China Economic

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• Latest Development of Chinas Banking Sector
• Challenges faced by Chinas State-owned
  commercial banks
• Our response to the Challenges

 
 
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Chinas banking sector becomes stronger and more
diversified than ever through reforms and
opening-up.

• As of the end-2003, the assets of the banking
  institutions in China totaled US3.4 trillion,
  103 times higher than the level at the end of
  1980, and account for nearly 95 per cent of the
  aggregate assets of all financial institutions in
  China.

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• At the end of 2003, Chinas banking sector
  comprised 4 wholly State-owned commercial banks,
  3 policy banks, 11 joint-stock commercial banks,
  4 asset management companies, 12 city commercial
  banks, 192 foreign bank branches and
  subsidiaries, 209 foreign bank representative
  offices, 723 urban credit cooperatives, 34577
  rural credit cooperatives, 3 rural commercial
  banks, 1 rural cooperative bank, 74 trust and
  investment companies, 74 finance companies, 12
  financial leasing companies, 3 auto financing
  companies and numerous postal saving institutions.

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• The trend towards a diversified banking sector is
  also demonstrated by the increasingly diversified
  equity structure of the Chinese financial
  institutions, whose equity owners now range from
  the government, State-owned enterprises, private
  companies, shareholding corporations and
  foreign-funded entities, and the private and
  foreign equity holding sees a notable increase.

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China has further opened its banking sector in
compliance with the WTO principles and Chinas
WTO commitments.

• By the end of 2003, altogether thirteen cities
  have been opened to foreign banks to conduct
  renminbi business, while the eligible foreign
  banks are now allowed to offer renminbi business
  to Chinese enterprises.
• The permitted equity share of a single foreign
  investor in a Chinese financial institution is
  raised to 20 per cent from the previous 15 per
  cent.
• The minimum operating capital requirements for
  foreign banking institutions are lowered and the
  procedures and processes for their market entry
  are streamlined.

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The State-owned commercial banks are still
playing a predominant role.

• The four wholly State-owned banks are the major
  fund raisers and suppliers for the countrys
  economic construction. As of the end-2003, their
  assets totaled RMB15 trillion, accounting for 55
  per cent of the total banking assets their
  deposits made up 57 per cent of the total and
  loans made up 55 per cent. They also undertook
  nearly 80 per cent of the gross payment and
  settlement volume.

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• The big four have made tremendous contributions
  to Chinas economic development and placed an
  irreplaceable role in Chinas economic reforms.
• They have provided the needed funding support for
  numerous development and infrastructure projects
  neglected by the private capital.
• They have played a significant role in promoting
  the balanced economic and social development.
• They have assisted in the economic and social
  restructuring campaign and assumed part of the
  associated cost.
• They have greatly contributed to the
  implementation of the nations policy strategy of
  employment and education to all.

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The big four are trying to enhance their internal
management though reforms and have made notable
progress.

• They have all established the mechanisms for
  asset/liability ratio management and risk
  management, and adopted the five-category loan
  classification system and prudent accounting
  policies and rules.
• Their NPL ratio was reduced by 13 percentage
  points from 33 per cent at the end of 2000 to 20
  percent at the end of 2003, and their outstanding
  balance of NPLs was lowered by RMB340.2 billion
  during the same time interval.

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• Latest Development of Chinas Banking Sector
• Challenges faced by Chinas State-owned
  commercial banks
• Our response to the Challenges

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Despite their achievements, the big four are
still confronted with a number of challenges.

• There are significant deficiencies in their
  corporate governance.
• Their average NPL ratio registered at a
  20-percent high level at the end of 2003 measured
  by the five-category loan classification
  criteria.
• Their capital adequacy ratio is low and profit
  earning capacity is weak.
• They appear weak in product innovations, and
  their services still focus on the traditional
  deposit-taking and lending activities.

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• According to Chinas WTO commitments, the
  Chinese banking market will be fully opened to
  the outside world at the end of 2006, which means
  that foreign banks will be allowed to engage in a
  full range of banking business, and the Chinese
  banks will have no other choices but to abide by
  the internationally recognized market rules and
  participate in the fierce market competition.
• The Chinese banks, in particular the big four,
  are facing a crucial task of improving their
  competitiveness by further deepening their
  reforms and restructuring.

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• Latest Development of Chinas Banking Sector
• Challenges faced by Chinas State-owned
  commercial banks
• Our response to the Challenges

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Setting the objective for the reforms

• To build the State-owned commercial banks, within
  the grace period provided by Chinas WTO
  agreement, into internationally competitive
  joint-stock commercial banks with adequate
  capital, stringent internal controls, safe and
  sound business operations, quality products and
  services as well as desirable profitability.

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Setting approaches for carrying out reforms

• Each bank formulates and implements its own
  reform policies and strategies
• Based on the banks progress with reforms, the
  eligible banks will be allowed to be transformed
  into joint-stock banks with the government being
  the controlling shareholder.
• After the careful selection, Bank of China (BOC)
  and China Construction Bank (CCB) were chosen at
  the end of 2003 to carry out the joint-stock
  reforms on a pilot basis.

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Taking measures to relieve the banks of their
historical burdens

• The non-performing asset burdens of the four
  banks are largely inherited from the past.
• The reasons for the accumulation of NPL burdens
  at the big four are different from those in
  western countries.
• The loss of Chinese banks is by nature the cost
  paid by China for the transition towards a
  market-oriented economic system.
• The BOC and the CCB received a capital injection
  worth of US45 billion to boost their capital
  strength and help them forge ahead the pilot
  joint-stock reforms.

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Taking measures to root out the deficiencies of
banks

• We set ten guidelines for building up corporate
  governance
• To establish a clear corporate governance
  structure comprising the general shareholders
  meeting, a board of directors, a board of
  supervisors and an executive management, with all
  the necessary checks and balances
• To select domestic and foreign strategic
  investors to form synergy
• To set clear-cut business strategies for maximum
  profitability

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• 4. To establish sound decision-making process,
  internal controls and risk management system
• 5. To adopt reduced layers of hierarchy and a
  line management structure as well as streamline
  business and management procedures
• 6. To adopt a human resource management system
  that highlights accountability and motivation
• 7. To establish policies and procedures for
  prudent accounting practices and stringent
  information disclosure

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To build up the information technology system
to secure quality management and services9. To
underpin staff training and recruitment of
qualified people for key positions 10. To
highlight the professional role of intermediary
institutions and proceed with the joint-stock
restructuring in a prudent manner
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Setting benchmarks to assess the banks reform
performance

• Assessment of business performance
• Net ROA (Return on Assets) ratio will reach 0.6
  per cent by 2005, and be further increased to the
  level of the best international banks by 2007.
• Net ROE (Return on Equity) ratio will reach 11
  per cent or above by 2005, and be further
  increased to 13 per cent or above by 2007.
• Cost/income ratio will be controlled within the
  range of 35 to 45 per cent from 2005.

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• Assessment of asset quality
• Non-performing asset ratio will be controlled
  within the range of 3 to 5 per cent.
• The BOC and the CCB are required to apply the
  five-category loan classification criteria for
  assessing both credit and non-credit assets by
  the end of this year.

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• Assessment of prudent operations
• The largest exposure to a single borrower will be
  no more than 10 per cent of the total capital.
• Capital adequacy ratio will be above 8 per cent
  at any point.
• NPL provisioning coverage ratio will reach 60-80
  per cent by 2005 and try to reach 100 per cent by
  2007.

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• The joint-stock reforms of State-owned
  commercial banks are an unprecedented practice in
  China, but we are prepared for the complex and
  arduous tasks ahead of us.

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• THANK YOU