China's banking system: Issues for congress

China's Banking System, Currency Policy and Economic Conditions

Volumn , Issue , 2012, Pages 1-62

  Martin, Michael F ^a  

^a CRS ^*  (United States)

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EID: 84891975215     PISSN: None     EISSN: None     Source Type: Book    
DOI: None     Document Type: Chapter

References (131)

1. Other authors refer to these banks as being "corporatized." This report will utilize the term most frequently used in the Chinese press, "equitized." 2 The concept of qualified foreign institutional investors, or QFIIs, was created by the Chinese government in 2002 to allow selected foreign investors a means by which they could purchase RMB-denominated shares of Chinese companies (the so-called "A shares") in the Shanghai or Shenzhen stock markets. As of July 2011, the China Securities Regulatory Commission (CSRC) had licensed 113 QFIIs with a combined investment limit of $20 billion.
2. Shares sold in Shanghai and Shenzhen are frequently referred to as A Shares and B Shares, respectively.
3. shares sold in Hong Kong are called H Shares. A and B shares are denominated in renminbi.H shares in Hong Kong dollars. Because the shares sell in separate markets, their prices may diverge from each other.
4. In August 2010, the China Banking Regulatory Commission and the China Securities Regulatory Commission limited the share holdings of employees to 10% for any local bank wishing to issue shares or wanting to be listed on either the Shanghai or Shenzhen stock exchange.
5. China Banking Regulatory Commission, Annual Report 2010, April 2011, p. 26.
6. http://www.cbrc.gov.cn/english/info/yjhjj/index_links.jsp?s=dbi7 "China Puts Rural Credit Cooperatives on Sale," Reuters, September 1, 2010.
7. China Banking Regulatory Commission, Annual Report 2010, April 2011, p. 26.
8. Unless otherwise noted, this report will use the prevailing official exchange rate on November 28, 2011, which was 6.3585 yuan per U.S. dollar.
9. PriceWaterhouseCoopers, Foreign Banks in China, May 2010.
10. For an overview of the types of institutions involved in underground banking, see Nicholas Borst, "China Shadow Banking Primer," China Economic Watch, Peterson Institute for International Economics, November 1, 2011.
11. "Small, Mid-sized Companies Turn to Pawnshops for Loans," China Daily, February 16, 2011.
12. For an overview of China's underground banking, see Nicholas Borst, China Shadow Banking Primer, Peterson Institute for International Economics, Washington, DC, November 1, 2011.
13. Andrew Moody and Hu Haiyan, "Cash Crunch Delivers a Knock-out Blow," China Daily- USA Weekly, January 6- 12, 2012.
14. "China Shuts Down 500 Underground Banks in 8 Years: Ministry," Xinhua, November 22, 2010.
15. Zhang Bing, Zheng Fei, and Zhao Jingting, "Cash Crash for Wnezhou's Private Loan Network," Caixin, November 10, 2011.
16. "China to Control Shadow Banking and Private Lending," BBC, October 19, 2011.
17. The official name of China's currency is renminbi, or "people's currency." It is denominated in units called yuan (. One yuan is divided into 10 jiao (), popularly known as mao (), or 100 fen (). Some publications refer to China's currency as the yuan, conflating the name of the currency with its unit of denomination.
18. The PBOC is also responsible for China's exchange rate policy, but that function will not be addressed in this report.
19. From CRS interviews with officials at Chinese banks, it is unclear if the banks view increases of the reserve requirement as an effort to reduce inflation by encouraging banks to reduce lending.
20. By comparison, the Federal Reserves' current reserve requirement for "net transaction accounts" (demand deposits, automatic transfer service (ATS) accounts, NOW accounts, and other highly liquid accounts) is 10% on holdings above $58.8 million. On December 5, 2011, PBOC reduced the reserve requirement by 50 basis points, the first cut since December 25, 2008.
21. The types of accounts included margin deposits, letters of guarantee, bills of exchange, and letters of credit.
22. For more information, see Wang Shenlu, "Central Bank Swerves to Block Deposit Detours," Caixin, September 7, 2011.
23. The size of the band varies for different types of interest rates. For example, bank lending rates can be no less than 90% of the benchmark rate set by the PBOC, with no upward limit. Following the devastating Wenchuan earthquake in May 2008, the PBOC lowered the floor mortgage rate to 70% of the benchmark rate.
24. Historically, the PBOC has maintained a roughly 3% range between comparable deposit and loan benchmark rates, thereby insuring banks approximately a 3% gross profit margin.
25. Wang Bo, "14% Credit Growth Predicted for 2011," China Daily, December 23, 2010.
26. People's Bank of China, "Financial Statistics, 2011," press release, January 12, 2012.
27. Zhou Xiaochuan () was appointed Governor of PBOC in December 2002. He is considered a close associate of ex-Premier Zhu Rongji and ex-General Secretary of the Chinese Communist Party (CCP) Jiang Zemin ().
28. Zhou Xiaochuan, "A Few Thoughts on Market-based Interest Rate Reform," December 17, 2010.
29. For an analysis of the Asian Financial Crisis of 1997, see CRS Report 98-434, The Asian (Global?) Financial Crisis, the IMF, and Japan: Economic Issues, by Dick K. Nanto.
30. China Banking Regulatory Commission, "Defend the Bottom Line; Better Serve the Real Economic Development," press release, December 14, 2011.
31. The other 50% is held by Central Huijin Investments, a wholly-owned subsidiary of China Investment Corporation.
32. Article 5 of Law of the People's Republic of China on the People's Bank of China, adopted in 1995, requires that the PBOC obtain the approval of the State Council for all its major decisions.
33. Leona Chen, "Will China Buy into BHP Billiton?" China Stakes, April 13, 2008.
34. Tim Johnston, "Beijing Buys into Australian Banks," International Herald Tribune, January 4, 2008.
35. China has created a domestic counterpart to the QFIIs-the "qualified domestic institutional investors," or QDIIs. The QDIIs are funds by which Chinese individuals can invest overseas.
36. "The SAFE Approves Investment Quotas for Qualified Institutional Investors in a Prudent and Orderly Manner," press release, State Administration of Foreign Exchange, April 29, 2011.
37. "China to Allow QFIIs to Trade Stock Index Futures," Reuters, May 7, 2011.
38. Contents of this section are based in part on information provided by the International Trade Administration of the Department of Commerce on its webpages-http://www.mac.doc.gov/China/Docs/industryfactsheets/banking.html and http://www.mac.doc.gov/China/ServicesSchedule.pdf.
39. Report of the Working Party on the Accession of China, "Addendum, Schedule CLII-The People's Republic of China, Part II-Schedule of Specific Commitments on Services, List of Article II MFN Exemptions," WT/MIN(01)/3/Add.2, November 10, 2001.
40. There were restrictions on the minimum amount (initially, 1 million yuan) a branch of a foreign bank can accept in a time deposit from a Chinese citizen.
41. The regulations allow for an extension of up to three months "in special circumstances." If there is an extension, the applicant is to be notified in writing.
42. Text of the law available online at http://www.china.org.cn/english/DAT/214824.htm.
43. Office of the U.S. Trade Representative, 2011 USTR Report to Congress on China's WTO Compliance, Washington, DC, December 12, 2011.
44. The six banks are: American Express, Cathay Bank Corporation, Comerica Bank Corporation, Far East National Bank, MetroBank, PNC Bank and State Street Bank and Trust.
45. Office of the U.S. Trade Representative, 2011 USTR Report to Congress on China's WTO Compliance, Washington, DC, December 12, 2011.
46. "Foreign Lenders under Loan-to-Deposit Ratio Pressure," Trading Markets, December 27, 2010.
47. Susan Li and Stephanie Tong, "Citigroup Targets 100 China Branches in 2-3 Years," Bloomberg, December 6, 2010.
48. China has four super cities with the administrative status of provinces: Beijing, Chongqing, Shanghai, and Tianjin,. In the second administrative tier, below the four super cities, are the cities of Changchun, Chengdu, Dalian, Hangzhou, Harbin, Guangzhou, Ji'nan, Nanjing, Ningbo, Qingdao, Shenyang, Shenzhen, Wuhan, Xiamen, and Xi'an...
49. Agricultural Development Bank of China, 2010 Annual Report, 2011, http://www.adbc.com.cn/report/2010report/en/2.htm.
50. Export Import Bank of China, Annual Report 2010, 2011, http://english.eximbank.gov.cn/annual/2010.shtml.
51. For more on the risk management priorities of ADBC and China Ex-Im Bank, see http://www.adbc.com.cn/report/2010report/en/11.htm and http://english.eximbank.gov.cn /annual/2010/2010nb42-43.pdf
52. For more about the transformation of CDB, see Erica Downs, Inside China, Inc.: China Development Bank's Cross-Border Energy Deals, Brooking Institution, John L. Thornton China Center Monograph Series, Number 3, March 2011.
53. China Development Bank, 2010 Annual Report, 2011, http://www.cdb.com.cn/english/Column.asp?ColumnId=91.
54. For a more detailed examination of CDB's lending activities, see Erica Downs, Inside China, Inc.: China Development Bank's Cross-Border Energy Deals, Brooking Institution, John L. Thornton China Center Monograph Series, Number 3, March 2011.
55. A draft revision to China's Budget Law would change that. China's unicameral legislature, the National People's Congress, had been expected to review the draft language in August 2011, but its review was postponed and no new date has been set.
56. Victor Shih, :Big Rock Candy Mountain," China Economic Quarterly, June 2010, pp. 26-32.
57. The "Going Out" strategy involves increasing outward foreign direct investment, expanding product diversification, developing overseas brand recognition for Chinese goods, and offering new financial channels for overseas projects and investments.
58. Downs, pg. 25.
59. For more about the China -Africa Development Fund, see D. Marko Cimbaljevich, "China's New Safari into African Development," Foreign Policy Digest, May 1, 2010.
60. Erica Downs, Inside China, Inc.: China Development Bank's Cross-Border Energy Deals, Brooking Institution, John L. Thornton China Center Monograph Series, Number 3, March 2011, p. 61.
61. Paul B. McGuinness and Kevin Keasey, "The Listing of Chinese State-Owned Banks and their Path to Banking and Ownership Reform," China Quarterly, vol. 201 (March 2010), p. 145.
62. One example of this argument is "Privatisation in China: Capitalism Confined," Economist, September 3, 2011.
63. For example, BOC's non-executive directors include individuals from PBOC, SAFE, and the Treasury Bureau. Prior to coming to BOC, the bank's executive directors either worked at another equitized banks or PBOC.
64. For more about the role of SOEs and private corporations in Chinese political system, see CRS Report R41007, Understanding China's Political System, by Michael F. Martin.
65. For more details about the significance of China's government ranking system, see CRS Report R41007, Understanding China's Political System, by Michael F. Martin.
66. Wen Xiu, "Bank Sector Execs Follow the Revolving Door," Caixin, December 6, 2011.
67. See Wen Xiu, "Bank Regulator's Loan Rules Appear Bendable," Caixin, August 15, 2011.
68. China Banking Regulatory Commission, Guidelines on Corporate Governance of Commercial Banks (Consultative Document), July 26, 2011.
69. The PBOC stipulated that out of a bank's outstanding loans no more than 2% could be classified as "bad loans," 5% as "problem loans," and 8% as "loans of concern." 70 According to Carl E. Walter and Fraser J.T. Howie, the AMCs were modeled after the Resolution Trust Corporation, which was established by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) of 1989 (P.L. 101-73) to handle the disposal of the assets of the collapsed U.S. savings and loans associations.
70. Carl E. Walter and Fraser J.T. Howie, Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, John Wiley & Sons, 2011 for more details about China's asset management companies.
71. Carl E. Walter and Fraser J.T. Howie, Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, John Wiley & Sons, 2011.
72. For example, China Cinda AMC purchased 278.7 billion in NPLs from BOC and CCB on June 21, 2004 at 30.98% of face value. (Alpha & Leader Law Firm, "Transactions Involving Non-performing Loans ("NPL") in China," August 2007.
73. For more about China's stimulus program of 2008, see CRS Report RS22984, China and the Global Financial Crisis: Implications for the United States, by Wayne M. Morrison.
74. In general, local governments are allocated a portion of personal income taxes, business taxes, and value-added taxes, plus levy property taxes, vehicle taxes, and various service charges.
75. "China Debts Dwarf Official Data Too-Big-to-Finish Alarm," Bloomberg, December 19, 2011.
76. Andrew Batson and Jason Leow, "China Credit Boom Spurs Concern-Officials Weigh More Regulation, Fearing Banks are Taking on Too Much Risk," Wall Street Journal, April 21, 2009.
77. Olivia Chung, "China's Debt-Heavy Bosses Go on the Run," Asia Times, October 1, 2011.
78. "China to Control Shadow Banking and Private Lending," BBC, October 19, 2011.
79. Ma Guangyuan, "What Do We Have for Wenzhou's Rescue," China-US Focus, November 16, 2011.
80. "China to Control Shadow Banking and Private Lending," BBC-, October 19, 2011.
81. Zhang Bing, Zheng Fei, and Zhao Jingting, "Cash Crash for Wenzhou's Private Loan Network," Caixin, October 11, 2011.
82. "USA Weekly," China Daily, January 6-12, 2012.
83. "Credit Crunch," China Daily (USA Weekly), January 6-12, 2012.
84. "China Tests to Check Rise of Cash Crunch Among Developers," Bloomberg, August 5, 2010.
85. Wang Xiaotian, "Property Loan Risks Controllable: CBRC Chief," China Daily, October 20, 2011.
86. China Banking Regulatory Commission, Annual Report 2009.
87. Xing Yun, "Four Local Governments to Issue Bonds," Caixin, October 21, 2011.
88. Ma Guangyuan, "What Do We Have for Wenzhou's Rescue," China-US Focus, November 16, 2011.
89. "Local Go. Debts, Property Loans, Shadow Banking 'Controllable:' Banking Regulator," Caijing, October 20, 2011.
90. Wang Xiaotian, "Informal Funding 'Can Support' Real Economy," China Daily, December 16- 18, 2011.
91. "Credit Crunch," China Daily (USA Weekly), January 6-12, 2012.
92. Wang Xiaotian, "Chinese Banks' Net Profit Up 34.5%: CBRC," China Daily, March 30, 2011.
93. Asian Development Bank, Asia Economic Monitor, December 2011, p. 21.
94. Wang Shenlu, "Commercial Banks See Rise in Overdue Loans," Caixin, August 30, 2011.
95. "China's Local Government Debts Exceed 10t Uuan," China Daily, June 27, 2011.
96. "Moody's Sees Much Bigger Local Debt in China," Reuters, July 5, 2011.
97. "China under Test with CBY1.84T Local Debts Dues in 2012," Caijing, February 13, 2012.
98. "Moody's Sees Much Bigger Local Debt in China," Reuters, July 5, 2011 102 "China Bank's Non-Performing Loans May Hit 15Pct; Fitch Ratings," Caijing, June 22, 2011.
99. Lan Lan, "Local Debt NPL Problems Loom by 2013, Asset Manager's Poll Says," China Daily, September 20, 2011.
100. Belinda Cao and Michael Patterson, "China Bad Debt May Reach 60% of Bank Equity, Credit Suisse Says," Bloomberg, October 12, 2011.
101. China Banking Regulatory Commission, "The CBRC Held the Second Economic and Financial Situation Briefing of 2011," press release, May 9, 2011.
102. "China to Clean Up Billions Worth of Local Debt," Reuters, May 31, 2011.
103. Feng Zhe, "Bank Regulators Try Tailoring Bad-Debt Risk," Caixin, April 22, 2011.
104. Chen Jia and Wang Xiaotian, "CBRC Weighs Debt Extensions," China Daily, February 14, 2012.
105. For more details about WTO agreements and subsidies, see CRS Report R40606, Trade Remedies and the WTO Rules Negotiations, by Vivian C. Jones 110 U.S. government, Request for the United States to China Pursuant to Article 25.10 of the Agreement, WTO document G/SCM/Q2/CHN/42, October 11, 2011.
106. Most of the alleged subsidies take the form of preferential tax treatments.
107. Office of Policy, Import Administration, International Trade Administration, Countervailing Duty Investigation of Coated Free Sheet, C-570-907, March 29, 2007.
108. U.S.-China Economic and Security Review Commission, 2011 Report to Congress, Washington, DC, November 2011, p. 46.
109. Elizabeth J. Drake, "Chinese State-owned and State-controlled Enterprises: Policy Options for Addressing Chinese State-owned Enterprises," testimony before the U.S.-China Economic and Security Commission, February 15, 2012.
110. Song Ligang, "Interest Rate Liberalization in China and the Implications for Non-state Banks," Chapter 7, Financial Sector Reform in China, edited by Huang Yasheng, Tony Saich, and Edward Steinfeld, Harvard University Asia Center, Cambridge, MA, 2005.
111. Adam S. Hersh, "Testimony before the U.S.-China Economic and Security Review Commission on 'Chinese State-owned and State-controlled Enterprises," testimony before the U.S.-China Economic and Security Commission, February 15, 2012.
112. Erica Downs, Inside China, Inc.: China Development Bank's Cross-Border Energy Deals (Washington, DC: Brookings Institution, 2011).
113. CRS interviews conducted with Chinese banking regulators and senior bank officials conducted in 2010 and 2011.
114. Xiao Gang, "Don't Blame It on the Government," press release, Bank of China, August 26, 2010.
115. Pieter Bottelier, "Managing China's Transition Debt: Challenges for Sustained Development," Chapter 6, Financial Sector Reform in China, edited by Huang Yasheng, Tony Saich, and Edward Steinfeld, Harvard University Asia Center, Cambridge, MA, 2005.
116. For example, Jason Leow, "China Loans Hard to Get-Smaller Enterprises Left Dry as Bulk of Lending Goes to Big Projects," Wall Street Journal, May, 14, 2009.
117. Nicholas R. Lardy, Sustaining China's Economic Growth After the Global Financial Crisis (Washington, DC: Peterson Institute for International Economics, 2012), p. 1.
118. For more details of Lardy's evidence, see Chapter 1: China's Reponse to the Global Crisis, pp. 5-42.
119. The full text of "The Supplementary Circular on Supporting Commercial Banks to Further Improve Their Financial Services to Micro and Small-sized Enterprises" is available online (in Chinese) at: http://www.cbrc.gov.cn/chinese/home/docDOC_ReadView/20111025F37A5341A99DC5A4FF3C903C0A953000.html
120. For more information on the history of interest rate reform in China, see Nicholas R. Lardy, Sustaining China's Economic Growth After the Global Financial Crisis (Washington, DC: Peterson Institute for International Economics, 2012), p. 83-85.
121. Wang Jing, "Unirule: SOEs Register Negative Real Profits," Caixin, March 3, 2011.
122. Giovanni Ferri and Li-Gang Liu, "Honor Thy Creditors Beforan Thy Shareholders: Are the Profits of Chinese State-Owned Enterprises Real?," Hong Kong Institute for Monetary Policy, HKIMR Working Paper No. 16/2009, 2009.
123. The authors acknowledge that their study and its findings are based on some debatable assumptions and analysis. First, the use of the private enterprise interest rate as a proxy for the market interest rate is questionable. Second, the specification of the econometric model, and particularly the variables included in the estimations, may result in misattribution of the sources of interest rate differentials. Third, while the authors note that the SOE's lower interest rates may be provided because of other commercial factors-some identified by the authors-not included in the study.
124. Nicholas R. Lardy, Sustaining China's Economic Growth After the Global Financial Crisis (Washington, DC: Peterson Institute for International Economics, 2012), pp. 78-86.
125. Zhou Xiaochuan, "A Few Thoughts on Market-based Interest Rate Reform," a speech written on December 17, 2010, presented in January 2011. Available online at PBOC's webpage: http://www.pbc.gov.cn/.
126. People's Bank of China, "PBC's Monetary Policy Committee Held its 4th Quarterly Meeting in 2011," press release, January 5, 2012.
127. Han Tianyang, "Banker: Flexibility Needed in Deposit and Loan Rates," China Daily, January 19, 2012.
128. For more information on the criteria for consideration of CVD petitions, see CRS Report RL32371, Trade Remedies: A Primer, by Vivian C. Jones.
129. "China's Central Bank Reiterates Monetary Policy Stance in 2011," Xinhua, December 31, 2010.
130. Basel III is an agreement on capital requirements among countries' central banks and bank supervisory authorities. The agreement is not treaty; member countries-which includes the United States-man modify the agreement to suite their financial regulatory structures.
131. For more about Basel III and the U.S. financial system, see CRS Report R41467, The Status of the Basel III Capital Adequacy Accord, by Walter W. Eubanks.