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between each other.
6. What are the differences of banking performance between China and Taiwan?
By comparing financial indicators relevant to profitability, assets quality, liquidity management, and capital adequacy ability between representative commercial banks in China and in Taiwan, the study aims to find out the differences of banking performance between each other.
7. What are the investment opportunities for Taiwan banks’ landing in China? By studying banking industry in China can help us better understand what kind of business in China might be niche market that suitable for banks from Taiwan to explore and invest. Moreover, by studying relevant regulations on cross-strait financial activities, the study dedicates to conclude the best approach for Taiwan banks’ development in China.
1.3 Research Method and Limitation
Reference materials about comprehensive study of banking performance comparison between China and advanced countries are relatively limited; as a result the study collects abundant financial indicators and figures of commercial banks and uses analyses and comparison of selective data to conclude the study results, hence quantitative methodology is adopted in the study.
As for data collection, because China Banking Regulatory Commission was set up in 2003, the history of financial regulatory institution in China is very short, historical statistics of banking sector are not sufficient for the study; thus, data collection also contains annual reports of state-owned commercial banks and other study subjects.
Except for Agricultural Bank of China, other three state-owned commercial banks in China have been listed by the end of 2007, and their financial statements are made in
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two different versions, one is for Hong Kong Stock Exchange (H share) complying with the international accounting standard—IFRS, and the other is for Shanghai Stock Exchange (A share) complying with local Chinese accounting standard—China GAAP.
In order to be in line with international norms, the study basically chooses H share annual reports as sources of financial data but if the data is not available in H share annual reports, and then A shares annual reports will be referred as substitute.
Besides collecting individual bank’s annual reports, the study is developed highly rely on data provided by the world banking information source—Bankscope.
Bankscope is a database with up to 16 years of detailed financial information including ratings, rating reports, news, ownership plus financial and credit analysis software for over 23,000 private and public banks in the world, which is commonly adopted for analyses of banking performance. Bankscope is maintained under the cooperation between worldwide-known credit rating agency-Fitch Ratings and BUREAU VAN DIJK, they updates relevant banking information regularly.
Financial information in Bankscope are majorly provided by Fitch Ratings;
however, not only Fitch Ratings but also other credit rating agencies, such as Standard
& Poor’s, Moody’s, Capital Intelligence, and the Economist Intelligence Unit supply additional information in this database.
According to the classification of Bankscope, if the bank is a subsidiary of a financial holding company, both of them have separate and independent financial reports and that will avoid users from mixing up each other and also allow the study obtains accurate data of research banks. In order to comply with local financial situation, different countries might have different accounting standard and regulations on financial statements, but in Bankscope each ratio is calculated under the same formula and which allows research subjects to be compared base on the same criterion,
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in this regard, indicators with respect to evaluating profitability, assets quality, liquidity, and capital adequacy will be adopted from Bankscope.
From the end of 2006 financial markets in China were fully opened for foreign banks’ entrance and most large state-owned commercial banks of China have been listed on Hong Kong Stock Exchange, since then financial statements released from China banking sector have become more transparent and reliable. Besides, the global financial tsunami began to batter world economy and finance in the end of year 2008, such difficult situation could better reflect true banking performance in different countries. As a result, comparisons of banking performance among representative banks in China, USA, and Taiwan will focus on the period from 2007 to 2009.
With reference to limitation of the study, when I cross-check the same data from different sources, e.g. statistic released by China Banking Regulatory Commission and annual reports of large state-owned commercial banks, sometimes the data does not exactly match. In consideration of the credibility of supervisory institution, the study adopts official data rather than annual reports of individual bank when analyzing the overall situation of China’s banking industry.
Additionally, during the research Agricultural Bank of China was in the process of initial public offering, even thought the bank postponed announcement of year 2009 annual report until July 12, 2010, the study still adopted the latest financial data in order to precisely reflect current situation of banking industry in China.
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Banking Performance in China
Before 1979 China implemented central-planned economy system, national finance was dominated by the government, and the expense of economic development financed by government was RMB 76.16 billion, meanwhile, the balance of all banks’
loans was RMB 19.2 billion, the former was four times larger than the latter; however, in 1995 the expense of economic development from government finance was RMB 170.4 billion, in the mean time, the balance of all banks’ loans was RMB 973.59 billion, the latter was almost six times larger than the former. This shows that with deepened economic reforms banking industry in China plays a more and more important role in supporting the country’s economy (Huang, 1998).
To achieve profound understanding of China’s banking sector, in this chapter the study not only gives a historical review of financial reforms and development process of China’s banking system, but also gives the whole picture of current banking situation in China. Additionally, by examining China’s state-owned commercial banks in four different dimensions, including profitability, assets quality, liquidity management and compliance with international regulations-Basel II to find out how well their performances are.
2.1 Development Process of China’s Baking System
Ever since 1979 the government of China has launched a series of financial reforms to accommodate the path of economic reforms; comprehensive reforms in
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economy and finance have made China maintained years of double digits economic growth rate (Figure 2-1).
Source: National Bureau of Statistics of China (2009), China Statistical Yearbook, http://www.
stats.gov.cn/tjsj/ndsj/2009/indexeh.htm.
Figure 2-1: Economic Growth Rate of China—1979~2009
When we look back to history of banking development in China, 1979 was a watershed year of initiating financial reforms, and development process of banking system in China can be divided into four stages, each of them will be discussed detailed as below.
Stage I: Unified Financial System—Before 1979
Before 1979 China performed planned economy, resources were dominated and distributed by the government. In this stage, all banks and financial institutions were dissolved or merged into PBC, at this time PBC was the only financial intermediary in China, and other financial institutions were functionless or became subsidiaries of Ministry of Finance (MOF). PBC was the country’s center of credit, center of settlement and center of cash teller. This stage was commonly known as ‘‘Unified Financial System’’ in China’s financial development history.
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Stage II: A Transition Period of The People’s Bank of China—1979~1994
This stage is not only the development process of how PBC adjusted its functions into a real central bank of China but also how national specialized banks developed into state-owned commercial banks (SOCBs).
From 1979 major banks including Agricultural Bank of China (ABC), Bank of China (BOC), and the People’s Construction Bank of China (renamed as China Construction Bank (CCB) in 1996) began to resume business in coordination with reform policies. Banking sector was diversified to meet the need of economic development and unified financial system was disintegrated gradually.
In January of 1984 Industrial and Commercial Bank of China (ICBC) was established, PBC transferred its city financial business to the newly-established ICBC, and withdrew from general commercial banking business. From then on PBC began to reveal its specific functions as the central bank of China.
In April of 1987, Bank of Communications (BOCOM) was re-established, and other regional joint-stock commercial banks, such as China Merchants Bank (CMB) and CITIC Industrial Bank (renamed as China CITIC Bank in July 2005); national joint-stock commercial banks, such as China Everbright Bank and Huaxia Bank; urban credit cooperatives and financial companies have been established, besides, foreign banks also came back to China one after another.
In this stage PBC still maintained part of policy and commercial banking business, it was a transitional period of banking system with PBC as the central bank, national specialized banks (predecessor of SOCBs) as the main body and other financial institutions co-existed and coordinated with each other.
After the third plenum of the fourteenth central committee, the State Council made an important decision in the end of 1993 that was ‘‘to develop PBC into a real
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central bank of China; to develop national specialized banks into real state-owned commercial banks’’. In March of 1994, three policy banks including China Development Bank, The Export-Import Bank of China, Agricultural Development Bank of China were established to take over policy financing roles from national specialized banks. Four national specialized banks were transformed into SOCBs pursuant to the government’s requirement of commercialization and to carry out complete commercial banking services.
Since the end of 1993 PBC was fully separated from commercial banking business and started to concentrate on financial supervision and macroeconomic control, and to exercise functions independently; the status of PBC as a central bank of China was assured.
Stage III: Establishment of Regulations and Financial Supervision—1995~2003
China has always been preparing for challenges and impacts that might come after WTO accession, except for building laws and regulations into financial system, policies of eliminating or consolidating financial institutions with weak composition and poor performance were adopted to increase competitiveness of banking industry.〈Law of the People’s Republic of China on the People’s Bank of China〉 and
〈Law of the People’s Republic of China on Commercial Banks〉 were released in 1995 which meant all banking operations in China have laws and regulations to follow.
In September of 1997 〈Measures for Administration on Urban Credit Cooperatives〉
was released, most urban credit cooperatives were regionally merged and some of them even became city commercial banks.
In addition to uniting urban credit cooperatives, in 1998 the MOF issued RMB 270 billion special national bonds to inject capital into four large SOCBs,6
6 Four large SOCBs are ICBC, CCB, BOC and ABC.
and four
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asset management corporations (AMCs) were set up according to 〈Regulations of Financial Asset Management Corporations〉 passed by State Council in April 1999, the main purpose of AMCs’ establishment was to deal with NPL problems of SOCBs.
During this period, PBC played multiple roles as the central bank and also the banking supervisor, PBC did not focus on performing monetary policy specifically until China Banking Regulatory Commission (CBRC) took over the function of banking supervision from it. CBRC was established in 2003 to conduct regulations and supervision over all banking institutions and their business activities in China.
In this stage, China’s financial system was getting back on track of laws and regulations binding, and regulatory system was gradually in line with international standards.
Stage IV: Accelerating Reforms of State-owned Commercial Banks—After 2004
According to the schedule of specific commitments under WTO regulations (Table 2-1), geographic restrictions on foreign banks were cancelled year after year, China must open financial markets in Shanghai, Shenzhen, Tianjin and Dalian upon accession; Guangzhou, Zhuhai, Qingdao, Nanjing and Wuhan within one year after accession; Jinan, Fuzhou, Chengdu and Chongqing within two years after accession;Kunming, Beijing and Xiamen within three years after accession; Shantou, Ningbo, Shenyang and Xi'an within four years after accession, five years afterward all geographic restrictions were removed.
As for client limitations, foreign banks can provide services of RMB business to Chinese enterprises after two years of accession, from then on financial markets in China have become more and more competitive than before, and after five years of accession that was December 11, 2006, foreign banks can provide services of RMB business to all Chinese citizens.
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Table 2-1: China’s WTO Commitments—Schedule of Market Access for Foreign Banks to do RMB Business
Schedule Upon
Accession 1 year 2years 3 years 4 years 5 years
Date
(Year/Month/Day) 2001/12/11 2002/12/11 2003/12/11 2004/12/11 2005/12/11 2006/12/11
Area
Source: World Trade Organization, Member Information, http://www.wto.org/english/thewto_e/countries_e/china_e.htm.
We can see from Table 2-2, foreign banks never stop expanding financial markets in China, in 2004 there were only 188 operational banking entities of foreign banks in China,7
From 2004 to 2009 the number of foreign banks’ operational banking entities increased from 188 to 338, assets grew more than twice from RMB 582 billion to RMB 1,349 billion. And the percentage of market share accounted for total assets in China banking industry rose steadily year by year, but in 2009 the figure fell to 1.71%
compared to 2.16% in the previous year, the reason was because the growth rate of total banking assets in China was much higher than that of foreign banks.
and assets of foreign bank were RMB 582 billion accounting for 1.84%
market share of total banking assets in China, but two years later, in 2006 limitations of geography and customers on foreign banks to provide services were no longer existed, hence the number of banking entities increased to 224; assets grew 59.35% to RMB 928 billion, and the market share increased to 2.11% as well.
7 Operational banking entities include head offices of locally incorporated banks, branches and subsidiaries of locally incorporated banks and foreign bank branches.
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Table 2-2: Foreign Banks in China—2004~2009
YearSource: China Banking Regulatory Commission (2009), Annual Report.
Table 2-3 shows that in 2004 total assets and liabilities of banking institutions in China were RMB 31,599 billion and RMB 30,325 billion, respectively, after five year elapsed, total assets increased to RMB 78,769 billion and total liabilities increased to RMB 74,335 billion, both of them maintained double digits growth rate every year in the period from 2004 to 2009.
Table 2-3: Total Assets and Liabilities of Banking Institutions in China—
2004~2009
YearItem 2004 2005 2006 2007 2008 2009
Assets
(RMB 100million)
315,990 374,697 439,500 525,983 623,876 787,691
Growth rate
(%)
14.25 18.58 17.29 19.68 18.61 26.26
Liabilities
(RMB 100 million)
303,253 358,070 417,106 495,675 586,015 743,349
Growth rate
(%)
14.03 18.08 16.49 18.84 18.23 26.85
Source: China Banking Regulatory Commission (2009), Annual Report, http://www.cbrc.gov.cn/chinese/home/
jsp/docView.jsp?docID=20100615A314C942DEE7DD34FF395FFCEB671E00.
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Attributing to markets opening up and thirty years of financial reforms, the scale of banking industry in China has grown very huge. For the purpose of accelerating reforms and increase competitiveness of SOCBs, in 2004 the government of China used huge amount of foreign exchange reserves to inject funds into BOC, CCB and ICBC in order to conduct comprehensive financial restructuring and corporate governance reforms, the final target was to transform them into limited joint-stock companies.
Meanwhile, the newly amended 〈Law of the People’s Republic of China on Commercial Banks〉 allowed commercial banks to provide services of not only banking business but also insurance agency, security cooperation, and investment banking sector. Multiple services have shown a pattern of financial holding company;
however, till now China does not officially approved establishment of financial holding company.
SOCBs (except for ABC) went public one after another since 2006, by internationalizing and diversifying their business to respond to competition pressures brought from foreign banks. As for ABC, it was transformed into joint-stock company in January of 2009 and has prepared to go public. In 2010 the initial public offering of
RMB-denominated ordinary shares (A Shares) at Shanghai Stock Exchange and H share at Hong Kong Stock Exchange of ABC has been approved by the China Securities Regulatory Commission (CSRC).
With fully support and protection from the government, SOCBs have a monopoly over the banking industry in China and the degree of competitiveness and internationalization of domestic commercial banks in China also improved a lot.
Above discussed four stages of China’s banking system evolution are summarized into Table 2-4.
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Table 2-4: The Evolution of China’s Baking System
Stage Year Policies & Events Features
I
Before1979
Under planned economy, all banks and financial institutions were dissolved or merged into PBC.
During this period PBC was the only financial intermediary in China.
Major banks resumed business since 1979;
banking sector was diversified to meet the need of economic development.
Unified financial system was disintegrated gradually.
1984
PBC transferred its urban financial businesses to the newly established ICBC, and withdrew from general commercial banking businesses.
PBC revealed its function as the central bank of China.
1987
BOCOM re-established in April, and other regional joint-stock commercial banks, national joint-stock commercial banks, urban credit cooperatives and financial companies have been established. Foreign banks also came back to China one after another.
State Council made an important decision that was ‘‘to turn PBC as a real central bank of China; to turn national specialized banks into real commercial banks’’.
Status of PBC as a central bank of China was assured.
1994
National specialized banks were developed into SOCBs in accordance with government’s requirement and three policy banks were established to take over policy-related business from SOCBs.
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Table 2-4: The Evolution of China’s Baking System (Continued)
Stage Year Policies & Events Features
III
1995
〈Law of the People’s Republic of China on the People’s Bank of China〉 and 〈Law of the People’s Republic of China on Commercial Banks〉 were released in March.
China’s financial system
In September 〈Measures for Administration on Urban Credit Cooperatives〉 was released, and most urban credit cooperatives were merged or transformed into city commercial banks.
1998 MOF issued 270 billion special national bonds to supplement capital of SOCBs.
1999 In April four AMCs were set up to deal with NPL problems of SOCBs.
2003 CBRC was established and took over functions of banking supervision from PBC.
IV
2004
Government of PROC used huge amount of foreign exchange reserves to inject funds into the BOC, CCB and ICBC to conduct a
comprehensive financial restructuring and corporate governance reforms. The goal was to transform SOCBs into limited joint-stock
companies. Accelerating reforms of
SOCBs in order to increase competitiveness.
2006
SOCBs (except ABC) went public one after another. In December a series of policies were implemented to speed up developing rural cooperatives into rural commercial banks.
2009 In January ABC was transformed into joint-stock company and has prepared to go public.
Source: Chu (2010); Bankscope, http://bankscope.bvdep.com/ip.
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2.2 Overview of Banking Industry in China
After thirty years of financial reforms, currently in the banking system of China the PBC takes charge of monetary policies as the central bank and CBRC plays the role regulating and supervising business operations of banking institutions.
The objectives of CBRC are promoting safety and soundness of banking industry, enhancing the industry’s competitiveness, and maintaining public confidence in the banking sector; the supervisory missions of CBRC are protecting interests of depositors and consumers, maintaining market confidence through prudential supervision, increasing public knowledge about modern financial products, services and related risks through education and information disclosure, and reducing banking-related crimes to maintain financial stability.
China’s banking system went through three decades of development; the structure has been built completely and also became more and more diversified. In the end of 2009, China’s banking system consists of 3 policy banks, 5 state-owned commercial banks (SOCBs), including ICBC, CCB, BOC, ABC and BOCOM, 12 joint-stock commercial banks (JSCBs), 143 city commercial banks, 43 rural commercial banks, 37 foreign banks, 196 rural cooperative banks, 148 village and township banks, 11 urban credit cooperatives, 3,056 rural credit cooperatives, 16 rural mutual cooperatives, one postal savings bank of China and other non-bank financial institutions (NBFIs) which include 8 lending companies, 58 trust companies, 12 financial leasing companies, and 10 auto finance companies, etc (Figure 2-2).
According to CBRC’s definition of commercial banks, commercial banks in China shall include SOCBs, JSCBs, city commercial banks, rural commercial banks, and foreign banks.
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Source: China Banking Regulatory Commission (2009), Annual Report, http://www.cbrc.gov.cn/chinese/home/j sp/docView.jsp?docID=20100615A314C942DEE7DD34FF395FFCEB671E00; Chu (2010).
Source: China Banking Regulatory Commission (2009), Annual Report, http://www.cbrc.gov.cn/chinese/home/j sp/docView.jsp?docID=20100615A314C942DEE7DD34FF395FFCEB671E00; Chu (2010).