Banking

The Chinese banking system has been in a state of transition since 1995, when the People’s Bank of China Law and the Commercial Bank Law both went into effect. The latter law chartered China’s “Big Four” state-owned commercial banks (Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China). The former law designated the People’s Bank of China as the country’s

central bank, with mandates to manage monetary policy and to issue currency. Originally, the People’s Bank was also the regulatory agency for Chinese banking, but that responsibility was removed in 2003 and assigned to the new China Banking Regulatory Commission (CBRC).

The legislation effective in 1995 also created three new “policy banks” (Agricultural Development Bank of China, Export and Import Bank of China, China Development Bank) to assume the state-spending and trade development functions previously performed by the Big Four banks.

Each of the Big Four banks specializes in specific areas of commercial lending and banking services. For example, the Bank of China is involved with foreign exchange transactions and trade financing. A legacy issue for all of these banks has been a high percentage of non-performing loans, mostly from the pre-SOE reform era (1995 and earlier). Between 1998 and 2005, the Chinese government spent USD 283 billion to take many of these bad debts off the books of the state banks through means of purchases through state-run assets management companies.

Of late, the amount of remaining non-performing loans held by China’s major commercial banks, including both state-owned and some private institutions, was estimated to be roughly USD 173 billion. However, financial problems associated with the real estate market may lead to additional loan deficiencies.

Despite the bad loans, foreign banks such as Bank of America and the Singapore bank, Temasek, have been very actively investing in Chinese banks. Current Chinese law allows foreign investment groups to take no more than a 20% interest in a Chinese bank, but several foreign banks now have 19.9% stakes.

Foreign investment has also been strong in China’s so-called second and third-tier banks, which are smaller commercial banks or city banks.

After China’s entry into the World Trade Organization, many foreign banks began to offer their services within China. By 2004, there were over 70 foreign banks with more than 150 branches operating within the country

Recently, China instituted new regulations allowing for the local incorporation of foreign banks, giving them the right to conduct business with local Chinese citizens in Chinese currency. As a result, more than 20 foreign banks opened branches with corporate status in China in 2007.