Banking Developments in the Peoples Republic of China

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Banking Developments in the Peoples Republic of
China John W. Campbell, Partner Presented at
the Bankers Association for Finance and
Trades14th Annual Conference on International
TradeNovember 4-5, 2004The Hotel
Intercontinental, Chicago, IL
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Contents

• PRC Banking Industry Overview
• Reform Activities
• Potential Challenges

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(No Transcript)
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The Role of Banks in the PRC Economy Continues to
Evolve
1990
-
Present
Pre 1980
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980
-
1989
1990
-
Present
Pre 1980
1
980
-
1989
 
 
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Chinas Banking Industry is Dominated by the
Big-Four
Source Almanac of Chinas Finance and Banking
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Commercial Realities Economy
Robust and Sustained Economic Growth - China
10-yr avg. Real GDP Growth 10 - China
Expected GDP Growth 8 Low levels of
Inflation - China CPI 0.8 Expanding Foreign
Trade - China Trade Balance continues to
increase Rising per capita Income - China per
Capita Disposable Income of Urban Households has
increased significantly High Savings Rates -
China Savings as of GDP is usually above 35
Source CEIC, GS Economics Research
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Commercial Realities WTO
Implementation of Chinas commitments under the
WTO presents the PRC banking industry with both
opportunities and challenges through the gradual
lifting of regulatory restrictions u Foreign
banks conducting local currency
business u Location of foreign currency
business u Regulations related to foreign
ownership and licensing requirements
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Commercial Realities Consumer Banking
Relatively undeveloped Consumer Banking
Segment - China consumer loans as of total
loans is less than 10 Residential Mortgages -
Growth of Chinas residential properties sale has
nearly doubled in the last 4 years Bank Cards
(including debit cards) - Growth of Chinas bank
cards has more than tripled in the last 4
years - Growth of Chinas bank cards transaction
amount is more than 5Xs the level only 4 years
ago Auto Financing - Growth of China auto
financing market is booming
Source Almanac of Chinas Finance and Banking,
company annual reports VISA International
Central Banks Journal of Economics
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Commercial Realities Wholesale Banking and
Other Activities
The indigenous PRC banks will increasingly need
to compete to retain the most desirable corporate
relationships currently, this is the earnings
engine Liberalization of regulators will enable
banks to engage in more sophisticated capital
markets and treasury products Similarly, trade
services will likely increase through the WTO
effect Leveraging these opportunities is
largely dependent on the effectiveness of
restructuring activities
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A Regulatory Overview
Pre-1998 Post-1998





State Council
State Council
State Council
State Council


State Audit and


Supervision Authority
















PBOC
1
CIRC
3
CBRC
2
CSRC
4
PBOC
1
CIRC
3
CBRC
2
CSRC
4






Stated
-
owned Banks
Stated
-
owned Banks








Big
-
Four
Big
-
Four




Division I
Policy Banks
Policy Banks






Joint
-
stock
Joint
-
stock




Foreign Banks
Commercial Banks
Foreign Banks
Commercial Banks












Other
Com
mercial


Non
-
bank Financial
Other
Commercial


Other
Commercial


Non
-
bank Financial

Division I
I

Di
vision I
I

I


Banks
Banks
Banks
Institutions
Institutions









Credit Co
-
operatives
Credit Co
-
operatives
Trust Companies
Trust Companies
Trust Companies









Non
-
bank Financial
Non
-
bank Financial
Non
-
bank Financial



Institutions Division
Institutions Division
Institutions Division



Finance Companies
Finance Companies
Finance Companies


Securities Companies
Securities Companie
s









Urban Co
-
operatives
Urban Co
-
operatives
Urban Co
-
operatives









Co
-
operatives
Co
-
operatives
Co
-
operatives



Division
Division
Division











Rural Co
-
operatives
Rural Co
-
operatives
Rural Co
-
operatives
Insurance Companies
Insurance Companies
1 Peoples Bank of China 2 China Banking
Regulatory Commission 3 China Insurance
Regulatory Commission 4 China Securities
Regulatory Commission
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Reform Activities and the Challenges Ahead
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Forces of Change The Reform Imperative in the
PRC Banking Industry
As new products, such as multi-currency credit
facilities, are introduced into the market
customers will become more sophisticated and
increasingly demand products that efficiently
meet their specific financing and risk management
requirements. As competition increases, financial
institutions will need to rely on innovation and
efficiency to promote profitability and focused
risk management initiatives to address a more
complex risk profile. Typically, large banks in
China are organized through a structure of
relatively autonomous branches. This structure
was designed to accommodate a bank serving as the
basic financial intermediary taking deposits
from local retail customers and lending funds to
local businesses in a number of discrete local
markets. As the economic focus in China evolves
from local markets to those based on products and
customer demand, the business of PRC banks will
cross local markets. The organization of PRC
banks will need to change to support both the
profile of customer demand and proper business
controls. In the current environment, global
standards for transparency, accountability,
control and risk management are becoming more
rigorous. Investors and depositors are looking
for stability and predictability. Regulators are
developing rules to require compliance with
global standards and increasingly exercising
their powers of enforcement. As PRC banks grow,
both domestically and internationally, the number
of constituents with a vested interest in the
financial position and performance of the banks
will increase. These constituents will include
investors, regulators, customers and
counter-parties. In the current environment
global standards of financial reporting and
disclosures are evolving to embrace transparency
and comparability. The constituents of PRC banks
will demand financial reporting that is
consistent with global practice.
Customers
Capital Markets
Organization Structure
Corporate Governance
Financial Reporting
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Challenges for PRC Financial Institutions

• Reducing the level of NPLs
• Encouraging a more competitive landscape for
  SOEs
• Maintaining the high level of low cost funding
  (savings)
• Strengthening the Enterprise Wide Risk Management
  Framework
• Achieving Supervision equivalency under the
  European Unions Financial Conglomerates Directive
• Maintaining market share post WTO requirements
• Attracting external capital
• Demonstrate a level of transparency consistent
  with global markets

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What does the future hold?

• Economic growth continues
• Increased International Competition will Help
  Strengthen the Financial System
• Broader Array of Financial Products will Evolve
• Compliance At the Heart of Risk Management -
  Enforcement
• Governance From Compliance to Strategic
  Advantage
• Alignment with Strategic Partners to Access
  International Capital Markets

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Conclusion

• That which is well planted cannot be pulled up.
• That which is closely embraced cannot slip away.
• The wise establish virtue firmly with themselves,
• And are honored for generations to come.
• Lao Tzu
• 5th Century B.C
• Chinas financial system is well planted for
  future growth, and is unlikely to slip away.

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