At the latest count there were 18 Chinese banks operating out of the People's Republic, a considerable increase on the four that existed in 1979. To this figure can be added the plethora of trade and investment corporations (TICs), also known as non-bank financial institutions (NBFIs), which perform many of the functions of western banks.
However the freedom of action of all these organisations is restricted, despite continual attempts to function in a more commercial style. Also, the regulatory structure which governs all banks appears ineffectual as it currently stands. The most outstanding example of this is inter-bank lending, or to be more accurate lending between banks and the NBFIs. According to a World Bank report this activity expanded by 40 per cent in 1992 to reach n140bn (US$24bn), and little can be done under current banking law to discourage banks from the practice.
In an effort to rationalise the banking system, the government is. drafting fiscal laws which will cover the role of the central bank, the functions of all other banks, taxation, insurance and accountancy. The formal policy of the government is to increase the regulatory powers and define more clearly the role of the central bank, which is the People's Bank of China (PBOC), founded in 1948. The banking law governing other banks is intended to increase their autonomy and enhance their commercial viability. It is though that the rules will be presented to the State Council early next year, although the original timetable has already slipped from the end of 1993.
Currently, banks are not allowed to set interest rates, despite press reports to the contrary. Several banks were heavily fined for attempting to set their own interest rates last spring. It is intended that this should be permitted to some extent, but there continues to be considerable disagreement in the higher echelons of the government regarding the roles of the banks in the development of China's economy. On the one hand, it is clear that there must be greater liberalisation of the banking system to ensure sustainable growth of the economy. But on the other, any liberalisation will inevitably erode the control that central government has over the financial system, particularly in the areas of determining interest rates and reserves. There are also disputes about the nature of regulation required over the system as a whole.
In addition to the question of interest rates, greater liberalisation would allow banks to lend on a purely commercial basis. As things stand, they continue to be obliged to supply policy loans; in other words, finance for state-owned enterprises at favourable rates, for procurement and for funding areas of priority investment decided by central government including the construction of expensive infrastructural projects in certain key sectors such as energy, telecommunications and transport, which may not be eligible for aid under the terms of the Helsinki Agreement.
The lead bank in China continues to be the PBOC, governed by Mr Zhu Rongji. Founded in 1948, it performs the functions one would expect of a central bank, such as formulating policy regarding credit, interest rates, foreign exchange earnings, currency convertibility, monitoring the movement of capital and overall reserves, and regulating and supervising the behaviour of the other state banks. Currently it is investigating the management of equity-debt ratios, risk and assets in the Special Economic Zones and Shanghai. Also it has been assigned the management of credit plans in Guangdong province, a function traditionally assumed by central government, but devolved to PBOC as a regulatory experiment.
The central banking law currently being drafted is expected to reinforce PBOC's position as the central bank and to define clearly its role, particularly on regulatory matters. The World Bank has recommended wholesale restructuring, from divestment of profitable activities (such as the ownership of securities companies and the operation of mutual funds) to the reorganisation of branches into a few regional offices and the spinning off of surplus branches and staff to form a new commercial bank. Whether the State Council will act on this is unclear.
There are four huge specialised banks which are wholly owned by the state. The oldest is the Bank of China (BOC). Established in 1912, BOC was the first bank allowed to engage in raising foreign funds for China, to enter foreign capital markets and to deal in foreign exchange. It is now thought to be on the point of issuing Hong Kong dollars, although its initial issues will be small. It participates in syndicated loans and investment.
The People's Construction Bank of China (PCBC) was established in 1954 primarily to fund urban development and expansion. Its supervision is divided between the Ministry of Finance and PBOC. Although it takes deposits and is engaged in commercial activities, its main function has been to channel state funds into urban development. It has links with urban credit associations, which are the small organisations that pool money for investment purposes in urban areas, although it does not have a supervisory role over these associations.
PCBC has shared the funding with the Industrial and Commercial Bank of China (ICBC), whose president is Ms Zhang Xiao. Of ICBC's 23,000 branches employing half a million staff, 138 handle international business. Recently the bank has been expanding over-seas (see box). ICBC issues bonds and shares, takes deposits and is also involved in real estate loans and development programmes. In 1991 it loaned US$530m to China National Oil Corporation to finance the development of an offshore gas field and it continues to lend money for the construction of residential and commercial property. A range of intermediary services are also offered, such as assets appraisal, payroll credit and custodial services. It operates the Peony credit card, and has issued over one million cards, representing 60 per cent of the existing market for credit cards in China.
The Agricultural Bank of China (ABC) has 51,000 branches and around 450,000 employees. It was established in 1979 and supplies loans to state-owned enterprises, takes deposits and is involved in. all aspects of agricultural and rural development in China, from procurement of equipment through to purchase of staples such as grain and cotton. Like other banks in China, the Agricultural Bank is developing its international business and is also involved in the issue of bonds and stocks. In 1988 it participated in the establishment of the International Bank for Agricultural Development, China's second joint venture bank. Its partners were the Development Bank of Singapore, the International Finance Corporation, Deutsche Genossenschaftsbank, Rabobank Nederland and the Yasuda Trust and Banking Co Limited.
It is thought that the State Council will approve the establishment of the Agricultural Policy-Oriented Bank, which would probably absorb the 'state policy loan' transactions such as financing for bulk staples, procurement, loans for agriculturally-linked state-owned enterprises such as equipment factories, leaving ABC to function as an entirely commercial operation.
PBOC supervises a collection of five banks which collect funds through the issue of bonds and stocks, rather than through deposits. These include the China Solicitors' Bank and three regional development banks: the Guangdong Provincial Development Bank, the Shenzhen Provincial Development Bank and the Xiamen International Bank. These were set up in the mid-1980s as channels for funds destined for the development of Special Economic Zones (SEZs). The Xiamen International Bank was established in 1985 as the first joint venture bank in China and is owned by the Hong Kong company Panin and three state-owned financial institutions.
The Bank of Communications, a Shanghai-based organisation established in 1908, was revived in 1987. Focusing initially on Shanghai, it has been involved in setting up local currency trades and foreign exchange business, insurance, real estate, securities and bond issues linked to the development of the city and its needs for swaps facilities. It was one of the nine financial institutions permitted to raise foreign exchange funds in 1987, along with BOC, the China Investment Bank and six provincial TICs.
The China Investment Bank was established in 1981, its president being Mr Lu Xianlin. Its main activity is now the raising of foreign funds through syndicated loans, club loans and bilateral loans to finance fixed asset investment projects. The bank is also involved in settlement of imports, exports and non-trade settlements, and owns an international leasing company. It is involved in supplying finance for aviation and telecommunications projects. Whilst regarded as a national policy bank, its position is unclear given that the State Council has announced its intention to establish a National Export-Import Bank and a National Bank of Long-term Credit.
Finally, five commercial organisations fall directly under the supervision of PBOC, although all appear to be obliged to some extent to participate in structural loans that might be more appropriately handled by the proposed ?policy? banks. The five include two formed in 1987: the Everbright Bank and the CITIC Industrial Bank ? an offshoot of the China Investment and Trust Corporation (CITIC) set up primarily to handle the banking aspects of CITIC business. Only last year the Shongang Iron and Steel Company created the Huaxia Bank ? the first state-owned enterprise to establish its own bank, with registered capital of US$172m. Meanwhile, the State Council has approved the establishment of the Fujian Industrial Bank, which will support investment activities in the SEZ of Fujian and China Merchants Commercial Bank with total assets of US$1.7bn, which will provide merchant banking facilities in Shenzhen.
PBOC and local governments generally have shareholdings in five commercial banks, although share ownership may be broadened in the long-term. All of the banks can engage in foreign exchange activities, but will be tightly regulated by the State Exchange Control Administration (SECA). The banking laws are currently so nebulous that it is unclear how SECA will be affected by them, although presumably its function could be devolved to PBOC under the Central Bank Law.
Any picture of banking in China would be incomplete without a mention of the foreign banks involved in China. The first four banks to set up representative offices and then branches were the Bank of East Asia, Hongkong and Shanghai Banking Corporation, Standard Chartered and the Overseas Banking Corp. Now there are around 70 foreign banks with branches and representative offices in the major cities, namely Beijing, Shanghai, Guangzhou and the SEZs. They are still limited by state controls in terms of the services they can offer to projects and enterrises, but the banking laws may in the Future allow them greater flexibility, building on the simplification of approvals for foreign financial services companies initiated by PBOC in 1991. *
ICBC branches out
The Industrial and Commercial Bank of China (ICBC) is China's largest commercial bank and recent developments have helped it to further its ambitions of expansion. On the domestic front, ICBC has become the first branch of a state-owned bank to open in the Yangpu economic development zone. Overseas, it recently announced that it is soon to open a branch in New York and a representative office in Seoul. Timing of the openings depends upon approval from the US and Korean financial authorities and an assessment of the bank's assets by international organisations.
ICBC, with an existing representative office in Singapore and a branch in Alma Ata, Kazakhstan, aims to raise more funds on the world market to support construction of China's key projects and strengthen ties with foreign financial institutions. To August 1993, ICBC had provided US$5.3bn of foreign exchange loans to large and medium-sized state companies. Its biggest hard currency loan to date is a US$530m foreign exchange loan to the Nanhai natural gas project which is located offshore in the South. China Sea. Total foreign exchange savings deposits over the same period reached US$6.4bn and hard currency assets were just short of US$9bn.