Title: Progress in Chinas Banking Sector Reform: Has Bank Behavior Changed
1Progress in Chinas Banking Sector ReformHas
Bank Behavior Changed?
2Content
- Why Banking Sector Reform is important
- Background information of the 4 SCBs BOC, CCB,
ICBC, and ABC - The reform timetable
- The overall performance of the Big 4 SCBs
- Conclusion
3Why Banking sector reform is important
- 1). -Underdevelopment in other financial
institution. - - Inefficient and political oriented lending
practice. - 2). - Bias to SOEs NPLs Twin Crisis.
- 3). - Discriminate lending decision toward hybrid
sector slower growth of the economy.
4Background information of the 4 SCBs BOC, CCB,
ICBC, and ABC
- Everything began with the Peoples Bank of China
(PBOC) in 1950. The pre-reform function of the
banking sector was to finance the physical
production plans through cash plan and credit
plan. - The first structural change began in 1978 and
ended in 1984, when PBOC departed from the
ministry and became the central bank. - The delegation of its functions are as following
- The Bank of China (BOC) Foreign trade and
investment. - The Peoples Construction Bank of China (CCB)
formed in 1954 Fixed investment
(manufacturing). - The Agriculture Bank of China (ABC) formed in
1979 Banking business in rural areas. - Industrial and Commercial Bank of China (ICBC)
formed in 1984 All remain commercial
transactions of PBOC.
5The Reform Time Table
- Recent reform was triggered by the Asian
Financial Crisis in 1997. It alarmed the
authorities the potential crisis raised by the
mass NPLs build up in the banking sector,
especially for the 4 SCBs. The total NPLs
amounted to USD 105.1 billion in 1999, which was
equivalent to 9.7 of GDP in the same year. - 1999 RMB 1.4 trillion NPLs, equivalent to 14
of the total loans of the state-owned banks and
17 of 1999 GDP, was transferred to 4 new formed
state-owned asset management companies (AMCs). - 2003 An injection of USD 45 billion of foreign
exchange reserve to two pilot banks, BOC and CCB. - 2005 ICBC began its reform.
- 2005 (early) over USD 80 billion, equivalent of
4.3 of GDP, was injected to ICBC. - 2005 (June) RMB 805 billion of NPLs was
transferred to the AMCs.
6Other reform measure
- Overall operation restructure
- Shifting loans weight from commercial loans in
total assets toward residential mortgages and
consumer loans. - Downsizing ICBC has laid off more than 200,000
employees by 2004. - Corporate governance and ownership restructuring
Introduced strategic investors with a minority
ownership share. - CCB In a deal with Bank of America Corporation
and Temasek (2005 June) - BOC In a deal with RBS, Merrill Lynch, and Li
Ka Shing (2005 Sept) - ICBC In a deal with Goldman Sachs, Allianz, and
American Express (2006 January)
7Pricing of Credit Risk
- Among many of the reforms, authorities also had
deregulated the lending and deposit interest
rates, providing the banks with room to improved
credit risk pricing. See Table 1. - Nevertheless, most new loans were still
contracted at or below the PBOCs benchmark rate
in the 4th quarter of 2005. - Furthermore, the interest rates distribution of
the 4 SCBs remained uniform. Meaning that the
lending decisions of these SCBs were not
commercially oriented. See Table 2. - The lack of a substantial increase in lending
interest rate and variation of interest rate
distribution may be caused by several factors - Slow implementation of changes in sizable SCB
operation. - Abundant liquidity for SCB
- Constraint of changing higher interest rate to
vulnerable client.
8Regulation of Interest Rates for Commercial Banks
9Distribution of Interest Rates Charged by SCBs
10The overall performance of the Big 4 SCBs(in
percent unless indicated otherwise)
11The overall performance of the Big 4 SCBs(in
percent unless indicated otherwise)
12The overall performance of the Big 4 SCBs(in
percent unless indicated otherwise)
13The overall performance of the Big 4 SCBs(in
percent unless indicated otherwise)
14Bank Lending and Enterprise Performance
- A fixed effect regression model is developed to
analyze the lending behavior of the SCBs. - growth rate of loansi,t ai ß1 ? GDPi, t-1
ß2 growth rate of saving depositsi,t ß3
(operating surplus/GDP)i,t ß4 (SOEs industrial
output/industrial output)i,t ß5 growth rate of
loansi,t-1 ß6 trendt ei,t (1) - for panel data i 1, ... , 31 provinces and
municipalities and t 1, ... , 8 years
(19972004). - Our main concern is whether banks take into
account the performance of enterprises, measured
by operating surplus to GDP in each province.
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18Result of the regression model 1
- 1). Availability of funding (growth rate of
saving deposit) - -Significant and positive relationship to the
lending growth rate for the SCBs. - -Insignificant for the BOC and other financial
institutions. - 2). Enterprise performance
- -Insignificant for other financial institutions
- -significant and negative relationship to the
lending growth rate for the SCBs, especially for
the ICBC. - 3). Share of SOE in output
- -Insignificant for both SCBs and other financial
institutions. This may implies that the SCBs
have reduced their lending to SOEs. - 4). The lending growth rate (-1)
- -The lending growth rate of other financial
institutions exhibit the martingale growth
pattern, meaning the current period of lending
growth rate is depending on the growth rate of
last period result.
19Result of the regression model 2
- 1). Change in saving deposit market share
- -It had significantly positive correlationship
with the market share of the 4 SCBs - 2). Operating Surplus/GDP
- -It had significantly negative correlationship.
- -This means SCBs were losing their market share
in those provinces which have more better
performance enterprises. Such as Beijing,
Fujian, Hebei and Shanghai. - 3). Change in lending market share(-1)
- -It had significantly negative correlationship.
- -This means if the SCBs had an increase in their
market shares in last period will probably had a
reduction in their current period market shares.
20Conclusion
- Regarding to the NPLs issue, I think all of the
SCBs are in the right direction. Together with
the help of the central government, they have
reduced their NPLs burden significantly. The
risk of insolvency is very low, however, the
recent increase in NPLs for ICBC and CCB should
not be neglect. - As to the question whether the SCBs have becoming
more commercialized in their lending decision,
the regression result shows that the SCBs
lending decision have become less favor to the
SOEs. However, there are still large room for
improvement for the SCBs, as the second
regression model suggests that the SCBs are still
losing their market share on those profitable
provinces.