Government and Business Case Study

Banking Reforms in China: Progress and Constraints

OR

Abstract:
This structured assignment is to accompany the case '107-038-1'. The abstract of the case is as follows: The Chinese banking system, characterised by a low profitability, huge non-performing loan (NPL), state-ownership and low capitalisation, had undergone several generations of reform process since 1978. The banking reform had been able to move Chinese banks, particularly the three strongest of the four largest state-owned banks, down the road toward solvency and success. Three main indicators:

1. Independent ratings.
2. Foreign strategic investments.
3. Retail investments (investment in shares)

revealed that China's banks had made significant improvements. Still, some old lending practices persisted, such as state directive lending and focusing on market share rather than profitability. Shareholder accountability was also lacking. The banks had recovered from the NPL problem through Ministry of Finance-funded asset management companies (AMCs), however they may have difficulty solving their problems independently in the future. The big question thus remained whether the banks would be able to cope with foreign competition as China opens up its banking sector fully to foreign players as part of the World Trade Organisation (WTO) agreement, or would they still require the protective shoulder of the Chinese government.

The paper deals with:

1. the three main pillars of banking reform, restructuring, liberalisation and regulation.
2. the progress and constraints of three generations of banking reform in China.

Pedagogical Objectives:

• To understand the role of reform in the growth strategy and revival of banking companies.
• To have a brief understanding of the Chinese banking industry.
• To understand the three main indicators of measuring the success of a reform: independent ratings, foreign strategic investments.
• To understand the three main pillars of banking reform, restructuring, liberalisation and regulation.

Keywords : China, Bank, Reform, Restructuring, Liberalisation, Regulation, Non-performing loan (NPL), Asset management company (AMC), World Trade Organisation (WTO), Huijin, SOCB (China's state owned commercial banks), Joint-stock commercial banks (JSCB), Foreign investment, Capital injection, China Banking and Regulatory Commission (CBRC)