Size and Structure of the Chinese Banking System - Essay Example

? To what extent is the incorporation of owned commercial banks improved the efficiency of the Chinese banking system ToWhat Extent is the Incorporation of State Owned Commercial Banks Improved the Efficiency of the Chinese Banking System Introduction During the past thirty year period, growth rate of GDP of China has reached to nine percent and attained the third position among the largest economies of the world. In addition with economic improvements, banking system of China has certainly put up to this event. With the objective of improving economic growth and sustaining social strength, the banking system has been study to step-by-step however, transformation through “touching stones to cross the river,” banking restructuring has accomplished significant outcomes (Chapman & Marshall, 2012). Since China gets more structured with the globe, because of these measures banking system of China now has turn out to be high-ranking in the global financial markets, corroborated by the rapid development of economy of China. The banking system of China is viewed as successful during the situation of financial crisis in 2008. Now, 3 drifted banks of China namely Bank of China (BOC), Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) are the biggest banks in terms of market value following the financial crisis which ruined many European and American banks. During 1990, many experimental and theoretical studies have analysed the chances and challenges that banking sector of China face (Chapman & Marshall, 2012). An important study regarding the Chinese Banking industry in the broader perspective of agreement of China with World Trade Organization (WTO) and economic transformation is extremely important (Chapman & Marshall, 2012). Discussion In 1980s, various banks of Latin American countries face crises. Lots of nations carry out a many steps to restructuring their misfunctioned banking industry, including fiscal relaxation and strengthened dictatorial regimes. Mostly these transformations were productive in strengthening banking industry and avoiding banking crisis. Transparent and imprudent authoritarian and administrative models played a significant role in the successful states (Wang, 2009). In 1978, in Chinese banking system the process of reformation was began with the establishment of the BOC and CCB. During last 3 decades, different measures of restructuring have been beginning piecemeal in order to strengthen the competitiveness and effectiveness of the domestic banks in China, particularly the state-owned commercial banks. Even so, the steps that have been carried out don’t give the required results. In 2004, official figures shows that the ratio of non-performing loans in the Chinese big four state-owned commercial banks that remained at 2.5 trillion Yuan (equal to three trillion US dollars at recent rate of exchange), was fifteen percent of the entire bank loans (Wang, 2009). This official estimation is viewed as to be undervaluing due to the oblique system of rating system. The ineffective operational mechanism, distribution system, and personnel management system result in failure of several significant restructuring steps. Therefore Chinese banking system requires a complete shakeup. Size and Structure of the Chinese Banking System During the last decade, the banking sector of China is greater in size comparative to the economy of China and has expanded drastically. Entire assets of Chinese banking system (as well as assets that are present in the international subsidiaries and branches of Chinese banks) were approximately equal to two hundred and forty percent of GDP at the end of 2011 which increase from two hundred percent that were in early period of 2000, however, from GDP domestic credit is estimated to be equal to one hundred and forty five percent (Chapman & Marshall, 2012). This ratio of credit-to- GDP is high comparative to states in which the per capita income is at equal levels. Intermediated credits are much developed than the other sources of funding in China: debt securities outstanding (without central bank and central government debt) and capitalization of equity market is equal to approximately thirty too forty percent of GDP. (Organisation for Economic Co-Operation and Development, 2010) In China the deposits and assets owned by the biggest 5 state owned commercial banks account for approximately half of Chinese banking system. In spite of the fact that most of the shares of these banks are owned by the state of China, the private segments are also the shareholders of these banks via their listings on the stock market of Hong Kong. The Banker states that throughout the world these state owned commercial banks are among the largest banks in terms of assets. In 2011, these banks were placed at fifth, twelfth, thirteenth, fifteenth and thirty seven positions in the world. In addition, according to Financial Stability Board, the BOC has been classified as a world’s significant bank in a systemic manner. The remaining system of banking in China is generally accounted for by other banks that are owned domestically. These banks includes policy banks, twelve small commercial banks, a postal savings bank, more than hundred local city commercial banks, and approximately 3000 small credit supportive and rural financial organisation. Financial intermediaries sector that are non-banks are growing rapidly that includes a financial institution (often affiliated with a holding company or manufacturer) that makes loans to individuals or businesses and organizations (usually with a commercial bank) that is engaged as a trustee or fiduciary or agent in handling trust funds or estates of custodial arrangements or stock transfers or related services (Fan & Morck, 2012). In addition, two percent of total assets include banks that are collectively foreign-owned, which represents a smaller part of the Chinese banking system. With the end of 2011, there had been seventy seven foreign banks that work under a branch license and thirty seven locally built-in foreign banks (Fan & Morck, 2012). (Fan & Morck, 2012) The above table shows the total assets that are owned by the state owned commercial banks of China. The Overall Banking System of China Before 1979, the only bank which played the double role of being both the a financial institution that accepts demand deposits and makes loans and provides other services for the public (commercial bank) as well as a government monetary authority that issues currency and regulates the supply of credit and holds the reserves of other banks and sells new issues of securities for the government (central bank) was the people’s banks of China. With the beginning of 1979, government of China started to restructure its banking system and set up four specialised banks. These banks were established during the period of 1979 till 1984. At the end of 1980s, when the scope of separate business decreased slowly, these four banks turned commercial banks. In 2001, even before the admission of China to the WTO, the Chinese government started to restructure its banking industry. For this purpose 4 companies for assets management of the four large state owned commercial banks were established. In 2001, these state owned commercial banks improve the efficiency of the banking system and increase their assets approximately equal to 1.4 trillion Yuan (which are equal to two hundred and twenty two billion US dollars at the recent rate of exchange) of non-performing loans. Over the last 6 years, induction of capital, exemptions of tax and the foreign investor’s introduction have improved the efficiency of the restructuring of the Chinese banking system. As a result all state owned commercial banks of China have increased their structures of assets and capital extraordinarily (ACFB, 2007) and after the success of these banks in stock exchange of Shanghai and Hong Kong, 3 of the state owned commercial banks namely BOC, ICBC and CCB have altered their structure of ownership. After the floatation of stock market, financial operation of these state owned commercial banks has been improved significantly (Fan & Morck, 2012). In 2007, banking system of China attained success when all of its state owned commercial banks stated that they have attained a substantial success in business. In 2007, among all these banks ABC was the most productive bank. Despite of the fear that in near future these Chinese banking system will fall into serious disarray, these state owned commercial banks have turn into the largest banks throughout the globe in the last 2 years (Fan & Morck, 2012). In recent times, the primary thrust of Chinese banking system transformation has been aimed at the efficiency and competitive potentials within single state owned commercial banking groups. In order to increase the efficiency of Chinese Banking System, the state owned commercial banks have carried out steps to introduce a culture of an independent credit and provide the credit managers with recent systems to check different risks factors. Further restructuring steps to increase the efficiency of banking system by increasing the implementing changes in state owned commercial banks operational level were taken. During 2002-2005 the branches of these banks has reduced by twenty seven percent whilst the number of employees has reduced by seven percent. These steps were successful in improving the efficiency of the Chinese banking system and increases competitiveness within individual banking groups. The state owned commercial banks rule both markets of business banking and retail banking for the state-owned enterprises. The state owned commercial banks have sixty three percent market shares of consumer deposits, whereas seventy percent of consumer loans. In addition to this, in 2005, at corporate level, the market share of deposits of these state owned commercial banks were seventy five percent and cooperate loans of approximately seventy percent. As state owned commercial banks have largest employers of banking sector so these banks have a great affect on the banking system, in 2005, fifty six percent of the total employees in entire banking system were part of these state owned commercial system. (Barth et al, 2009) Stages of reforming the Chinese SOCBs for Increasing Efficiency of Banking System From the research of Heffernan and Fu, the process of restructuring of state owned commercial banks for increasing the efficiency of these banks and the competitiveness of the entire banking system is divided in four phases (Barth et al, 2009). During the period of 1979-1983, the first reform step was the establishment of People’s Bank of China in to specialised state-owned banks from commercial banking. In order to fulfil the demands of government of China in economic sectors, the four specialised state owned banks, which include ABS, CCB, BOC, and ICBC, were established during the period of 1979 to 1984 (Barth et al, 2009). In banking system of the China these banks are also known as the “big-four”. In mid 1980s, these big four banks were all permitted to take deposit and to keep lending. This step was the starting process of commercialisation of these big four. The second phase was during 1994 and 1998, when these 4 big state owned banks was the commercialised. In order to increase the efficiency of banking system separate policies were required from commercial concerns in the limits of the specialised big four state owned banks, in 1994, various banks that are policy-oriented for example the Export-import Bank of China, Agricultural Development Bank of China and China Development Bank were establish under the State Council’s direct control. The limitation on operations of banking group in assigned fields of business was also reduced (Barth et al, 2009). The third phase was started from 1998 till 2003 in which the assets administration was done, particularly regarding the state owned commercial banks NPLs. All the way through the period of 1980s and 1990s, from the time of the establishment of the state owned commercial banks, lending were entirely inefficient in the non financial system of owned by the state, a substantial amount of risky loans had collected and for this purpose 4 companies were hired for the management of the assets of these state owned commercialised banks (Barth et al, 2009). The fourth and last phase stated from the year 2003 and still continues, in this period the restructuring of the Chinese banking system was the strategic coalition and partial flotation with overseas financial institutions. Win 2001, with the admission of China to the WTO, these steps of the government of China for the improvement of the financial and banking system was also accelerated. Another feasible step of the government of the China was the recapitalization of the state owned commercial banks prior to their listing on the stock markets (Barth et al, 2009). This listing got successful because of the injection of the sixty billion US dollars in the state owned commercial banks assets, during 2004-2005, and this floatation of these state owned commercial banks attracted the interest at extraordinary stage, as well as the foreign financial institution interest which were keen to come into the Chinese banking system which potentially produced a sizeable profit. From another point of view, these state owned commercial banks are made giving the impression of being profitable (Barth et al, 2009). Profitability of Chinese Banking System Over the past years, these sate owned commercial banks have maintained substantial profitability, showing total after tax returns on impartiality of fifteen to twenty percent annually. Over this period the development of the profit has been maintained by fast expansion in lending of banks (GUO, 2012). (GUO, 2012) The net interest margins provide the index of the typical profitability because of the activities of the banks of China to earn interest that continued at reasonably high levels of approximately 2.5 to 3 percent throughout current years. The efficiency of Chinese banking system’s loan portfolios has remained to progress as the non-profit loan’s removal phases are arranged from the balance sheets of the largest state owned commercial banks during the period of 2004-2008 (GUO, 2012). The average percentage of the NPLs for state owned commercial banks reduced from 2.4 percent to one percent during the period of 2008 and 2011; the corresponding ratio of NPLs for the complete Chinese banking system was at 1.8 percent. This improvement in performance of the loaned of banks during the last few years has matched with a period of time of strong development in credit and nominal incomes in China. (GUO, 2012) Including everything, the average capital ratio of Chinese state owned commercial banks stays substantially over the least possible standards of international restricting according to rule (GUO, 2012). (GUO, 2012) Conclusion The Chinese banking system was developed to commercial banking developed from mono-banking during the past few decades; these reforms were governed by the central bank. The banking system of China comprises of 5 of the largest state owned commercial banks of the world and several other smaller institutions and banks. The reforms of the government of China for the improvement of the state owned banks increases the efficiency of the Chinese banking system as well as it large related to the economy of China and these banks state owned commercial banks governed the allocation of the capital in China. With this bank ownership of the largest banks of the world to a great extent, the government of China proceeds to be involved considerably in the banking system, as well as the authorities of the China continue significant influence over the activities of depositing and lending by the banks. The capitalization and profitability of the banks of China have substantially improved due to the improvement in profitability of the state owned commercial banks during the last decade, which led to the improvement of the Chinese banking system. These improvement increases the efficiency of state owned banks as well as of the overall banking system of China. References Wang, M. (2009). China in the wake of Asia's financial crisis. Abingdon, Oxon, Routledge. Barth, J. R., Tatom, J. A., & Yago, G. (2009). China's emerging financial markets challenges and opportunities. New York, Springer. GUO, R. (2012). Understanding the Chinese economies. Amsterdam, Elsevier/AP. Organisation for Economic Co-Operation And Development. (2010). OECD economic surveys: China. Paris, OECD. Fan, J. P. H., & Morck, R. (2012). Capitalizing China. Chicago, University of Chicago Press. Chapman, Jake J., & Marshall, Upton N. (2012). China's Banking System, Currency Policy and Economic Conditions. Nova Science Pub Inc. Read More