In 2004, Chinese government decided to take a radical reform on the state-owned banks- bank of China and china construction bank as the pilot by injecting$45 billion foreign exchange reserves, by introducing the strategic institutional investors. By the efforts taken, the two banks are aimed to be transformed to share-holding companies first, then listing companies. The state-owned bank reform has attracted the worldwide attention.
1. The pace of state-owned bank reform has been significantly speeded in 2004.
1/ due to the challenge posed by the access to WTO
In 2006, china will fulfill the obligations of the accession of WTO by liberalizing the constraints on foreign banks operating in China. Within the remaining two-year interim period, china must take the reform of the state-owned banks; otherwise, the now dominating stat-owned banks may not have adequate competitiveness with their counter parties in the world.
2/because the further sustainable growth needs the support from the efficient financial system
Chinese economy has made great economic achievements since 1978. With the annual growth rate of 9% in 26 years. Chinese banking system has taken the great costs of the transition, at the same time, the low efficiency in the banking sector has costs a huge amount of NPL in the banking sector. The NPL problems have become the obstacles to the future growth of Chinese economy. With the growing economy, the demand for financial services is getting stronger. Without the market-oriented reform of banking sector, would there be further and new accumulation of large NPL.
3/ in order to enhance the financial stability
In recent years, Chinese economy has grown strongly. Chinese finance sector has been one of the most active parts in the economy; therefore, the risk of finance has great effect on the whole economy. So far, the financial assets in China has reached 20,000 billion Yuan and the outstanding credit reached 17,000 billion Yuan. The huge amount of finance aggregate has been one of the most important parts in the economy. Any big amount of NPLs will pose threats to the financial stability.
4/ china has taken the state-owned banks reform as the focus of the financial reform
The time period before the end of 2006 has been the last chance for the state-owned banks reform. Compared with the reforms in 1998, the 2004 recapitalization of state-owned banks was the real injection of fund into the banks rather than the notional reform. This big step forward signifies the central government’s determination to reform the banks.
Some countries in the world has experienced the sluggish economy due to the swing in the attitude towards the NPLs. On the other hand, some countries have revitalized the economy after determinedly taking action to deal with the NPLs with the recapitalization. The experiences and lessons from the world have been the references for China.
For quite a long period, the finance reform has been lagging in china, especially the stat-owned banks reform. At the early stage of banking reform, many new share-holding banks were established- reflecting the reform approach of imposing external pressure to the existing banks by adding new participants. The approach has achieved some effects, however, it did not work with the existing state-owned banks. The new recapitalization with the foreign exchange reserves aims to enhance the corporate governance of the banks due to the stat-owned banks’ market position in China.
2. The major contents of the state-owned banks reform
1/ the restructuring of assets and finance by injecting resources to write off the NPLs
According to the 2002 annual report of bank of china, at the end of 2002, the total NPL was 408.5 billion Yuan by the 5-loan classification with the total loss of 187.4 billion Yuan. The china construction bank held the total NPLs of 268 billion Yuan with the loss of 56.9 billion and the suspicion of 128.9 billion Yuan at the end of 2002. In a whole, this is the base line estimation of the NPLs in the two banks.
The resources used for the write-off come from the provisions, the profit before the provision and the existing capital. So far, the provision for bank of china was 90 billion Yuan, equivalent to the 22.09% of the total loans. The provision for china construction bank was 35 billion Yuan, equivalent to the 13.4% of the total loans.
The inadequate provision cannot meet the demands for the write-offs. The profits in the recent 2 years will be used for the write-offs. With the high growth rate in recent 2 years, the two banks has accumulated the operating profit around 50 billion each. By the authorization of the ministry of finance, the existing capital held by the state will be used for the write-offs. According to the preliminary estimation, the above measures can write off all of the NPL in the history.
2/ recapiatlization
The state-owned banks after the write-offs will be much healthier banks with the NPL ratio into the consideration; however, they will be the banks without capital. By injecting foreign exchange into the banks, the capital is formed for the new banks.
In 2003, the foreign exchange reserves grew very fast by 160 billion USD. It reached 403.2 billion even when 45 billion deducted. Bu the international standard, it has been over the optimal volume. In fact, the reserves have been growing since the 1994 when there was the unification of foreign exchange rates.
From the perspectives of central bank, there may be the decrease of foreign exchange reserves, but there the increase of the investment. The previous purchase of T-bonds of USD will be substituted for the investment in the Chinese banks that have business in a growing economy.
The state council approved HUIJIN investment limited will be responsible for the operation of the recapitalization and the supervision as the shareholder. The ministry of finance, people’s bank of china and SAFE together set board of the directors. The HUIJIN will supervise the two banks as the shareholder to do with the corporate governance and to pursue the high return of investment.
3/ the restructuring of the ownership
The new emphasis will be put on introducing the high- qualified international strategic institutional investors. By the transfer of technologies and the change of the ownership, the corporate governance will be enhanced.
4/ IPO
The new emphasis will be put on the IPO of the two banks in order to enhance the corporate governance, the diversification of ownership, the constraints from the market and the improvement of the management of the banks.
5/ the focus will be on the corporate governance
The recapitalization by public resources around 800 billion Yuan aims to establish a new mechanism preventing from future accumulation of huge NPLs. There is a Chinese saying“pay for the new mechanism’. Form the aspects of the reform of institutions; it belongs to the passive institutional innovation.
The CBRC has asked the two banks to fulfill 10 requirements on the corporate governance:
1/ establish the board of directors, the board of supervisors, the management and the shareholder meetings by international standard;
2/ introduce the overseas strategic investors to diversify the ownership;
3/ develop the clear strategy for the optimal profit;
4/ establish the appropriate decision-making procedures, internal controls and risk management;
5/ streamline the business and management procedures and achieve the matrix for the business and the authorization;
6/set the standardized human resources management and the effective incentives and constraints;
7/ adopt the prudential accounting standard, enhance the financial management and the disclosures;
8/ Enhance the technology updating and improve the comprehensive service capability;
9/ develop the professional firms to speed up the IPO;
10/ strengthen the training and public relations and other related work.
At the same time, the CBRC has designed the 7 sets of indicators, including capital adequacy ratio, the NPLs ration, and the return of assts, etc. to review the financial strength of the banks in order to push the two banks reach the international standard
3. The causes of the NPLs in the banking sector
The recapitalization of two banks signified that the central government has taken the cost of NPLs that were caused by the transition
The state-owned banks have been paying for the transition for a long time. How to deal with the NPLs, in fact, determined future reform approach. By the write-off and the recapiltalization, the history burden will have no further constraints on the banks future development. By doing this, there will be possibility of new competitive markets.
In the past, Chinese government once tried to deal with the NPLs by enhancing the management and the internal control. However, it did not work. The huge amount of NPLs makes the review of the banks performance even difficult. By the injection of new capital, the new pilot banks will set examples for the other banks reform.
1/ the causes of NPLs
In the NPLs of the state-owned banks,
30% was caused by the government intervention, including both central and local governments;
30% was by the support of the state-owned enterprises. By the survey conducted by PBoC, over 50% loans went to the non state-owned sectors, including FDI companies, private companies and the household for mortgage or car credit.
10% was by the low standard of legal system or weak awareness of the legislation.
15% was by the close or merge of some industries, including military industries.
In general, only 20% of NPLs was by the banks themselves. Amount was huge, true. But the ratio, was not so bad.
2/ china has got the positive solutions for the NPLs
The Asian financial crisis has enhanced the awareness of healthy banking system and the risks possibly brought by the financial vulnerability and pushed the decision–making authority to make the determination.
After the financial crisis in Asia, the government has abandoned the administrative interference to the bank loans.
Chinese government has enacted laws to ensure the commercial banks’ independence on extending loans. The government has not ever asked the banks to support the SOEs any more.
The high and stable growth of Chinese economy has made the resources for reforming the state-owned bank
The state-owned bank reform in china: po
Editor:at0086 | Resource:AT0086.com
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