Introduction
For the last 30 years, China has undergone a far-reaching economic expansion that can only be considered miraculous. However, this growth can be traced to the financial sector, especially the banking sector, and its assistance through loans and targeted investments as the primary form of investments to businesses. This paper aims to break down the evolution of the Chinese banking sector following the great financial revolution following the policy reforms of the 1990s that brought about the economic revolution. The paper aims to analyze the effects of reforms in the banking sector and understand the implications of the change to the system’s performance, growth, and efficiency. The paper will review several topics on the industry-first, starting with a brief history of the industry, the effect of reforms on the industry, key players, and trends in the sector, as well as the challenges facing the industry
A Brief Overview of the Chinese Banking Sector History
In the early history of the Peoples Republic of China, the Peoples Bank of China was the major player in the banking sector, wholly owned and operated by the state. However, this all changed in the 1970s when it was restructured to form what would now be known as the big four; four state-owned banks, Agricultural Bank of China, Bank of China, China Construction Bank, and the Industrial and Commercial Bank of China, formed to take over the PBOC’S role of credit allocation while the PBOC took a step back to become the country’s central bank (Barth, Li, Li, Song, 2013). Major reforms would soon follow in the 1980s, 1990’s and 2000’s especially when China opened up its borders and banking sector to foreign institutions as a requisite to joining the World Trade Organisation (Liu, 2018). However, the Chinese economy is still primarily government-planned. Therefore, the issue arose about who would carry out government policies if the big four banks became commercial banks. Thus in 1995, three policy banks were formed, Export-Import Bank, China Development Bank and the Agricultural Development Bank of China (Yulu et al., 2011). These three banks would be wholly responsible for carrying out the Chinese government’s policy actions.
Key Players and Trends
To better understand the Chinese Banking industry, we need to look at the key players in the industry and the trends that have been undergone or are undergoing in the ever dynamic industry. The key players shall be categorized in terms of the Central Bank (the PBOC) and the commercial Banks, the various big four and big three commercial banks, and their ties to the Chinese government and how that affects the operations of the business
The Central Bank/ the Peoples Bank of China
Arguably the most important player when it comes to the Chinese banking sector. The PBOC is the agency majorly responsible for the country’s high economic growth by supporting structural reforms while also maintaining lower inflation levels than would be expected for an influx of money supply as seen in China in the past thirty years. Through its monetary policies, it can influence the money supply in the country.
Established on December 1, 1948, in Huabei province, the PBOC would, later on, become the country’s central bank in 1984 (Allen, Gu, Qian, 2017). According to Allen, Gu, and Qian (2017), the mandates of the PBOC include:
- Formulating and enforcing relevant laws and rates that relate to its functions
- Drafting and implementing monetary policies
- Regulation of financial markets like the interbank borrowing and lending
Through these powers, the bank can implement financial reforms with nationwide reaching powers. Following the financial crash of 2008, China’s banking system faced a massive liquidity crunch following declining capital inflows and trade surpluses; the State council increased the mandate of the PBOC, especially its role in macro-control and financial management (Allen, Gu, Qian, 2017). That coupled with rising financial innovations means that the monetary policies are shifting from quantity-based instruments in favor of price-based tools meaning the country is moving towards a market-led system campaigned by the PBOC itself.
The PBOC has further made new monetary policy instruments, including standing lending facility, short term liquidity operations, pledged supplementary lending and medium lending facility since 2013 (Allen, Gu, and Qian, 2017)
Commercial banks
To talk about commercial banks in China would mean discussing the topic of corporate governance. Corporate governance refers to the rules followed by a company in its administration. In China, the majority of the banks are state-owned, and thus it is normal for the majority of the senior managers in a listed company to be state-appointed, which creates a problem with corporate governance that originated from the USA (Luo, 2016). The Chinese government encouraged the use of corporate governance of a top-down initiative where there is an owner, board of directors, and senior managers; however, these policies were made for anglo American countries, while in China, the government has a say in the appointment of senior managers in state-owned banks who in turn have seemingly more power than the board (Luo, 2016). In essence, this does retain power in the hands of the government directly, which limits the companies’ independence from government control.
Another issue with regards to state-owned banks is the matter of transparency. Luo (2016), in his research on disclosure and transparency of Chinese SOBs after their IPOs, discovered that in the case of a commercial bank like China Construction Bank, since its IPO in 2005, the number of pages of its annual report rose from 150 to 300 pages with the financial statements increasing from 10% of the information to 50% of the report
Emerging trends in Chinese Banking
Blockchain
Blockchain is a relatively new concept in the banking industry. It entails using several computer technologies and encryption algorithms in data storage and information transmission (Guo, Liang, 2016). Blockchains, an example being Bitcoin are both decentralized and permissionless, thus offering unlimited usage, especially in the banking industry regarding savings and money transfer. It has proved to be a very disruptive technology, and it is no surprise that banks have jumped on the bandwagon to stay afloat.
Different blockchain industrial agglomerations have emerged to promote blockchain technology, with the R3 consortium being the largest with 40 banks, including Ping An Bank and China Merchants Bank (Guo, Liang, 2016). in China, , Ping An Bank, WeBank, CMB Network Technology, and others have also joined to form the China Financial Blockchain Consortium (Guo, Liang, 2016).
Challenges Facing the Chinese Banking Industry
The massive burden of nonperforming loans (NPLs)
Following the government-directed policy of offering loans to mostly State-Owned Enterprises, the big four banks found themselves in the predicament of having massive NPLs in their balance sheets. These create a risk to the banks because they are losing money on these loans but can hardly do anything about t as they were primarily government-sanctioned loans. Recognizing its fault in the debt burden placed on the big four banks, the Chinese government in 2003 implemented a series of capital injections in foreign reserves into the banks to boost their balance sheets as they prepared to go online (Allen, Qian, Zhao and Zhang, 2012). Since 2003 through the Central Huijin Investment Company, the government has injected $45 billion into the BOC and PCBC, while ICBC received $15 billion in 2005 and ABC $19 billion in 2008 despite the financial crash. (Allen, Qian, Zhao, and Zhang, 2012). However, rather than help the banks, this creates a situation of too big to fail in the banks themselves. If the management thinks the government will always bail them out, they make high-risk investments that turn out to be NPLs, thus exacerbating the situation. (Allen, Qian, Zhao and Zhang, 2012)
Reduced Market Share by Internet Finance Companies
Recently a significant leap in internet and internet-based finance has accelerated the growth and expansion of the financial sector. According to data from the Chinese government, as of June 2016, internet financial users were 710 million while internet financial platforms stood at 8490 (Guo and Liang, 2016). The issue with this s that these platforms have advanced and penetrated the market much faster than the banking industry can catch up. That, coupled with the ease of using the services through smartphones, means that BAT( Baidu, Tencent, and Alibaba) are eating a large chunk of the banking industry’s market share (Guo and Liang, 2016).
References
Yulu, C., Yong, M., & Ke, T. (2011). The Chinese financial system at the dawn of the 21st century: an overview.
Barth, J. R., Li, L., Li, T., & Song, F. (2013). Reforms of China’s banking system. The evidence and impact of financial globalization, 345-353.
Allen, F., Gu, X., & Qian, J. (2017). People’s bank of China: History, current operations and future outlook. Current Operations and Future Outlook (October 10, 2017).
Luo, D. (2016). The development of the Chinese financial system and reform of Chinese commercial banks.
Guo, Y., & Liang, C. (2016). Blockchain application and outlook in the banking industry. Financial innovation, 2(1), 1-12.
Allen, F., Zhang, C., & Zhao, M. (2012). China’s financial system: Opportunities and challenges.
Liu, K. (2018). Chinese banking sector’s intrafinancial system debt issue. Journal of Asia-Pacific Business, 19(3), 166-181.
write