The Changing Face of China’s Banking Industry

Traditionally, under the old socialist banking system, China’s banking industry was, like most industries, monopolized by the State.  Historically, Chinese banks existed to maintain flows of money between individuals, state owned enterprises (SOEs), then back to individuals again.  The circular flow of money worked like this: SOEs essentially borrowed money from people through state banks so as to continue their (inefficient) operations, which employed and paid wages to thrifty Chinese people, who would then take most of their earnings to deposit at the state banks, and given the limited investment options, thrifty Chinese people rarely withdrew their savings.  This meant that Chinese banks faced little to no liquidity pressure, and were not run like typical western banks.  Non-performing loans were common on bank balance sheets, as government directed lending continued to support troubled and non-competitive SOEs.

Fast-forward to 2001, and China’s accession to the WTO: as part of these negotiations, China promised to open up its domestic banking sector to foreign participation by 2006.   Since December 2006, foreign investors interested in the Chinese banking industry have been able to compete.  Indeed, Chinese authorities have taken measures to make Chinese banks more competitive domestically and internationally, and more attractive to foreign investors, such as through the removal of non-performing loans from bank balance sheets.

However, while restrictions have been formally lifted, foreign bank branches are still forced to deal with a host of additional regulatory requirements. Foreign investors must decide how to enter the Chinese banking market: whether to set up their own wholly foreign owned branch in China, or buy into one of China’s existing state owned banks through equity participation.  The applicable rules and regulations will differ depending on the course chosen.   Those who choose to buy into an existing Chinese bank must comply with a multitude of rules and regulations and ultimately seek approval of the State Council acting on advice of China’s central bank and commercial banking regulator (formerly the People’s Bank Of China (PBOC), now the China Banking Regulatory Commission (CBRC).)  Through this approval process, the State still maintains strong control over foreign participation in Chinese banks.

Yet, despite all the hurdles, many foreign investors still see the Chinese banking industry as a promising investment opportunity.  The pace of growth of the Chinese economy and the enormous personal savings of the Chinese are major drawcards for foreign banks, and for investors seeking an equity stake in a Chinese bank.

The Structure of China’s Banking System

At the apex of China’s banking system is China’s central bank, the PBOC.  It makes and implements policy, oversees the State Administration of Foreign Exchange (SAFE), and formulates foreign exchange polices.  The CBRC has responsibility for maintaining a safe and sound banking system in China.  It regulates and supervises banks, asset management companies, trust and investment companies, as well as other deposit-taking financial institutions. The PBOC and CBRC are state owned institutions.

Beneath the PBOC and CBRC are the so-called “big four,” the four state-owned commercial banks: Bank of China (BOC), Agricultural Bank of China (AgBoC), China Construction Bank (CCB), and Industrial and Commercial Bank of China (ICBC).  The Chinese government owns the majority of each of China’s four largest banks, which control over 50% of all total banking assets and deposits.

Beneath the “big four” are smaller state-owned commercial banks: Bank of Communication, CITIC Industrial Bank, China Everbright Bank, Hua Xia Bank, China Minsheng Bank, Guangdong Development Bank, Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong Development Bank, and Fujian Industrial Bank.

In addition, three policy banks exercise government-directed spending functions: the Agricultural Development Bank of China (ADBC), the China Development Bank (CBD), and the Export-Import Bank of China (Chexim).  These banks are responsible for financing economic and trade developments and state-invested projects.