Financial Development and Regulatory Reform in China

1
Financial Development and Regulatory Reform in
China

• HUANG Ying
• China Institutes of Contemporary International
  Relations
• Joint workshop on
• Financial Evolution, Regulatory Reform and
  Cooperation
• IDEAs SNU Center for Social Sciences SNU
  Political Economy and Social Policy RC
• 17-18 May, 2013

2
Structural shifts in financial sector

• Commercial banks
• Non-bank financial institutions
• Shadow banking sector
• Capital markets
• Local government debts

3
By the end of March 2013, the commercial banks
expanded their assets to 141.3 trillion RMB,
equivalent to 270 of its GDP.
4
The top ten profit-making banks in the world in
2011
rank bank Profits(billion dollars)
1 Industrial and Commercial Bank of China 43.2
2 Construction Bank of China 34.8
3 Bank of China 26.8
4 JP Morgan Chase Co 26.7
5 Agricultural Bank of China 25.1
6 Wells Fargo 23.3
7 HSBC 21.9
8 Mitsubishi UFJ Financial Group 17.6
9 Citibank 14.6
10 BNP Paribas 12.5
5
Expansion of non-bank financial institutions by
the end of 2010
Financial institutions Total assets (trillion RMB) Change from 2006 ()
Securities company 2.24 530
Fund management company 2.51 332
Insurance company 4.9 120
bank 92 116
6
Mushrooming of the non-financial institutions

• Non-financial institutions with financial
  functions by the end of 2011,
• 4,282 small-scale loan companies
• 5,237 pawn companies
• 8,402 financing guarantee companies

7
Rise of Alternative Financing
8
Local government debts by the end of 2010
(roughly 25 percent of GDP)
9
Shifts in Financial Structure
10
Expansion of M2 in China (trillion RMB)
11
High risks in the rapid expansion of the banking
sector

• (1) Property price bubble
• (2) Local government debts
• How healthy is banking sector in China?
• How to reform it to create a more equitable
  competitive and resilient banking sector?

12
Commercial Banks Performances in 2011
bank Capital adequacy ratio () Non-performance loan ratio () Net profits (billion yuan)
Industrial Commercial Bank of China 13.2 0.94 208
Agricultural Bank of China 11.9 1.55 122
Bank of China 12.9 1.00 130
Construction Bank of China 13.7 1.09 169
Bank of Communications 12.4 0.86 51
All commercial banks 12.7 0.96 1040
13
Financial reform

• Narrow sense
• interest rate reform
• private capitals entry into financial
  sectors
• capital market development
• more open to foreign investments
• Broad sense
• exchange rate formation mechanism reform
• capital account opening
• internationalization of RMB

14
Interest rate reform

• Why reform
• (1) the negative deposit rates help foster the
  shadow banking sector, which is a destabilizing
  factor (various trust products questionable
  wealth management products interaction between
  the banks and non-bank entities).
• (2) the big gap between deposit and loan rates
  raised the question why the banks are allowed to
  make money so easily.
• (3) believed to make the banks more competitive
  in the markets and more responsibility for their
  own choices.

15
Interest rate reform

• Liberalizing the interest rates mainly means
  increasing the lending rates and reducing the
  deposit rates.
• In June 2012, PBC announced that commercial banks
  will be allowed to set the interest rates charged
  on their loans at or above 80 percent of the
  governments benchmark rate, down from the
  previous 90 percent. The central bank also gave
  them permission to set deposit rates at or less
  than 1.1 times the government benchmark rates.
• Later, PBC further lowered the lending rates from
  80 percent of the benchmark rates to 70 percent.

16
Three financial reform pilot zones

• (1) Wenzhou transparency of private lending.
• (2) Zhujiang Delta for internationalization of
  its financial services.
• (3) Quanzhou to better service the real economy.

17
Measures to develop capital markets

• Future reforms as identified by the China
  Financial Stability Report 2012
• (1) Expand the direct finance.
• (2) Encourage a multi-layered capital market
  system, to diversify Banking systems risks
• (3) Actively promote the securitization of credit
  assets guided by the principles of simplicity,
  transparency and reasonable share of risk costs.
• (4) Encourage the commercial banks to set up fund
  management companies in an orderly way, to
  support the healthy development of capital
  markets.

18
Exchange rate formation mechanism reform

• Reasons for pursue this reform
• conform to the international mainstream practice
  under the great external pressures (especially
  from US).
• (2) Believed that a more resilient exchange rate
  system can dampen the speculative attacks on its
  currency, Which is against the experiences of
  many floating exchange-rate countries.

19
Chinas Current Account Surplus
20
Capital account opening

• Capital account opening has always been connected
  with the need to internationalize RMB. However,
  the link between the two is questionable.
• Historical experiences by Britain and America
  were clearly different.
• Japans efforts were fruitless.
• EU has never actively pursued it.
• For China, to promote the use of RMB is
  necessary, but opening the capital account may
  not be helpful.

21
Financial regulation system and reform

• Chinas financial regulation system is modeled on
  Americas.
• Chinas financial supervision system consists of
  one bank and three commissions. One bank refers
  to the Central Banks, and the three commissions
  are Banking Supervisory Commission, Securities
  Supervisory Commission and Insurance Supervisory
  Commission.
• As China moves to universal bank system, this
  supervision system will be less effective.

22
Some observations

• Chinese governments mind is occupied by the
  needs to liberalize the financial sector for
  various reasons, not to revamp its regulatory
  system.
• China successfully withstood the two big
  financial crises, not because it had sound
  financial system.
• China also thinks that the western banking
  practices, including the new BASEL rules are more
  advanced than its own. Its still in the phase of
  learn and adapt.