Tenth Five-Year Plan of Banking Industry and its Development

Overview of the Banking Industry
1. Outline of the banking industry

China's financial system has experienced great changes since the reform and opening up, with the People's Bank of China (PBC) as the central bank, State-owned commercial banks as the mainstay and other various forms of coexisting financial institutions. By the end of 2000, there were more than 100 banking institutions, including three policy banks, four State-owned commercial banks, 10 joint-equity commercial banks and 99 city commercial banks.

China's banking industry has lent strong support to the healthy development of the national economy. During 1993-99, State-owned commercial banks contributed 640 billion yuan (US$77.1 billion) to the central budget, accounting for 29 percent of total profits and taxes of State-owned enterprises in the corresponding period by paying taxes, surrendering a part of the profits and tax reduction.

By the end of 2001, the amount in deposit balances and loan balances of State-owned commercial banks hit 8,700 billion yuan (US$1,048.19 billion) and 6,400 billion yuan (US$771.08 billion) -- up 13.7 and 11 per cent respectively from the corresponding period last year.

2.Legal construction of the banking industry

In recent years, China picked up the pace in its construction of the financial and legal systems, and gradually established a set of legal bases for conducting banking operations and supervision, with the Law of the People's Bank of China and the Law of the Commercial Banks as the mainstay.

On the basis of the four financial laws, the People's Bank of China formulated a set of financial rules and regulations to take strict precautions against financial crises. These administrative regulations, highly adaptive and maneuverable, played an important role in standardizing financial operations and making the contents, methods and procedures of financial management and operations clear.

At present, China's financial legislation emphasizes two points: to perfect the financial and legal systems and make a complete clean up and revision of financial laws, principles and regulations in line with the World Trade Organization (WTO) rules and commitments China made after its entry into the WTO. To date, the Intermediary Operating Regulations of Commercial Banks and the Interim Regulations of Internet Bank's Business Management have been enacted.

With the prudent accounting system being continuously promoted and the sufficiency rate of capital increased, commercial banks will count and withdraw the provisions of bad debts, write off bad debts on a timely basis, withdraw enough interest payable and adjust overdue interest to ensure the reliability of profits is compatible with financial and accounting systems as revised by the Ministry of Finance, including the generally accepted prudent accounting principles.

In 1998, China reformed its system of bad-debt reserves of financial institutions. The time to withdraw 1 percent of the loan balance at the beginning of each year was changed to the end of each year. In 1999, the time limit for repaying overdue interest was changed from two years to one year, and, again in 2000 from one year to six months. China also planned to reduce the sales tax rate of commercial banks from 8 percent to 5 percent, relax the identification terms of bad debts and expand the scope of withdrawing bad debts within three years since 2001.

Until now, eight joint-equity commercial banks have made the annual supplementary report on financial affairs and accepted the audit from the international accounting office. Four State-owned commercial banks have analyzed and estimated the impact of such a reform over the next five years of financial affairs and profits and losses. Commercial banks should increase their capital and ability to resist a crisis through self-accumulation, financial capital increases, issuing long-term financial bonds and IPOs and splitting stocks.

3. The corporate management of commercial banks and its reform of institutions and the credit system

State-owned commercial banks have basically completed their amalgamation of provincial branches with its city branch, proper trimming down of city sub-branches and the removal, amalgamation and adjustment of county sub-branches and its Internet institutions. By the end of 2000, the four State-owned commercial banks have removed and amalgamated about 116,100 branch institutions at all levels, with a reduction in 127,200 employees.

According to the Key Rules for the Supervision and Management of Effective Banks under the Basel Agreement, several regulations, such as Advice about the Corporate Management of Joint-equity Commercial Banks and Guide to the Management of Commercial Bank Companies, have been created to help small and medium-sized commercial banks perfect their structure of corporate management. In 2000, to optimize the supervisory system of State-owned financial institutions, boards of supervisors were sent to 16 State-owned major financial institutions to conduct supervisions on behalf of the nation.

1)Establishing the five-level classification system of credit assets and strengthening the management of credit risks.

The banking sector divided credit assets into five categories under the status of its own assets and international experience: normal, doubtful, worthy of concern, secondary and loss. This way, the degree of risk of the bank's credit assets will be more accurately revealed. The banking sector also created The Classified Guides to Loan Crises and tested the five-level loan classification system. In April 2000, the four State-owned commercial banks and nine joint-equity commercial banks made a five-level classification to 7,000 billion yuan (US$843.37 billion) and improved their credit-management level.

In 2001, PBC made a significant examination of the five-level management of those State-owned commercial banks with a view to create favorable conditions under which the five-level classification management would be a major method in credit assets quality management. PBC set up a check-up system to cover the main aspects of risk supervision for State-owned commercial banks. Under such a system, 13 indicators in four categories, including assets quality, profit-making ability, capital ratio and liquidity, will all be evaluated. In general, this check-up system reflects the operation of the State-owned commercial banks at a certain time. The application of such a system signals a great change in the banking management system from qualitative supervision to quantitative supervision and aspires to improve the management level of the State-owned commercial banks.

2)Removing bad loans and increasing credit assets quality.

In 1999, four financial asset-management companies were established. The objective was, firstly, to isolate bad loans and convert bad State-owned commercial bank loans into bonds guaranteed by the Central Budget to improve bank credit. Secondly, to shift the operation mechanism of enterprises, the State invests in enterprises to change the way in which they operate by transforming debts into stocks, thus helping State-owned companies achieve the goal of escaping their predicament within three years. In November 2000, the State Council released the Regulations of Financial Assets-Management Companies; corollary regulations were also published in succession. By the end of 2000, the four companies finished isolating and acquiring bad debts of State-owned commercial banks successively with a total amount of 1,393.2 billion yuan (US$167.86 billion).

4. Information Publishing System of Commercial Banks

The Guides to the Information Publishing of Commercial Banks was issued to encourage commercial banks to perfect their information-publishing system. To date, the Shanghai Pudong Development Bank and another two listed banks have published information for the public; the Bank of China has released the five-level classification information about loans; PBC has assigned the mass media, such as newspapers and periodicals, to publicize regulations, rules, systems, working procedures and their results with respect to monetary policies and financial supervision. External supervision from intermediary organs like accounting (auditing) offices have also become important.

To date, 354 accounting (auditing) offices and credit-appraising institutions have obtained the qualification to conduct financial audits. From 2001, PBC has stipulated that all commercial banks should have their year-end financial reports audited by qualified accounting (auditing) offices and surrender the results to PBC. A credit registration and advisory system has been established in 326 cities at the town level and above. In addition, a personal joint-credit reference system has been established in Shanghai to provide credit services to the public and financial institutions.

5.The enterprise's market scale

The four State-owned commercial banks monopolize the domestic banking to a great extent. But, as competition becomes increasingly severe, this condition is beginning to change, especially in the aspect of loan increases.

At the end of 2001, the total deposit balance of the country's financial institutions was 1,436,000 billion yuan (US$173,012 billion), with a loan balance of 11,230 billion yuan (US$1,353 billion) -- up 16 and 11.6 percent respectively year-on-year. Among them, the deposit balance of State-owned commercial banks were 8,750 billion yuan (US$1,054.2 billion), with a loan balance of 6,470 billion yuan (US$779.5 billion) -- up 13.72 and 11 percent year-on-year, accounting for 61 and 58 percent of the total, respectively.

The deposit and loan balances of joint-equity banks reached 1,660 billion yuan and 1,450 billion yuan -- up 37.77 and 36.17 percent, accounting for 12 and 10 percent of the total, respectively. The deposit and loan balances of city commercial banks amounted to 6,790 billion yuan and 4,530 billion yuan, assuming 5 and 4 percent of the total, respectively. The deposit and loan balances of the city's credit cooperatives were 1,830 billion yuan and 1,270 billion yuan, accounting for 13 and 11 percent of the total, respectively.

6. Employee wage level

In 1999, there were 2 million staff members with an average wage level of 12,033 yuan per year. By the end of 2002, with a growing money supply, M2 totaled 18,500.7 billion yuan -- an increase of 16.8 percent over the previous year; M1 totaled 7,088.2 billion yuan -- up 16.8 percent over the previous year; totaled 1,727.8 billion yuan, climbing 10.1 percent over the previous year.

In 2002, as deposits and loans of financial institutions also ballooned, the total deposit balance of financial institutions amounted to 18,338.8 billion yuan, up 18.1 percent over the previous year. The total loan balance reached 13,980.3 billion yuan, up 15.4 percent over the previous year. The loan structure was also improved step by step. The total loan balance of rural credit cooperatives amounted to 1,394 billion yuan, up 195.3 billion yuan over the previous year. The loan balance for consumption use totaled 1,066.9 billion yuan, up 369.4 billion yuan, among which the loan balance for purchasing individual houses totaled 825.8 billion yuan -- up 267.1 billion yuan over the previous year.

[Source: Yearbook of China Financial Market 2001]