatives
Rural
1%
Commercial
Banks
2%
City
Commercial
Banks Joint-stock
5% Commercial
Banks
15%
Postal
Savings
Institution
3%
Foreign Banks
2%
Policy Banks
8%
SOCBs
54%
COMPOSITION OF BANK ASSETS IN CHINA-2004
The dominance of big four over all other
financial institutes
The Assets, Deposits and Loans of Financial Institutions RMB100 Million yuan, %
Balance
Total
Policy Banks
SOCBs
Joint-stock Commercial Banks
City Commercial Banks
Rural Commercial Banks
Urban Credit Cooperatives
Rural Credit Cooperatives
Trust Corporations
Finance Companies
Leasing Companies
Postal Savings Institution
Foreign Banks
Assets
shares
316006.68
24122.48
169320.5
46972.2
17056.3
565.36
1786.76
30767.02
2674.09
5854.1
215.37
10849.6
5822.9
Deposits
Balance
shares
1 248988.62
7.63%
1274.87
53.58% 144417.48
14.86% 40598.84
5.40% 14145.58
2.34%
500.8
0.57%
1588.76
9.74% 27340.16
0.85%
1750.11
1.85%
4954.1
0.07%
69.32
3.43%
10849.6
1.84%
1499
Source: the People’s Bank of China database, 2004.
Balance
Loans
shares
1 189298.46
0.51% 22228.24
58.00% 101182.99
16.31%
28859.41
5.68%
9030.97
309.7
0.64%
1014.54
10.98%
19241.56
0.70%
1331.85
1.99%
3097.8
0.03%
157.2
4.36%
0
0.60%
2844.2
1
11.74%
53.45%
15.25%
4.77%
0.54%
10.16%
0.70%
1.64%
0.08%
0.00%
1.50%
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

Overview of China’s state-owned
commercial banks
 The history of state-owned commercial
banks
 The progress of reform
 Conclusion

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)
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
Performance Comparison of BOCBs with the Top 10 in 2004
(Million Dollars)
Total Assets Net asset
/total asset
Top 10 average
SOCBs average
991704
472770
4.51
4.26
Earnings
before tax
11224
486
ROA
1.16
0.11
NPL
3.19
19.2
Earnings
per employee
152.19
2.49
Overview of China’s state-owned
commercial banks
 The history of state-owned commercial
banks
 The progress of reform
 Conclusion

The progress of reform
Phase I (1979-1993): the forming of
framework of modern banking system
 Phase II (1994-1999): transition from
specialized bank to commercial bank
 Phase III (since 2000): SOCBs
Comprehensive Reform

The progress of reform (cont 1)

Phase II (1994-1999): 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
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
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

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
The progress of reform (cont 5)

High non-performing loan ratio
NPL ratio
SOCBs
Japanese banks in average
French banks in average
British banks in average
American banks in average
2001
25.40%
Source: database from People’s Bank of China
– A fragile banking system
2003
20.36%
4.50%
4.20%
2.40%
1.80%
The progress of reform (cont 6)

Low profitability
Profit on Asset (%)
SOCBs

ICBC
ABC
BOC
CBC
Joint-stock banks
Foreign banks in China
1999
0.11%
2000
0.13%
0.36%
2.67%
0.39%
1.92%
2001
0.12%
0.14%
-0.24%
0.35%
0.21%
0.30%
2.26%
Source: China Financial Yearbook, 1999-2003
2002
0.24%
0.13%
-0.03%
0.45%
0.50%
－
－
Profit Per Employee (thousand dollars)
SOCBs(excludes ABC)
Top 10 banks in the world
2003
2.5
152
The progress of reform (cont 7)

Capital inadequacy
The Capital Adequacy Ratio of SOCBs
1997
1999
ICBC
2.55%
5.70%
ABC
2.14%
5.10%
BOC
4.70%
3.00%
CBC
2.73%
2.50%
2002
5.54%
1.44%
8.15%
6.91%
Source: Annual report of Big Four
– Capital adequacy ratio had been reached 8% after
Ministry of Finance injecting $33 billion in SOCBs in
1998. But the ratio kept declining after that
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.
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
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
The progress of reform (cont 11)

Improve legal environment
– Passing three banking laws

Transfer from wholly state-owned bank to jointstockholding 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
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
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
Overview of China’s state-owned
commercial banks
 The history of state-owned commercial
banks
 The progress of reform
 Conclusion

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
THANKS!