China Banking System Overview
China Banking System Overview
Before 1979, China had a mono-bank system in which the People's Bank of China (PBOC) acted both as central bank and commercial bank for the whole country. Financial reforms launched in 1979 led to a bifurcated banking system in which the PBOC was designated as the central bank and other banks were given commercial banking functions.
The Banking Structure in China
China's banking sector is currently dominated by a handful of large state-owned banks. The PBOC is the central bank and government treasury of China and is responsible for directing and supervising all banks and non-bank financial institutions. Other government authorities also play certain roles in the financial system include the Ministry of Finance (MOF) and the State Administration for Exchange Control (SAEC). The latter one is a bureau under PBOC and is in charge of foreign exchange control.
An organizational system for China banking sector, which separates policy finance from commercial finance and meets the need of contemporary market economy has been established. Currently, there are six types of incorporated commercial banks, which make up the Chinese banking system:
* State-owned commercial banks
* Shareholding national commercial banks
* Shareholding regional commercial banks
* Urban and rural cooperative commercial banks; and
* Foreign Banks' branches1
* Foreign-funded and wholly foreign-owned banks2
With The People's Bank of China (PBOC) as the central bank, which is responsible for formulating and implementing monetary policy. Directly below, there are 4 state-owned commercial banks:
). The Industrial and Commercial Bank of China (ICBC), the largest bank, which originally specialized in lending to the industrial sector. ICBC has the largest domestic branch network - over 40,000 branches and sub-branches across the country.
2). Bank of China (BOC), the most profitable bank, which traditionally has been responsible for foreign exchange activity and the financing of imports and exports. BOC has a large overseas branch network.
3). China Construction Bank(CCB), former known as The People's Construction Bank of China (PCBC), which used to focus on financing infrastructure projects.
4). The Agriculture Bank of China (ABC), which conventionally provides lending on agriculture and rural development.
In 1994, the Chinese government founded 3 development or "policy" banks, which do not take deposits:
). China Development Bank
2). The ...
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2). Bank of China (BOC), the most profitable bank, which traditionally has been responsible for foreign exchange activity and the financing of imports and exports. BOC has a large overseas branch network.
3). China Construction Bank(CCB), former known as The People's Construction Bank of China (PCBC), which used to focus on financing infrastructure projects.
4). The Agriculture Bank of China (ABC), which conventionally provides lending on agriculture and rural development.
In 1994, the Chinese government founded 3 development or "policy" banks, which do not take deposits:
). China Development Bank
2). The Agriculture Development Bank
3). The Export-Import Bank of China
These policy banks were created to take over the role of policy lending in China. However the major 4 banks continue to participate in directed lending to state-owned enterprises and national projects, and they purchased bonds issued by the policy banks.
The China Banking Regulatory Commission was officially launched in April 2003 to take over the supervisory role the Peoples Bank of China (PBOC) to improve the efficiency of bank supervision and to help the PBOC to put more focus on economic policies. The Figure 2.1 illustrates the current banking structure in China
Figure 2.1: Current Banking Structure in China
Internationalization of Banking Business in China
The scope of business of domestic commercial banks in China includes business operations such as taking deposits from the public, granting loans, handling settlements, issuing bonds, and buying and selling foreign currency. Current laws and regulations prohibit commercial banks from engaging in non-commercial banking activities such as insurance, investment banking, and fund management.
Under existing laws and regulations, foreign investors can participate in China's financial services sector by setting up wholly foreign-owned banks, joint venture banks, branches, wholly foreign-owned finance companies and joint venture finance companies.
A representative office may only engage in non-business activities, such as consultation, liaison and market research on behalf of the Foreign Banks that established it.
Under the recently-revised Foreign Funded Institutions (FFI) Regulations and implementing rules, wholly foreign-owned banks, foreign bank branches and joint venture banks may carry on the following types of business, in whole or in part, provided that their scope of business is approved by the PBOC:
* Accepting deposits from the public;
* Making short-term, medium-term and long-term loans;
* Accepting and discounting bills;
* Buying and selling government bonds, financial institution debentures and securities denominated in foreign currencies other than shares;
* Providing letter of credit services and security;
* Carrying out domestic and international settlement;
* Buying and selling foreign currency on its own account or as agent;
* Exchanging foreign currency;
* Inter-bank lending;
* Bank card business;
* Safety deposit box services;
* Credit investigation and consulting services (relating to banking operations); and
* Other business approved by PBOC.
Before accession to the World Trade Organization (WTO), the People's Bank of China (PBOC) only permitted foreign banks to operate in certain cities in China and also limited the number of foreign bank branches that could be established in each locality. Most foreign banks were restricted to only conducting foreign currency business, and only a small number of foreign banks were allowed to engage in local currency business. WTO accession introduced significant changes, China sped up to internationalize its banking sector and open it further to the outside competitors. Restrictions of geographic distribution and clients on foreign currency and foreign exchange services have been lifted.
China has promised as part of commitments to the WTO that by 2006, it will give foreign banks the same treatment as local institutions. Fierce competition will soon take place between local and foreign banking organs and domestic banks must speed up innovation of financial products and improve service efficiency to catch up in the long run.
Foreign Exchange Control in China
The RMB is not a freely convertible currency now, and the foreign exchange rate system is a controlled floating one on the basis of market demand by the State Administration for Exchange Control (SAEC). On December 1, 1996, China announced to accept Article 8 of the International Monetary Funds, that is, RMB can be freely converted under current account.
The major policies and regulations of foreign exchange control on Foreign Invested Enterprises (FIEs) are as follows:
- Applying for FIE's exchange control register: within 30 days from the issuance of business license, FIEs should apply for an Exchange Control Register from the local administration on foreign exchange control.
- Opening a foreign currency account: FIEs should choose a bank that has the right to undertake foreign currency operations to open their foreign currency account.
- The government will mainly control the inflow and outflow of FIEs' foreign currency under current account, the use and settlement of foreign currencies under capital account, its deposit and loans denominated in foreign currencies.
- Annual foreign exchange audit: FIEs should entrust qualified accounting firms approved by the State Administration for Foreign Exchange Control (SAEC) to conduct annual foreign exchange audit to reports to local Administrations on Exchange Control to renew their Exchange Control Registers.
- Favorable treatments to FIEs: any foreign investor of an enterprise with foreign investment who reinvests his share of profit directly into the enterprise or uses the profit as capital investments to establish other FIEs can be refunded part of the income tax already paid on the reinvested amount.
In December 2001, when China became a member of the World Trade Organization (WTO), China's banking regulators marked the event by issuing a series of new regulations which paved the way for more changes and foreign participation in the banking sector.
. The minimum operating funds for a foreign bank branch is the equivalent of RMB 100 million in a freely convertible currency.
2. The minimum registered capital for wholly foreign-owned banks and joint venture banks is the equivalent of RMB 300 million in a freely convertible currency.
