VIII Международная студенческая научная конференция Студенческий научный форум - 2016

This work is prepared in order to present and analyze the current situation in China Mainland banking. It concentrates on the analysis of problems, key tendencies and most significant news of the sector, concerning macroeconomic environment. The research is based on the publications of national and foreign scientists, works of experts in the banking sector, views and experience of professionals, working in banking sector, and data from the official sites. Author tries to make general predictions about the consequences of latest events effecting performance of Chinese banking. In order to do this author overviews the structure of Chinese banking sector, tracks the growth of the sector (through growth of assets and liabilities), examines the problem of nonperforming loans and factor influencing them, considers profitability and risk resistance of Chinese banks. Evolution of Chinese banking and description of its structure

1.  
   1. Evolution of Chinese banking sector

During the whole period of its development, banking sector of China satisfied the needs, which arose as economic policy of the country changed. Banking sector serves as the key instrument of controlling of economic and social processes in China. The role of Chinese banking increased after 1978, as intensive monetarization and commercialization of Chinese economy started. The new reform of 1994 was provided in order to realize strategic goals and solve the problems of stabilization after transition period. The current goals for the BS are development of financial connections with production sector and providing freedom for decision-making and actions of economic entities. The problems which BS has to solve are reorganizing and restructuring banks, increasing capitalization of commercial banks, decreasing number of bad loans and reducing risks increasing the banking stability. According to PRC’s policy all listed problems are solved considering Chinese specificity.

1.  
   1. Structure of Chinese banking sector

Chinese banking sector has two-tire structure. The first level is the Peoples Bank of China (Chinese central bank). The second level includes specialized governmental banks and wide banking network. In the same time there exist cities’ cooperatives, rural credit cooperatives and cities’ banks, which provide credit and depository operations.

 

Peoples bank of China

 

 

Commercial Banks

Cities’ and rural credit cooperatives

Cities’ credit banks

Specialized governmental banks

Private Banks

 

Peoples Bank of China is the central bank of PRC. It was founded in 1948 by merger of three largest Chinese banks. The head of Peoples bank of China is director, who is proposed by prime of the State Council (Prime minister) of the PRC and appointed by the decision of National People’s Congress. Peoples Bank of China controls the monetary policy of country. It is empowered to use following regulators:

• Setting up proportions for deductions to the reserve funds

• Setting up the Bank rate (of central bank)

• Providing credits to commercial banks

• Buying and selling Government bonds.

Peoples Bank of China has a right to “handle” a commercial bank. It occurs when commercial bank is in crisis, which can influence the interests of depositors.

Commercial banks commercial banks can be divided into two big groups: those, which operate on the mainland and Hong Kong banks. The authority of Peoples Bank of China is not spread over the Hong Kong territory, so there is no currency control in Hong Kong and the capital movement is not restricted. Previously commercial banks could have been founded either by government or by both government and big enterprises (on the joint stock basis), however now the foundation of private banks is allowed. Minimal authorized capital for commercial bank is 1000000 RMB. Chinese commercial banks are not allowed to

• Provide operations with stocks

• Invest in real estate (except real estate for banks’ needs)

• Invest in nonbank credit organizations.

Five largest banks have leading positions in the sector. These banks are Bank of China, China Construction Bank, Industrial & Commercial Bank of China, Bank of Communications and China Merchants Bank. They form the basis of Chinese banking having share of approximately 70 – 80% of all deposits and loans.[1] Initially they were created as banks providing support of certain economic branches, however lately lost their specification.

Cities’ banks are banks, which operate only within cities and provide services for companies within certain territory.

Credit cooperatives are small institutions, which operate mainly in rural areas. They work as savings banks and usually reallocate resources to cities. Paradoxically but undeveloped rural areas have more savings than investments. There are about 44000 of credit cooperatives in China. The lack of qualified staff and unprofessional management lead to the large amount of bad loans within loan structure of credit cooperatives.

Private banks are not numerous in China. The reason is that decision on promoting and developing private banks was made only on June 2015. Private bank system is supported to improve the current financial system, create a financing market for small and micro-sized enterprises, and form a well-structured financial system, thus provide more targeted and convenient financial services to real economy. Now there are six private banks in continental China.

Foreign banks are represented by about 200 institutions concentrated in large cities and coastal regions. Their activity is strictly regulated by governmental license system, which makes competition between them and governmental banks impossible.

Banking sector condition analysis

1.  
   1. Total assets and total liabilities

Assets and liabilities remain increasing in 2015, however their growth rates are still lower than rates which correspond to the boom period. Author expects tendency of rates increase to continue due to appearance of private banks in the sector. Newly formed Chinese private banks are expected to provide more market oriented, hence more attractive services accelerating the growth rates of assets and liabilities of the whole sector. The historical data concerning the amounts of assets and liabilities and rates of their growth is represented by following two graphs, which are build using CBRC data (see appendix 1 and appendix 2).

1.  
   1. Non-performing loans

One of the most urgent problems in Chinese banking is acceleration of non-performing loans. According to CBRC non-performing loans are doubtful and loss loans. From 2013 the NPLs of commercial banks in China showed 46% absolute increase, while their share in loan structure increased by 30,9%. The most significant increase is fixed between the fourth quarter of 2014 and the first quarter of 2015 (14,2%). Today non-performing loans make up 1,39% of Chinese banks’ loans. Experts expect that NPLs will keep rising, as factors influencing them strengthen. The rise of non-performing loans and their share in loan structure of the sector can be represented by two following graphs. Graphs are build using information from NBS official site (see appendix 3).

1.  
   1. Reasons for the increase of non-performing loans

Two reasons, which lead to acceleration of non-performing loans in China, are overcapacity (overproduction) and economic slowdown. Overproduction is followed by decrease of Chinese industrial sector profits growth rates, recorded since the first quarter of 2013. During 2015 profits of Chinese industrial sector (which makes up about 40% of economies GDP) contract. It leads to the dramatic increase in nonperforming loans.

Quality of banks’ loans is related to the economic cycles. History proves that during the economic slowdowns the quality of banks’ loans declines, while during the expansion periods credit assets show good quality. According to the IMF data, China shows the lowest rates of real GDP growth rates since 1990. PRC’s real GDP growth rate in 2015 is 6,8%.

The slowing of Chinese economy can be represented by another significant indicator, which is known as «Li Keqiang» index. «Li Keqiang» index is used to evaluate the situation in Chinese economy using three indicators, which are the railway cargo volume (20%), electricity consumption (40%) and loans disbursed by banks (40%).

According to the growth index used by PRC’s prime minister Chinese economy shows the worst growth rates since 2005. International monetary fund expects China real GDP growth rates to be on the level 6-7% until 2020. Author supposes that as recession in Chinese economy continues non-performing loans balances will keep rising in the next five years.

1.  
   1. Profits of Chinese banking

Despite the hard economic situation and obligation to increase capital imposed by regulatory organizations, Chinese banks succeeded to increase their profitability in 2014 and 2015. KPMG experts believe that banks multiplied their profits through innovative financial services provided to their clients.[5] Nevertheless, China Banking Regulatory Commission reported that growth of banks’ profits in the third quarter of 2015 continued to slow down and presented only 2,21% year on year (see appendix4).

Now Chinese banking profits growth rates are lowest since the period of World Economic Crisis. However, will banking profits growth rates remain low or will they accelerate is an aspect of debate. On one hand, according to the experts’ expectations nonperforming loans will continue increasing with simultaneous contraction of borrowings by industrial sector (suffering from decreasing profits). Both factors will definitely negatively influence banking profitability, as interest income makes up 62,2% in Chinese banking income structure. Income structure of banking institutions can be represented by the following pie chart.

On the other hand, in the long run author could expect positive effect on banking profitability from two factors, which are appearance of the private banks in the sector and deposit insurance system implementation. It was already mentioned, that private banks should provide more market-oriented services and create financing market for small enterprises, their activity should increase profitability of the whole sector. Appearance of deposit insurance system can also increase banking profits. Since deposits are ensured, risks are lower and depositors agree to get less income, hence make lower interest rates deposits. Lower interest rate deposits mean higher profits for banks. It will take time for described positive factors start working, while negative factors are already influencing banking profits. Summing up, author expects that in the nearest future increase of Chinese banking overall income would be relatively low. Later on, previously described factors will play their role.

1.  
   1. Overall risk resistance

In the fourth quarter of 2015 China Banking Regulatory Commission provided comments on the supervisory statistics concerning the third quarter of the current year. Regulator underlined that overall risk resistance remains stable. The provision coverage ratio is 190,79%, while the loan loss provision ratio is 3,04%, which is 0,06% more than in the previous quarter. Weighted average CAR (capital to risk adequacy ratio) was 13,15% (For example: Minimum CAR for U.S. banks is 8%). It means that the situation about the risks is generally under control [4].

A very significant step for reducing risks and increasing stability of Chinese banking is introduction of deposit insurance system. The deposit insurance system was introduced in 1 May 2015, however it is rather controversy measure. On one hand, it increases stability as in case of risks or even bankruptcies depositors would not run on the bank, because they know that their deposits are insured. On the other hand, deposit insurance system can change depositors’ behavior. They can become too confident about risks and check bank’s performance less, rather than choosing the most reliable institution. All in all, author is sure that appearance of deposit insurance system will positively affect risk resistance of the sector.

Conclusion

This work allows to resume that Chinese banking sector faces permanent problems as pace of banks’ growth declines and the ratio of non-performing loans increases at higher rates with simultaneous decrease of profits growth. Author expects banking sector expansion to continue slowing down due to the recession in the economy and overproduction. In the same time, author is convinced that risk resistance and stability of banking system will increase, because of actions of Chinese regulators and May’s deposit insurance system implementation. Author is sure that after recovery of economy, Chines banking sector will start to expand at high rates due to the appearance of private banks, which are expected to attract clients by more market oriented products and better-quality services. In the long run new players (private banks) will grow and increase profitability of the whole sector.

Appendix 1 Total assets of banking institutions (2003-2014)
Unit: RMB 100 million
Institutions/ Year	2003	2004	2005	2006	2007	2008	2009	2010	2011		2012		2013		2014
Banking institutions	276,584	315,990	374,697	439,500	531,160	631,515	795,146	953,053	1,132,873		1,336,224		1,513,547		1,723,355
Policy banks & the CDB	21,247	24,123	29,283	34,732	42,781	56,454	69,456	76,521	93,133		112,174		125,278		156,140
Large commercial banks	160,51	179,82	210,05	242,364	285,000	325,751	407,998	468,943	536,336		600,401		656,005		710,141
Joint-stock commercial banks	29,599	36,476	44,655	54,446	72,742	88,337	118,181	149,037	183,794		235,271		269,361		313,801
City commercial banks	14,622	17,056	20,367	25,938	33,405	41,320	56,800	78,526	99,845		123,469		151,778		180,842
Rural commercial banks	385	565	3,029	5,038	6,097	9,291	18,661	27,670	42,527		62,751		85,218		115,273
Rural cooperative banks	—	—	2,750	4,654	6,460	10,033	12,791	15,002	14,025		12,835		12,322		9,570
Urban credit cooperatives	1,468	1,787	2,033	1,831	1,312	804	272	22	30		—		—		—
Rural credit cooperatives	26,509	30,767	31,427	34,503	43,434	52,113	54,945	63,911	72,047		79,535		85,951		88,312
Non-bank financial institutions	9,100	8,727	10,162	10,594	9,717	11,802	15,504	20,896	26,067		32,299		39,681		50,123
Foreign banks	4,160	5,823	7,155	9,279	12,525	13,448	13,492	17,423	21,535		23,804		25,628		27,921
New-type rural financial institutions & Postal savings bank	8,984	10,850	13,787	16,122	17,687	22,163	27,045	35,101	43,536		53,511		62,110		70,981

Notes: Data for 2003 to 2006 refer to the combined assets of banking institutions within China.

Data for 2007 to 2014 refer to the consolidated assets of banking institutions within and outside China.

Appendix 2 Total liabilities of banking institutions (2003-2014)

Unit: RMB 100 million
Institutions/ Year	2003	2004	2005		2006		2007		2008		2009		2010		2011		2012		2013		2014
Banking institutions	265,945	303,253	358,070		417,106		500,763		593,614		750,706		894,731		1,060,779		1,249,515		1,411,830		1,600,222
Policy banks & the CDB	20,291	23,005	27,760		33,006		39,203		52,648		65,393		72,159		88,231		106,647		118,966		148,704
Large commercial banks	154	172,18	200,45		228,824		269,18		306,142		386,036		440,332		502,591		560,879		611,611		657,135
Joint-stock commercial banks	28,621	35,333	43,320		52,542		69,350		83,924		112,54		140,872		173,000		222,130		253,438		294,641
City commercial banks	14,123	16,473	19,540		24,723		31,521		38,651		53,213		73,703		93,203		115,395		141,804		168,372
Rural commercial banks	380	538	2,873		4,789		5,767		8,756		17,546		25,643		39,208		57,841		78,492		105,954
Rural cooperative banks	—	—	2,574		4,359		6,050		9,381		11,940		13,887		12,959		11,796		11,232		8,732
Urban credit cooperatives	1,464	1,766	2,001		1,781		1,247		757		255		21		24		—		—		—
Rural credit cooperatives	26,646	30,035	30,106		33,005		41,567		49,893		52,601		61,118		68,575		75,521		81,434		83,270
Non-bank financial institutions	7,683	7,745	9,126		9,424		7,961		9,492		12,649		17,063		21,310		26,194		31,952		40,384
Foreign banks	3,751	5,329	6,530		8,532		11,353		12,028		11,818		15,569		19,431		21,249		22,896		24,832
New-type rural financial institutions & Postal savings bank	8,984	10,850	13,787		16,122		17,568		21,942		26,713		34,365		42,247		51,712		59,812		67,972

Notes: Data for 2003 to 2006 refer to the combined assets of banking institutions within China.

Data for 2007 to 2014 refer to the consolidated assets of banking institutions within and outside China.

Appendix 3 NPLs of banking institutions (2010-2014)
Unit: RMB 100 million, percent
Items/Year					2010						2011						2012						2013												2014
Outstanding balance of NPLs					12,437.0						10,533.4						10,746.3						11,762.7												14,334.7
Substandard					5,852.5						4,784.3						5,270.6						5,649.4												7,295.2
Doubtful					4,967.8						4,400.9						4,386.7						4,899.4												5,639.3
Loss					1,616.7						1,348.1						1,089.0						1,213.9												1,400.2
NPL ratio					2.4						1.8						1.6						1.5												1.6
Substandard					1.1						0.8						0.8						0.7												0.8
Doubtful					1.0						0.7						0.6						0.6												0.6
Loss					0.3						0.2						0.2						0.2												0.2
Appendix 4 Profit after tax of banking institutions (2007-2014)
Unit: RMB 100 million
Institutions/Year	2007		2008					2009					2010						2011							2012				2013								2014
Banking institutions	4,467.3		5,833.6					6,684.2					8,990.9						12,518.7							15,115.5				17,444.6								19,277.4
Policy banks & the CDB	489.3		229.8					352.5					415.2						536.7							736.3				922.1								1,079.6
Large commercial banks	2,466.0		3,542.2					4,001.2					5,151.2						6,646.6							7,545.8				8,382.3								8,897.5
Joint-stock commercial banks	564.4		841.4					925.0					1,358.0						2,005.0							2,526.3				2,945.4								3,211.1
City commercial banks	248.1		407.9					496.5					769.8						1,080.9							1,367.6				1,641.4								1,859.5
Rural commercial banks	42.8		73.2					149.0					279.9						512.2							782.8				1,070.1								1,383.0
Rural cooperative banks	54.5		103.6					134.9					179.0						181.9							172.2				162.1								125.5
Urban credit cooperatives	7.7		6.2					1.9					0.1						0.2							—				—								—
Rural credit cooperatives	193.4		219.1					227.9					232.9						531.2							654.0				729.2								829.8
Non-bank financial institutions	333.8		284.5					298.7					408.0						598.8							825.5				1,059.7								1,265.2
Foreign banks	60.8		119.2					64.5					77.8						167.3							163.4				140.3								197.2
New-type rural financial institutions & Postal savings bank	6.5		6.5					32.2					119.0						257.9							340.7				390.3								427.3
Appendix 5 Liquidity ratio of banking institutions (2007-2014)
Unit: percent
Items/Year		2007				2008			2009						2010						2011							2012				2013								2014
Banking institutions		40.3				49.8			45.7						43.7						44.7							47.8				46.0								48.4
Commercial banks		37.7				46.1			42.4						42.2						43.2							45.8				44.0								46.4

References

1. Shenin R.K. “Bankovskiye sistemi stran mira” Knorus (2015).

2. Krugman P. and Wells R. “Macroeconomics” Worth Publishers.

3. Lavrushin O.I. “Dengi, Kredit, Banki” Knorus (2012).

4. China Banking Regulatory Commission (http://www.cbrc.gov.cn/english/index.html).

5. “KPMG mainland Chinese banking survey” (2015). (http://www.kpmg.com/cn/en/issuesandinsights/articlespublications/pages/mainland-china-banking-survey-201507.aspx#.VmbliB9Ieuc)

6. “Foreign Banks in China” Pricewaterhouse Coopers. Hong Kong, 2012.

Код для цитирования: Скопировать