留学生毕业dissertation：中国金融系统的改革与发展研

 

Abstract

China’s financial reforms started 1978, the banking system reform was base on the economy transforming from a planned economy to the market economy. Over twenty years reform, the Chinese banks were obvious successful. However, some problems were still unsolved, such as the accumulation of non-performing loans, weak supervision, low profitability, capital inadequacy, and so on.

On 11th December 2001, China joined to WTO, follow the WTO commitments, China allow opens the wholly financial market to the foreign financial institutions. This means the many foreign banks entry to China. the domestic banks face to strong competition.

This dissertation would analysis the ongoing banking sector reform, the current structure and situation of the Chinese domestic banks, and discussed the development of the foreign banks in China. Then use the two case studies compare and contrast between foreign banks and domestic banks, use the SWOT analysis summaries their strength, weakness, opportunities and threats. Finally, it comes up some recommendations for domestic banks and foreign banks to survive in the competition.

Keywords

Chinese banking system, Chinese domestic banks, foreign banks in China, WTO accession, Chinese banking reform, non-performing loans, state-owned enterprise, profitability, efficiency.

Preface

The reason to research this topic is for personal interest. China is the largest population country, following the Chinese economy rapid growth; these attract many foreign investors entry to China. After China’ s WTO accession, China opening financial market, many foreign banks will flood into China, the Chinese domestic banks face to the fierce competitive pressure from the foreign banks. Facing this situation, to analysis the Chinese banking sector is an interesting topic to research.

I would like to express my sincere appreciation to my supervisor Ding Rong, who has given me zealous assistance, support and advice during the process of research and writing this dissertation.

I would like to thank my friends who helped me during my stud in UK, and last, I would like to thank my family, for their endless love and support.

Chapter 1 Introduction 

China is the largest developing country in the world, it has achieved outstanding economic developing, such as some Chinese government’s policy reform and “open the door” for foreign investors. Some foreign investors entry to China to expand their company and open the new trade. They also open some branches of foreign bank in China. However, there is so many strictly limited for the foreign banks. After December 2001, the China’s accession to the World Trade Organization (WTO), the some restriction of foreign bank will gradually canceled, the more and more foreign investors glad to open the branches of foreign banks in China.#p#分页标题#e#

For the foreign banks, they need face to the different country environment, dissimilar banking systems, and the different banking regulation. Uniformity, the domestic banks face to the new challenge. When the new banks entry to Chinese financial market, they need to find the way to competition with strong competitors. In the same time, domestic banks need to solve the problem which is existent matter in past time.

This dissertation will state the country environment and the Chinese banking system, according to the literature review, find the remaining problems, and current structure of banking, then focus on compare the foreign bank and domestic bank, analysis the new challenge in domestic banks and foreign banks after China’s WTO accession. Finally, give some recommendation and conclusion.

1.1 Research objective

The main objective of this paper is to compare and contrast the foreign bank and domestic bank system, and use some cases to illustrate the foreign bank effect domestic banks, and then give some analysis and discussion, it’s lead to know the current circumstances of China’s banking sector and Foreign banks in China

1.2 Research Question

To achieve the objective, my research tries to find the answer for the comparison and contrast between foreign bank and the domestic banks in the post-WTO period. The question in detail is followed:

 What the macro environment effect foreign bank entry to China ?

 How dose the operation of foreign bank in China?

 Compare the foreign Banks, what should the domestic bank do?

 How did the Chinese financial market change in past time?

 Who is the winner in Chinese financial market?

1.3 Research Significance

Following Deng Xiaoping’s reform and open the door policy, the Chinese leaders regard the WTO accession as the second most important change in China’s economic policy regime. After China’s WTO accession, the Chinese financial market has the space of developing and opportunities. For example, it can attract more and more foreign investors. When the foreign financial institution entry to China, they can bring considerable capital，for the regulation, when the foreign bank set up the branches in China, they must bring the 100,000,000 RMB capital, if they can deal in RMB operation, they must increase 30,000,000 RMB. (source: http://www.sdau.edu.cn/rf/WTOzl-2.htm) Another example is when China’s WTO accession, the competition will become more actively, it can promote domestic bank reform and developing. 

However, when the foreign bank entry to China, they will have the enough ability to solve some problem. Because they need to face the different environment and banking system, they must adapt the new strategy to face the dissimilar banking regulation in China.

In the same time, the domestic bank has the challenge for foreign bank. Compare with the foreign bank, the domestic has some shortages, such as NPLs, tax etc. They also have some advantages, compare with foreign bank in the China. For example, there are some restrictions for foreign banks, such as service objects, the working and operation area. So face these shortages and advantages, the domestic banks need find the new strategy and reform to become stronger, in order to competitive with the foreign banks. #p#分页标题#e#

After 2006, when the China promises to fully open its financial market for foreign participate, the lots of foreign banks entry to China, so this topic becomes increasingly more popular and important. I would to give own contribution to research. The finding from this research should help answer some of the questions of the restriction for foreign bank, and problem of the domestic bank, thereby, more deeply to understanding the Chinese financial market and banking system.

1.4 Chapter Contents

Chapter 1 

Introduction to the foreign bank entry to China, research objectives research questions and the research significance.

Chapter 2

The country and the Chinese system profile: know the Chinese financial system, economic, legal, social and bank backgrounds.

Chapter 3

Literature review on domestic bank s characteristics, the problems encountered, and after China’s WTO accession, the impact of the Chinese banking industry. 

Chapter 4

Research methodology and the justification for methods and techniques adopted, then outline the limitations.

Chapter 5

Data analysis: use the information and other figures analysis the current situation of domestic bank.

Chapter 6

Data analysis continued: know the history of foreign banks in China, anaysis the foreign banks entry strategy and performance

Chapter 7 

Data analysis continued: use two case study compare between the domestic banks and foreign banks, SWOT analysis summarize their characteristics

Chapter 8

conclusions and recommendation for future research develop.

1.5 Chapter Summary 

In this chapter, a brief introduction of the foreign bank entry to the China was introduced. Research objectives and questions were addressed. The chapter contents were outlined. It then move to Chinese background profile, to general information of environment, which the foreign banks will face when they entry to China.

Chapter 2 Chinese background Profile

2.1 Introduction 

This Chapter will be discussing the Chinese background profile, make the foreign investors know the Chinese environment. Firstly, it will introduce the country environment, and then describe the Chinese banking system.

2.2 Country profile

China has the rapid economic growth in the past decades, in the financial market, it also has the huge change, this attract many foreign investors coming to invest some trade, especially, when China’s WTO accession, the many foreign banks entry to China. However, when the foreign banks entry to China, they will know the country environment.

2.2.1 Political environment#p#分页标题#e#

 Open door policy

Since 1978, Deng Xiaoping announced “the open door policy”, this policy was introduced by China began to allow international trade and foreign direct investment. In the same time, it also earmarking four cites as Special Economic Zones (SEZs), government offering tax privileges and tax exemption to encouraged the foreign investment and new trade established in these areas. Beside SEZs, many coastal cities were also designated as opened areas. For example, Shanghai and Tianjin. This policy has been carried out for more than 20 years. Deng Xiaoping let these coastal areas have growth first, and then wealth effects can be infiltrated into inland areas. This policy is successful, especially in the Shenzhen; the foreign investment was motivated obviously successful. (source: http://www.geocities.com/colamon1/colamon. WBP.html )

 Prudent and Tight monetary policy

In 1997, China has been implementing a prudent monetary policy, however, from 1998 to 2002, the Country increased money supply to counter deflationary pressure. So From 2003 to 2007, the China decide change “prudent” to “ tight” , adopt tight monetary policy, that mean, A central bank policy designed to curb inflation by reducing the reserves of commercial banks and consequently the money supply, through open market operations. (source: http://www.investorwords.com/4974/tight_monetary_policy.html ) the policy help address changes in economic development, including rapid growth in credit extension, investment and foreign exchange reserves. This policy reflects the right judgment on China’s current economic. (Song Shutao, 2007)

2.2.2 Legal environment

In the Chinese Banking system, there are some laws to restrict Chinese banks. The law is called “Law of the People’s Republic of China on Commercial Banks”. This adopted in May, 10, 1995. (National Congress, 1995) it’s the most fundamental set of rules governing both domestic and foreign banks. It defines major rights and liabilities of commercial banks. For foreign banks entry to China, the Chinese government also has some rules to control and management them. For example, general rules applicable to domestic banks and foreign banks, rules specialized for foreign banks. Except these rule, the “Law of the People’s Republic of China on Commercial Banks, Operational Guidelines of Foreign Financial Institution in People Republic of China” (PBOC 2002) were specific for foreign banks and defines their establiment and business scope.

2.2.3 Economic environment

 Economic reform 

The Chinese economic reform refers to the program of economic reforms called “Socialism with Chinese characteristics” in the People’s Republic of China (PRC). The goal of Chinese economic reform was to generate sufficient surplus value to finance to the modernization of the mainland Chinese economy. (source:http://en.wikipedia.org/wiki/Economic_reform_in_the_People's_Republic_of _ China) Chinese economic reform has been an economic success; from the early 1980s to present, it’s over two decades of rapid economic growth. In these period effect the financial system is three period. Firstly, in the early 1980s, the market institutions were created to a price driven market economy. When the enterprises begin to gain profit, the foreign trade’s bring modern technology and foreign exchange; the inflation, crime and corruption problems were occurred ( source: World Bank, August 10, 2006. ) secondly, in the late 1980s, the Chinese economy is a mixed system. When the expansion of the reform program, the economy was no longer tightly controlled by the plan, in addition, the prices were still set or restricted by government, market can’t operate efficiently. Then leadership of Deng Xiaoping pointed out making great progress but can not entirely in control.#p#分页标题#e#

Thirdly, in early 1990s, central planning required the creation of mechanisms to set monetary policy, and a system of banking and capital markets. It work was done throughout the 1990s to put these systems in place. (World Bank, August 10, 2006.) however, after the system of fixed price became to prices were market based, most of the SOE’s became unprofitabl because they provide general social service provision, nobody wants to buy, This press move on the banking system, because they borrowing from the banks, created many non-performing loans.

 Foreign direct investment 

Table 1 Stages of FDI in China (USD million)

Beginning stage (1991) FDI 23,350

High-speed growth stage (1992-1995) In 1995, China’s FDI 15.0% of world

Structure adjustment stage (1996-2000) Slowly/ negative growth

Instauration stage (after2001) Increase very rapid.

Source: personal collected

China’s FDI has the four stages (Table 1) the one point need mention, in the third stage, the FDI growth slowly, and some year has the negative growth were effected by 

the financial crisis in Asia and global economy recession. In stage four, after China joined the WTO, the FDI increase very rapid. (Wang Suqing, 2004) In the 2002, the total amount of actual usage the FDI is USD 52,700 million, this amount exceed the United States, become to the first in the world. So the FDI has already occupied an important position in the Chinese economy. (source: http://www.crifs.org.cn/0416show.asp?art_id=120 )

 WTO accession

At the end of 2001, China joined the World Trade Organization (WTO). China commit to open its financial markets to the foreign competitors. It has the implication for the country’s financial system, especially in banking industry, all the business and geographical limitation that previously restricted the activities of foreign banks in China will be gradual removed, such as type of services, geographic restrictions, Clients, licensing, and so on. ( Economic Forum, HKTDC, 2001) (additional acitivities see appendix two)

1. Type of services

 Acceptance of the deposits and repayable funds form the public

 Lending of all types, such as the consumer credit, mortgage credit, factoring and financing of commercial transaction.

 Guarantees and commitments

 Financial leasing

 Credit cards charge and debit cards, travelers cheques and bankers drafts (including import and export settlement) all payment and monet transmission services.

 Trading for own account or for account of customers: foreign exchange

2. Geographic restrictions

Table 2 geographic restriction

Foreign currency business No restrictions

Local currency business

Time Religion

No restriction (WTO) Shanghai, Shenzhen, Tianjin and Dalian

WTO + 1 Guangzhou, Zhuhai, Qingdao, Nanjing and Whhan

WTO + 2 Jinan, Fuzhou, Chengdu and Chongqing

WTO + 3 Kunming, Beijing and Xiamen#p#分页标题#e#

WTO + 4 Shantou, Ningbo, Shenyang and Xi’an

WTO + 5 No restrictions 

(source: Robinson, 2003)

3. Clients

Table 3 regulation for foreign and local currency business 

Foreign currency business No restrictions

Local currency

WTO + 2 Only for Chinese enterprises.

Operation capital: >= 600 million RMB

WTO + 5 For all Chinese clients.

(source: Deepak Bhattasali, Shangtong Li, and Will Martin, 2004 )

2.2.4 Social and cultural environment

China is one country, however all Chinese are not the same, because Chinese have the different live style, the business and management styles also have the dissimilar conduct. For example, the experience in China has persuaded some foreigners that in contract negotiations, the people from Beijing are easy to deal with, however, the Shanghai people are cunning, and they also well versed in Western business practice. In China, it also can meet two broad types of Chinese. Firstly, it’s older Chinese officials and business people are old fashioned, conservative in manner and traditional in approach. They dislike the innovation. Secondly, it’s young bustling entrepreneur. They are more Westernised and has often thrown off traditions in an effort to be trendy and modern. (Kevin B. Bucknall, 2002)

However, in China there are some culture are not nice. The culture of corruption is one of them. They controlled the largest enterprises or have the ascendance in personal, judicial, administrative and financial sectors. But they utilize authority to do the cheat, violent, illegal conduct; the purpose is in possession of public property. Despite China pushed push anti-corruption measures in- depth way, the bribes and corruption were not stopped.(source:http://english.cri.cn/3178/2006/07/28/ [email protected])

2.2.5 Technological environment

In the banking system, along with the technological improve, the banking technological also increase. In early year, the product and services are fewness, consumer need go to the banks to take money and put money in. but nowaday, the consumer can use the bank card to take money in or out in ATM cash machine, they also can transfer money online and payment for online banking. Nowadays, the bank card is consumers’ absolutely necessary financial payment tool in the real life.

2.3 Chinese Banking system reform

When China’s rapid economic growth in the past two decades has made banking reform. Since economy become to market oriented, the insufficiencies of banking system have become rising. In same time, China’s WTO accession bring the international competition, it is accelerate Chinese banking system reform. Initially, the Chinese banking systems is mono-bank system, along with the economy growth, the banking system gradually expansion and reform. Now, Chinese banking system is complicated and diversiform.

2.3.1 Mono-bank system (before 1978)

Before 1978, the banking system in China was Soviet-style mono-banking system with the People’s Bank of China (PBC), it only bank serving both government and business customers. During the Cultural Revolution, most of Chinese financial institutions were closed or incorporate into the PBC or the Ministry of Finance (MOF). So the PBC became the only bank in China. However, in that period, The bank only played a subordinate role in the economy. No laws and regulation for the bank, it also no independent role in financial services.#p#分页标题#e#

In the mid-1970s, the government tried to strengthen the role of the PBC, so the financial system was restored, however, they also keeping to the central control. In January 1978, the PBC separated form the MOF became to a bank. The PBC has sole responsibility for issuing currency and controlling the money supply.

2.3.2 Establishing various kinds of banks (1978-1992)

In 1978, the first stage has began, the main objective of this reform is changing the mono-banking system into diversiform banking system, including central bank and other kinds of financial institutions. From 1978 to 1984, the four state-owned specialized banks were established. Each of them has special function:

 ABC assigned to financing the rural and agricultural sectors

 BOC assigned to financing foreign trade and investment

 The People’s Construction Bank of China (PCBC), which was changed name to the China Construction Bank (CCB), assigned to financing construction and fixed-asset investment.

 ICBC assigned to financial the business activities of the SOEs.

Since 1985, the enterprises and other customers were allowed to choose them to open own account. Some different branched of banks became independent accounting units, they can retain their profits. In addition, the four state-owned special banks transform into state-owned commercial banks (SOCBs).

In 1984, the role of the central bank PBC was clearly defined, mission to carry out monetary policy, issue bank notes, monitor financial markets, etc. this mean the commercial bank function of the PBC was abolished, it was became to central bank. Though the PBC was not independent from the government, but it was the part of the State Council and required to manage the funding of the State-owned enterprise (SOEs) (shang 2000) the SOEs are major part of the nation’s industrial, SOEs has important position, when SOEs need restructuring, banks were forced on provide sufficient capital to SOEs. (wang 2000) In this period, other commercial banks with diversified ownership structures have been established. After 1984, the Trust and Investment Companies (TICs) continually set up by banks and central or local government departments. This period is the upsurge of establishing TICs. In 1986, the Bank of Communications was established with some types of shareholders, it was called JSCB later.

Furthermore, in the 1980s, after Deng Xiaoping claimed “open door policy”, some foreign banks were permitted to set up their branches in the Special Economic Zones (SEZ). By the end of 1992, nine JSCB had been established, such as Guangdong Development Bank, Shenzhen Development Bank, the Merchants Bank and so on. They concerned the regional economic then expanded their network areas to nationwide within a few years. By the end of 1992, various other financial institutions were established. For example, 12 insurance companies, 387 trust and investment companies, 29 finance companies, 11leasing companies, 59,000 rural credit cooperatives, and 3,900 urban credit cooperatives in China. (shang 2000)#p#分页标题#e#

2.3.3 Implementing market-oriented polices (1993-present) 

In 1993, the Market-oriented policies were introduced, the banking reform has been reiterated (Yang, 2001) the government began large-scale experimentation with financial markets. In 1993, State Council issued the “Resolution on Financial System Reform”, it’s set the targets of the financial system reform (in detail see Appendix three) Implement this policy, in 1994, three policy banks, the China Development Bank (CDB), Agricultural Development Bank of China (ADBC) and the Import-Export Bank of China were established by government. They were financing the policy-oriented projects for specific sectors with the industrial projects or state’s development plan/ (Yang, 2001)

In 1994, the PBC set up the China Foreign Exchange Trading System (CFETS), these centers cover foreign-exchange swap centers. In 1995, the PBC established local financial centers, aim to introduce order into the interbank money market, furthermore, the PBC closed brokerage institutions run by commercial banks. (Yang 2001) So during this time, the Chinese financial market also developed considerably. In 1995, the Law of the PBC on Commercial Banks (known as the Commercial Bank Law) was promulgated. In the same year, several other basic laws were also promulgated. These laws provide a legal foundation in the financial sector; however, these laws didn’t cover the newly developing financial business completely.

In 1996, China as a member participation in the Bank for International Settlements (BIS), the PBC can have more chance to discuss monetary policy and understand the international financial-market conditions with other central banks and to promote cooperation with them in a bank supervisory area. (PBC 2006) after Asian financial crisis of 1997, the Chinese leader was reminded the stability of the financial sector is very importance. In 2001, the PBC pointed out the domestic banks faced crisis. The domestic banks continue to reform roundly.

2.4 Chapter Summary

According to the general profiles for the country and the Chinese banking industry, it can understand the macro environment and reform process of banking system. China open the financial market to foreign investors, it can bring more international competition for the domestic banking sector, encourage the domestic banks reform, to achieve the international standards. For this goal, the domestic banks reform need to seriously face the problems firstly, then resolve them. So next chapter will focus on many literatures, state the major problem which is the domestic banks need to resolve. 

Chapter Three Literature review 

3.1 Introduction 

Since the economic reforms were initiated under Deng Xiaoping in 1979, China’s economy has gradually changed. When the China’s economic growth as a high rate, that push the reform for Chinese financial market. However, the Chinese financial system existed lots of deep-rooted problems which are coming from the banking system and the securities market.#p#分页标题#e#

This chapter will discuss major problems of banking sector by literatures review firstly, then analysis the impact of the Chinese banking industry after WTO.

3.2 Major problems of Chinese banking sector

After China joined the WTO five years, the domestic banks and foreign banks have the same treatment. Meeting this situation, domestic banking sector faced to formidable challenge. The domestic banks need resolve the problems in the following.

3.2.1 Accumulation of Non-Performing Loans (NPLs)

Alicia, Sergio and Daniel (2006) point out the Chinese banks is the main financier of non-profitable state-owned enterprises (SOEs), so SOEs reform has a direct impact on bank reform. Because the Chinese banks’s governance has the larger extent to massive government intervention. Especially, the four state-owned commercial banks (SOCBs), they are not free to choose their asset structure, the credit is directly or indirectly controlled by the central or local government. (DeYoung and Rice, 2004) 

SOEs is the major part of the nation’s industrial, until the 1980s, their share in the industrial production and employment were 60 to 70 percent, when the China’s economy reform, the SOEs is gradually become no profit enterprises. LU (2006) states some factors make the NPLs crisis’ emergence in the late 1990s. The early period, in 1984, the government began to require the SOCBs support SOEs, provide the sufficient capital make SOEs’ smooth and gradual restructuring. And the taxes-for-profits and loans- for-grants reforms, the government transferred the burden to SOEs from the state budget to SOCBs. But many of SOEs also operating inefficiency, the non-performing loans (NPLs) were formed. Until 1994, the government campaign in the mid-1990s to clear up widespread inter-firm arrears by injecting bank funds, all contributed to the accumulation of NPLs.

According to research of GUO (2005) during 2001, total bank loans expanded to RMB 1.3 trillion, in this number, SOEs sectors leverage was very high. In these secor, a high proportion of loans taken by state-owned enterprises were non-performing. Government estimates the NPLs of the SOCBs at about 27% percent of their loans outstanding.

Table 4 NPLs in Chinese financial system

Time USD(billion) NPL ratio (% of total loans) % of GDP

State-owned commercial banks Dec 03 232 20 17

Joint-stock Commercial banks Mar 04 23 7 2

Policy banks Jun 03 19 18 1

Credit cooperative Mar 04 60 30 4

Banking system total Dec 03 373 19 28

Asset management companies Dec 03 107 -- 8

Financial system total Mar 04 480 -- 36

Source: official figures reported by Bofit (2004)

From the Table 4, in 2003, the ratio of NPLs to total loans was 20 percent, compare with the ratio of NPLs in 1997, it’s decreased to 10% however, this ratio also above the other emerging economics standards, for example, the 9.1% in Eastern Europe. By the end of 2003, Ernst Yong (2004) pointed CBC had bad loans about RMB 193 billion (U.S. 23.4 billion dollar ) , nearly 9 percent of its total loans, the BOC was RMB 344 billion (U.S. 41.5 billion dollar ) bad loans, and other two banks ( SOCB and ABC ) were burdened with over 700 billion (U.S. 85 billion dollar) each.#p#分页标题#e#

In addition, banks are considered performing loans so have special mention loans, however, this have a higher risk becoming non-performing in the future. The BOC shares the special mention loans was 14 percent, the CBC was 19 percent, and the ICBC was 12 percent. For the Chinese banks, NPLs is long time problem. Lardy (2000) states this is grow out of both the rapid expansion of bank lending to ill-performing SOEs and the misallocation of lending to the real estate sector. If they want to resolve this problems, need to objectivity assessed the lending companies and reduce the credit risk.

3.2.2 Insufficient supervisory system 

The China Banking Regulatory Commission (CBRC) is an agency of China authorized by State Council to regulate and supervisory the Chinese banking sector. Fan, Gao, Tao, Rosanna, Bobby (2006) reported the CBRC should develop and implement the information system and analytical tool. They identify the weaknesses in the existing supervisory statistical system. They focus on policies, systems, processes and data, four major groups to identify CBRC’s lack. For the policies, the data definitions are not complete or clear. In there, the documentation is not as strong as it should be; also the contributing is the lack of user involvement in the development of the definitions, and information form PBC not collected for supervision. For the systems, the banks not enough attention and emphasis on developing appropriate systems, and lack of bank management attentions on the importance of submitting accurate information, the CBRC can not completely. In the data collected process, the CBRC has no efficient way to assure the data generated from banks. Furthermore, the bank submit the reports both formal and informal requests to the CBRC, they increases the cost, and reduces the accuracy of the data, CBRC can not control them every times. (Fan, Gao, Tao, Rosanna, Bobby 2006)

3.2.3 Insufficient risk management mechanisms

In recent years, the non-performance loans (NPLs) increase, that because the high risk fasten on some trades and client. So the risk management mechanisms were the important system to control and management risk loans of banks. Liu (2007) stats major problems of the Chinese baking’s risk management mechanisms.

 lack of the risk management culture

The standards of China’s bank risk management mechanisms is placed in the beginning stage, the principle of the risk management was very weak.

 weak performance of risk management

In the Chinese banking system, the inner-controlled mechanism didn’t have the completely control laws system and operation regulation, then make the performance of bank inner risk management very weak.

 weak human resource

The China lack the person which good at theories of risk management and technology of risk metrology. Furthermore, the training course no ability make person achieve required.

 behindhand technique of risk management. 

China’s bank risk management technique is lack of innovation and quantity analysis, in the long term, it below the international standard.#p#分页标题#e#

3.2.4 Capital inadequacy

Naughton (1998) pointed out from 1985 to 1992, the capital adequacy reduced steadily in ABC, ICBC and CBC. None of the foue SOCBs reached the 8 percent ratio required accounting to the Basle standards by the end of 1992.

According to Guifen and Sayuri (2004) analysis, faced this problem, in August 1998, the MOF issued RMB 270 billion (US $32.5 billion) of special government bonds to SOCBs. 

Table 5 the Capital Adequacy Ratio of the SOCBs

1997 1999 2002

Agricultural Bank of China 2.14 5.1 1.44

China Construction Bank 2.73 2.5 6.91

Bank of China 4.70 3.0 8.15

Industrial and Commercial Bank of China 2.55 5.7 5.54

Source: annual report of the ABC, the BOC, the ICBC and the CCB

As a result of this, the SOCBs capital adequacy ratios reached 8%, however, this rescue only turned out to be a temporary solution. After 1998, the capital adequacy ratios of the SOCBs have dropped. (the figures can see table 5)

The reason of the capital inadequacy is the SOCBs’ the speed of asset increases is higher than speed of capital increases. In fact, the rapid extension of credit can make the decrease of the capital adequacy ratio. In addition, the decline in profits form lending activities, the low capital adequacy ratios were formed.

Table 6 Profits on Asset of China’s Banking Sector 

year SOCBs Policy banks Joint-stock Commercial banks Foreign banks

1998 0.10% 0.11% 0.97% --

1999 0.17% 0.15% 0.64% 2.69

2000 0.25% 0.51% 0.49% 1.92

Source: Almanc of China’s Finance and Banking 1998-2000

Based on the reported by Almanac of China’s Finance and Banking (table 6), it can clearly prove the profits on the assets of the SOCBs have lower than these of policy banks, they also lower than profits on the assets of joint-stock commercial banks. When compare with foreign banks, the profits on the assets of all these kinds of Chinese banks are much lower than those of foreign banks.

3.2.5 Low Profitability

After over two decades reform, the profitability of the domestic banks still remains at relatively low levels. Alicia, Sergio and Daniel (2007) points out Chinese banks has the low profitability for the period 1997-2004. It induce reduce the investors’ interest in financial institutions, so the banks might no enough capital to continue operating.

Table 7 International comparison of performance measures in 2004

(in percentage) China Eastern Europe

ROA 0.4 1.8

Net Interest Margin (*) 2.2 5.1

Operating Income (*) 2.6 6.3

Cost to Income (*) 47.2 21.7

Pre-Provision Profit (*) 42.6 60.1

Capital ratio 4.0 11.0

NPL ratio 13.0 2.7

Loan Loss Reserves over total loans 5.5 6.3

(*) Over total assets

Source: Bankscope

According to the table 7, it can know the return on average assets (ROA) of the Chinese banking system was 0.4, compare with 1.8 ROA of Eastern Europe, it’s obviously low, it’s also lower than international standards. The Chinese bank has the low net interest margin and operating income, however, they have the high cost to income. Furthermore, Yao and Jiang (2007) show that state-owned banks were 8%-18% less efficient than non state-owned banks, but no analysis has yet been conducted on profitability. The foreign banks are more profitable than domestic banks in emerging countries.#p#分页标题#e#

There are some factors affect the profitability. Firstly, it’s bank capitalization. Berger (1995) provide some evidence of the positive relation between bank capitalization and profitability: capital is considered to be the most expensive bank liability in terms of expected return, holding a relatively large share of capital is an important signal of creditworthiness; a well capitalized bank will borrow less to support a given level of assets. However, from table 7, the capitalization of the Chinese banks, measured by the capital to assets ratio, it also lower than the capital to assets ratio of Eastern European banks. The equity to assets ratio was 4% , this figure has fallen since 1998.( Sergio and Daniel 2007) because the largest fall is other commercial banks. JSCBs has the least capitalized, because of their expansion without additional capitals injections. The capital to assets ratio of SOCBs also fell. So they didn’t have the higher capitalization to foster profitability.

Secondly, it is asset quality. The poor asset quality will reduce profitability. Chinese banks generally suffer form poor asset quality. In 2004, the ratio of NPLs to total loans of the Chinese banks was 13%, though government has some restructuring to reduce the NPL ratios, but the NPLs ratio is still high. The asset quality is low, that also because of the provisioning ratio to NPLs is also low. In 2004, the ratio of loan loss reserves to total loans was only 5.5%.

Thirdly, it is bank efficiency. If the bank has the high efficiency, it can more effective use of its loan resources and fostering profitability. (Sergio and Daniel 2007) for the China’s bank, Berger et al. (2006) show that Chinese the SOCBs are least efficient .

3.2.6 Lack of transparency

Fons (1998) states the accounting transparency is important to make the banking system have health trend. If the bank without transparency, the banks were insolvent in an economic sense, and risk contaminating the whole banking system. If the banks always use the opaque accounting methods to keep alive, the banks will be growing weak.

In China, the commercial banks were controlled by the governments, so they think banking information is the state classified information, and intentionally leave depositors in the dark. Furthermore, in the banks’ annual reports, the information concerning corporate credit quality is not transmitted to the public by banks. However, nothing forces the banks to disclose these information to the public. (Langlois, 2001).

The lack of transparency can make the inner-banks have some fraudulent financial deals. If the information was provided to the regulators is highly inaccurate, the poor accounting standards for asset quality were emergences. The lack of transparency is result of the basic lack of information for inside banking system. Banks can’t aware the true ability in time. In the long time, they led to high number of financial frauds deals. In China, there is the 30% of China’s total fraud cases, in some areas the amount goes up as high as 50%.#p#分页标题#e#

3.2.7 High tax

In early study Luo (2003) can know some other factors affecting banks. Tax policies are the one of them. Many banks wanted resolve the bank problems, however, the tax policies on banks are particularly unfavorable and affect their operation and profitability.

The commercial banks are subject to two main forms taxation. (Luo 2003)

 Business tax, is currently 5 percent (based on revenue)

 Income tax, is set at 33 percent for domestic commercial banks (based in profit)

The level of income tax on commercial banks is very high, it will make it difficult for commercial bank to operate and make commercial deals basis. Moreover, it compare with the foreign banks, foreign banks are subject to a tax rate of 15 percent, with a full tax holiday for the first year of operation and a 50 percent tax holiday for the second year. (Luo 2003) The tax rate for domestic banks also unfavorably.

In the world, very few countries impose the business tax on gross income for the banks, however, China is one of them. Until 2001, the business tax rate was 8 percent, for this, 3 percent collected by the central government and 5 percent collected by the local government, and in January 2003, this rate has been reduced to 5 percent. The high level of revenue tax affects the profitability of the banks. It make the banks difficult to generate and retain earnings, then loss the profit. In 1998, the four state-owned commercial banks paid 11.6 billion in business tax and generated a total profit only 4.1 billion.

3.3 The impact of Chinese banks industry after WTO

After China’s WTO five year transitional period, the China need rescind the restrictions on foreign access to the retail banking market, to provide financial services on equal ground with domestic banks. This commitment imply on the domestic banks face to new challenge.

3.3.1 The competition with foreign banks

After China’s WTO accession, the develop of foreign banks more quickly. Accoding Xinhua (2002) reported, Citibank NA and HSBC Holdings Plc are gradually gaining wider access to China’s US$964 billion of household savings. At the end of 2001, combined deposits at these two banks was at US$508 million, and loans at US$366 million, representing some 30% of China’s savings and 27% of its total loans advanced respectively. In 2001, foreign banks opened 214 representative offices, 190 operational outlets and 31 of them were allowed to conduct Renminbi(Yuan) business, with high concentration in Shanghai, Shenzhen, Beijing and Guangzhou. In addition, the businesses in joint-equity commercial banks, the assets reach a combined total of US 291 billion dollar in 2001, up more than 28% year-on year.

Face this pressures from foreign banks, Yang Kaisheng, who is the president of ICBC, he pointed out foreign banks will use the leverage their experience and sophisticated products to attract customers, employees and business in China’s financial sector. In other words, the domestic banks face the competition on customers, employees, and business with foreign banks.#p#分页标题#e#

According Li (2006) to analysis, it knows the domestic banks face on talents competition with foreign banks. The foreign banks employ some excellent talents to aim gain the advantage of competition. They use good work environment, and the chance to go aboard to attract the talents of domestic banks.

Secondly, customers competition, as the pointed out in Wong and Wong (2001) the depositors choose banks with stronger fundamentals and better services. In the past time, the big four SOCBs gained the large numbers of the depositors. Because in that time, the foreign banks were highly controlled by Chinese government, they have so many restrictions on business and services, make depositors can’t choose them. However, under the WTO schedule, the restriction of foreign banks was rescinding. They can offer roundly services to depositors with the good services and high reputation, make the customers satisfaction.

Finally, it is the business competition. Foreign banks focus on several categories of financial services in which they have the good expertise or they can make the bigger profits. For example, intermediate business in foreign currency and money management.. (China Daily 2007) The foreign banks use their stricter managerial policies, the more flexible business mode, and good designed financial products and services, to steady growth their market share in China.

To increase competition, the Chinese banks need push their reform and innovation. They also need utilize their extensive network in China, better understanding of customers and the Chinese business culture to find the new competitive strategies to foreign banks. Some evidence has already proved the way to Chinese banks increase competition. Cinar (2002) pointed out the Bank of China pays attention in the capital market, BOC approval the listing committee of the Hong Kong Stock Exchange to sell some of its stocks in an initial public offering. And Beijing plans to big four SOCBs improve their positions to compete with other foreign banks.

3.3.2 More integration with global economy

Globalization can be have the huge opportunities on new markets, workers, business partners, goods and services. In 1980s, large banks in different countries expanded their businesses beyond the boundary of nations, and established branches and agents throughout the world, to facilitate the capital flows. In 1990s, there is the trend of global integration of world economics, it’s inevitable to global financial industry and internationalized banking industry. Under this condition, the globalization of banking progressed rapidly. In China, beginning of the “open door policy”, the foreign financial institutions invest in China. In 2001, China entered the WTO and is required to open wholly financial market. The international banks more and more entry into China.

Face this situation; some of the multi-international banks have already done many years, however, Chinese banks just was introduced into universal. Zhou (2005) stats the Chinese authorities pay attention for this, required all newly established commercial banks to have at least one foreign investor. This is benefits for Chinese banks, because the foreign investors can bring their technologies and expertise to help their Chinese partners, make them more efficiently and build up risk management and credit culture, they also can help Chinese banks improve their corporate governance. Moreover, they can force on Chinese regulators do the better job and become more efficiency.#p#分页标题#e#

After ICBC, BOC, CCB have their initial public offerings, they trying to tap overseas markets and develop international businesses. However, according to Zhang (2007) research the go overseas have some pressure and competition, if the banks unfamiliar with the enterprises and clients, they may struggle to gain a foothold overseas amid the competition. So foreign banks entry to China, they can give the Chinese banks good opportunity to study their operation. After Chinese banks gain more experiences about doing international bank business, the Chinese banks become more integration is easier than before.

3.4 Chapter summary

According to the different literatures, the problems of China’s banking system can be found. However, the general conclusion of different literatures was similar: the banking reform was not thorough and did not bring the expected outcomes. The accumulation of Non-Performing Loan, the lack of an incentive system in banking sector, the lack of transparency and so on, these problems remain exist. After China entry to WTO, face on the equal treatment between the domestic banks and foreign banks, the Chinese banks have the new challenge. Focus on existed problems and new challenge, the Chinese banking industry need to innovation. Then move to next chapter, in that chapter, the research methodology and the justification for methods and techniques adopted.

Chapter four Methodology

4.1 Introduction

This chapter describes the methodology adopted in the research, in order to answer the research question logically. Firstly, it introduces the research approach adopted in this dissertation, secondly, describe and analysis how the data be collected, including the primary and secondary data. Finally explain the data processing, give the detail about analysis.

4.2 Research approach

This dissertation will use the combining qualitative and quantitative research conduct.

The qualitative research is give more descriptive details and emphasizes contextual understanding of issues and generates data. It aims to gather an in-depth understanding of human behavior and the reasons that govern human behavior. Quantitative research is the systematic scientific investigation of quantitative properties and phenomena and their relationships; its results can be easily collated and presented statistically.

This dissertation employs lots of literature research mainly focus on introduction the Chinese banking, WTO factor and foreign banks in China. It also has lots of historical literature review to describe the background of Chinese banking reform. Therefore, the inductive approach will be adopted to do the research. The primary purpose of the inductive approach is to allow research finding to emerge from the frequent, dominant or significant themes inherent in raw data, without the restraints imposed by structured methodologies.

By the analysis the country profiles, use the Porter’s PEST analysis the external factors. The purpose is analysis the environmental pressures on foreign banks, make them know current environment whether is opportunities or threats.#p#分页标题#e#

The case study approach is the most useful knowledge in which means include quantitative evidence, relies on multiple source of evidence and benefit to understanding of different processes to answer and analyses the question. It can affect an individual or group of individuals (ethnographic case study), relatively complete organizational units (single case study) or group of organizational units (compareative case study) (source: http://www.studygs.net/casestudy.htm) in this dissertation, it was selected two specific case study: HSBC and China Construction Bank(CCB) to compare and contrast the different operation and strategies. The reason for chosen these case studies, the HSBC bank has the longer history than other international banks. It opened in Hong Kong and Shanghai more than 130 years ago. Now, it has 66 networks, and 17 branches in mainland China offer to a wide range of the banking and financial services. (source:http://www.hsbc.com.cn/1/2/hsbc -china-cn) it is a representative case in international banking industry, the CCB is the one of the Chinese Big four SOCBs. On the other hand, the case study can help me to answer the research questions more deeply. After case study approach, use the SWOT analysis to summaries the domestic banks and foreign banks different characteristics.

4.3 Data collection

The data general from two ways: primary data and secondary data. For the primary data, it can collection directly achieve purpose of dissertation proposal, and the secondary data which is the information that has already been collected and published by others.

For this topic, it planed to design the questionnaire for the dissertation, however, the limit time, and the limit geography factors. It only has some interviews with Chinese bank’s employees, it use the face to face interview and phone interview. However, this method also has the limitations. The interviewers have their own opinions; it is difficult to prove that speeches are unbiased and completed. Therefore, in this dissertation, the primary data collected from reports, the documents from the Chinese government, the bank’s annual reports and conference.

There is a great number resource of secondary data, including journal, books, newspapers, statistics, surveys, websites, census etc. the libraries of School of Management and J.B library have many kinds of secondary data resources. They are include the academic journals relate to the banking industry, textbooks referring to the foreign banks’ strategy and foreign direct investment. Bradford library also have some e-source system to help student find useful information. For the Chinese banks’ information, the resource of the Bradford library are limited, so collected these Chinese banks’ information in Chengdu, Sichuan Province, China, the financial university of Xi Nan.

The easy and fast way to collect data, it is the Internet. I collected some data from the official website, the ministry of finance websites, and the homepage for the banks. In addition, some financial magazine is used, such as banker, financial.#p#分页标题#e#

There are some problems when secondary data was obtained. Some of the data and information available on the books and internet are before 2007. The HSBC China’s latest statistical data did not published by government or financial institution. This is the part of the Hongkong and Shanghai banking corporation limited. So by the following chapter for analysis HSBC China, I will adopt the official published annual report in 2007 by the Hongkong and Shanghai banking corporation limited, So some numbers of figures are not exactitude.

4.4 Data processing 

The data processing has to be adjusted for inaccuracies of data collected. Both the qualitative data and quantitative data will be presented. The quantitative analysis is used to discuss the performance of the banks, and formation of the problems, the numerical data will be collected and analysis. The statistics will be adopted. This is a tool to present in tables and figures, different statistics lead to different conclusion. For example, ROE ratios use to estimate the capital of the banks, the NPLs ratio use to identify low profitability and government intervene of state-owned commercial banks. So quantitative data is the proof to support the thesis, quantitative analysis is also the basis of the qualitative analysis. In addition, the published reports for the CCB and HSBC which are collected before, they have the different units, so according to the People’s Bank of China’s exchange rate in 2007 and 2006, the data will be processed, after calculate, transfer to the same unit.

The qualitative research can explore the area, new areas of interest that are more appropriate may arise and the direction of research. In this dissertation, the qualitative analysis will be used to analysis the current situation of Chinese banks and foreign banks. It is use the inductive approach based. The inductive approach cover attitude of government, the situation of banks, and foreign financial institutions etc.

Furthermore, the techniques used to analysis the two kinds of banks is the case study. 

It selected two banks, one is the foreign bank another one is the domestic bank. It used the data collected to compare and contrast the performance and strategy between the foreign banks and domestic banks. It can present the different operation results of different banks in same country. Take into account, the SWOT analysis for both kinds of banks can be summarized.

4.5 Summary

By the research methodology, it can clear the approach to use in this dissertation: the main approach is the inductive approach on the Chinese banking reform and current structure of Chinese banking system, the development of foreign banks, and so on. The way to collect data is various. The data analysis will be presented in next chapter.#p#分页标题#e#

Chapter Five Current domestic banks profile

5.1 Introduction 

After China opened the financial market for the foreign investors, the domestic and foreign banks are played important role in China’s current banking industry. According to the review on Chinese banking system, domestic banks always have some problems, however, the world economic integration process gradual expedite, the financial markets opening after WTO accession, all make the acceleration of the Chinese banking system reform. Focus on foreign banks, they have played important role in introducing the advanced management experiences and attracting foreign capital, intensifying competition, and promoting the improvement the corporate governance of the Chinese banks.

This chapter will analysis the current situation of China’s banking industry. Firstly, it will introduce the measures of the Chinese banking system reform; secondly, discuss the current structure and situation of domestic banks. Finally, give the summary.

5.2 The measures of Chinese banking system reform 

5.2.1 Increase capital adequacy 

The Chinese bank’s capital inadequacy, the government tries to find the way to resolve this problem. There is two ways which are implementing in commercial banks: capital injection and issuance of subordinated term bonds.

In 1998, the State Council submitted to issue the special government bonds to provide for the in injection of capital into the SOCBs. The total amount of this capital was RMB 270 billion (US 32.5 billion dollar) government expected this capital can resolve the capital inadequacy of the SOCBs, however, they can’t resolve this problem. In 1998, the capital ratios reached 8%, but, after 1998, the capital ratios of the SOCBs have dropped. 

After 2003, the government implemented a unique scheme to inject capital into system. The Central Huijin Inverstment Company (Huijin) based on the investment of the foreign exchange reserves by State Administration of Foreign Exchange (SAFE) was established. (Cheng 2006). Huijin injected RMB 499.6 billion ( US 60.4 billion dollar) to the SOCBs. The original largest shareholder is the Ministry of Finance (MOF) increased its investment by RMB 5 billion to avoid reducing the value of shareholders ‘holdings, after Huijin injected capital, and the Social Security Fund (SSF) also invested RMB 10 billion.

The result of the capital injected is effective. Before, MOF is the largest shareholder, when the conflict occurred between the interests of the SOCBs and the SOEs, it only reform the SOEs, the government was no strong ability to protect SOCBs’ commercial interests. Now Huijin become an influential shareholder of the SOCBs. It urges them to carry out their reform plans, improve their corporate governance, then gain the efficient returns from their business.

For other aspect, the way of capital injection indirectly increase the foreign exchange reserves. Because the capital injection was use the official foreign exchange reserves, but government didn’t want to the desire deterioration for the government’s balance sheets, so Chinese leaders were use the efficient way to increasing foreign exchange reserves. From 2001 to 2003, the foreign exchange reserves of China more than doubled and have continued to expand. (Kumiko 2007)#p#分页标题#e#

In addition, the PBC permitted the Chinese commercial banks to issue the subordinated term debt to increase capital adequacy in 2003. (permitted issue up to RMB 300 billion subordinated term bonds) this measures effectively increased the capital adequacy of SOCBs. In 2004, CCB issued RMB 30 billion subordinated term bonds, and increasing the capital adequacy to 11.29 by end of December, 2004. BOC issued total amount of RMB 60 billion subordinate term bonds in 2004 and 2005, the ICBC also issued USD 35 billion bond in the Chinese inter-bank financial market in 2005. (Liu, Wang, and Effendi 2007)

5.2.2 Disposal of NPLs

The government established four asset management companies (AMCs). The main objective is collecting NPLs, restructuring them or converting them into equity, responsible for issuing bonds and borrowing from financial institutions to pay for the NPLs. The government allowed each SOCB can have its own AMC. The MOF were injected capital to the AMCs, PBC lending.

In 2002, because of the BOCOM, CCB,BOC, and ICBC prepare IPOs, they transferred total more than RMB 1,200 billion, which was about 80 percent of their reported NPLs. the government only allowed transfer the NPLs in “Loss” and “doubtful” categories (before classify), in 2002, the banks held RMB 814 billion “doubtful” NPLs, and transferred RMB 778 billion of them to AMCs, they held RMB 635 billion “Loss” NPLs, then transferred RMB 456 billion of them into AMCs. Then the government introduced auction systems to diposal of the NPLs. 

Figure 1 The” Double Declines” of NPLs balance and NPL ratios (source: CBRC,NBSC) 

Table 8 AMCs disposal of NPLs at 2005

AMC SOCB Assets transferred (USD billions) Share of banks loans outstanding NPL resolved Cash recovery

Orient BOC 32.3 20.4 12.9 (39.9%) 2.9 (22.8%)

Great Wall ABC 41.8 24.6 25.8 (61.8%) 2.7 (10.4%)

Cinda CCB 45.0 21.7 18.56(41.2%) 6.2 (33.6%)

Huarong ICBC 49.2 17.9 25.9 (52.6%) 5.1 (29.9%)

Total 168.3 20.7 83.2 (49.4) 26.9 (20.5%)

Source: PBC, CRBC annual reports, BIS working paper NO.115

As the result of disposal of NPLs, figure 1 can know, all commercial banks’ NPL balance has been lowered to 1.3 trillion Yuan and the NPL ratio dropped for the first time below 10%, reaching 8.6%. The AMC received NPLs from its respective SOCB at face value for the total amount equivalent to 8 percent of GDP (Table 8) and issued 10 year bond with an annual 2.25 percent coupon for 83 percent of the amount and paid 17 percent in cash. (Alica, Sergio, and Daniel 2006)

5.2.3 Tax Exemptions

When China’s WTO accession, the domestic and foreign banks have the same tax system, they pay the tax equally. In addition, the Ministry of Finance (MOF) allowed tax exemptions related to the write-offs of NPLs and the organizational restructuring. For example, in the 2004, the CCB officially income tax exemption was RMB 15.4 billion, the ROA of the banks was 1.31 percent. In 2005, its income tax exemption was RMB 7.4 billion; the ROA of the banks was reported 1.11 percent. (source :www.CCB.com)#p#分页标题#e#

5.2.4 Organizational restructuring

Since 1998, the government implemented the restructuring program. The banks have been required to improve organizational management efficiency. The government closed some non-profit financial institutions, for example, the number of the investment trust companies declined from 240 in 1997 to 60 at the end of 2002. Some of urban credit cooperatives were merged and transformed into “City United Commercial Banks’ (CUCBs) In the same time, some banks reducing some numbers of network and branches, they also changed the long-term contract employees to the short-term contract employees, and reduce the number of low-skills employees. For example, the SOCBs merged provincial and municipal branches, between 1998 and 2002, the number of branches and employees fell by 45.7%, and 16.2% (China’s Finance and banking, 1986-2003) these ways should have contributed to increase banks’ profitability.

5.2.5 Public Listing

After 2000, the government encouraging commercial banks to go public. The China Merchants Bank is the first share-holding commercial bank. Which launched IPO with the issuance of 1.5 billon common shares in March 2002, and was successful listed in Shanghai Stock Exchange. (Zhou 2006) from 2005 to 2007, the BOCOM, CCB, BOC and ICBC were listed on stock exchanges. The government need SOCBs use the overseas market to recognized the market pressures, make stronger than before. So the first IPOs were carried out in Hong Kong, however, it is limited the domestic investors have chance to invest into SOCBs, the government decided to list BOC and ICBC in Hong Kong and Shanghai. 

Table 9 Total Capital Increase by IPOs (RMB billion)

bank Total Capital Selling Price Per Share Proceeds from IPO Including Issuance Cost Share Capital

Increased Capital Reserve Increased % of Total Capital Increased by IPOs

ICBC 326.2 (2006) HK 3.07

RMB 3.12 Total 173.3 47.5 97.1 44.3

BOC 233.8 (2005) HK 2.95

RMB 3.08 Total

110.0 35.9 71.1 45.8

CCB 200.9(2005) HK 2.35

74.6 30.5 42.1 36.1

BOCOM 52.1 (2004) HK 2.50

RMB 7.90 Total 43.2 9.9 32.3 80.9

Source: Annual report and prospectus for Hong Kong IPOs of each bank and Shanghai Stock Exchange.

The IPOs were welcomed by the markets, because selling prices was low and the capital of the banks increased 30 to 80 percent. (see Table 9), when the banks go public, the transparency have increased. The banks invited foreign accounting offices to review their financial reports, such as balance sheets, profit and loss accounts, and cash flow statement. Now, the financial reports of the Chinese banks are much clear and much faster than before.

5.3 Current domestic banking structure 

5.3.1 China’s Central bank and China banking regulatory commission

In Chinese banking sector, the People’s Bank of China (PBC) is China’s central bank. It implements monetary policy, and maintains the payment of the banking sector, clearing and settlement systems, manages official foreign exchange and gold reserves. On April 28, 2003, the government launched China Banking Regulatory Commission, the objective of this commission is take over the supervisory of the PBC, help the PBC to further focus on the macro economy and currency policy.#p#分页标题#e#

5.3.2 Domestic banking institutions

After the reform, the Chinese domestic banks have some changed. By the end of 2007, there were 3 policy banks, 5 large state-owned commercial banks, 12 joint-stock commercial banks, 124 city commercial banks, 42 urban credit cooperatives(UCCs), 8,348 rural credit cooperatives (RCCs), 17 rural commercial banks, 8,509 rural financial institutions, and so on. The total employees are 2,696,760. (Table 10)

Table 10 number of legal entities of domestic banking institutions (end-2007)

Name of institutions Number of legal entities

Policy banks 3

State-owned commercial banks 5

Joint-stock commercial banks 12

City commercial banks 124

Urban credit cooperatives 42

Rural financial institutions 8,509

Non-bank financial institutions 148

Postal savings bank 1

Financial asset management companies 4

Source: CBRC annual report 2007

 Policy Banks

In 1994, the three new policy banks were established. They are Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim). These banks are focus on financing economic and trade development and state- invested projects. Through central bank loans, government deposits and the issuance of government-guaranteed deposits held by commercial bank, the policy bank can receives operation funds. ADBC provides funds for agricultural development projects in rural areas, such as raise agricultural political credit capital. CDB focus on long-term financing for key projects and supportive construction in infrastructure, and basic and pillar industries. Chexim has developed into a key channel of policy financing for the exports and imports of mechanic and electronic products, complete set of equipment and new products, it is also onlending bank of foreign government loans and the sole lending bank for Chinese Government Concessional Loan entrusted by the Chinese Government.

 State-owned Commercial Banks

Before China has four state-owned commercial banks, they also called “Big Four”. They are the Bank of China (BOC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC).The “Big Four” banks have different specialize area by themselves. BOC specializes in foreign-exchange transactions and trade finance. CCB specializes in medium to long-term credit, such as infrastructure projects and urban hosing development. ABC specializes in providing financing in agricultural sector such as retail and wholesale services, township and village enterprises. ICBC is being first in RMB business and second in foreign exchange business. It used to funds to China’s urban and manufacturing sector. In 2004, the bank of communications (BOCOM) became to SOBCs.

 Joint-stock commercial banks

Joint- stock commercial bank (JSCB) are partially owned by local governments and state-owned enterprise, also sometimes by the private sector, including Huaxia Bank (HXB), Guangdong Development Bank (GDB), China Everbright Bank (CEB), Shenzhen Development Bank (SZDB), Shanghai Pudong Development Bank (SPDB), Fujian Industrial Bank (FIB), China Minsheng Bank (CMSB) and China Merchants Bank (CMB). They also have the extensive range of network, the fast growing in coastal areas. They also carry out most bank activities, such as RMB deposits, syndication loan, short-term and medium-and long-term loans in domestic and foreign currencies, etc.#p#分页标题#e#

 City commercial banks

During the 1990’s, the City commercial banks (CCBs) were created by city governments. They merging and restructuring of China’s urban credit cooperatives aim to resolve some urban credit cooperatives’ problems and developed within the sector. The first city commercial bank was Shenzhen City Commercial Bank. There are currently CCBs 112. CCBs often maintain ties to their respective city governments; the city governments hold an average 75 percent share of the banks. Now CCBs are playing more and more important role in the local economy.

 Credit Cooperatives

Rural and Urban Credit Cooperatives were established in the 1980s. Rural Credit Cooperatives (RCCs) identified to delivery of financial services to the small-scale entrepreneur or consumers in the countryside. They handled deposits and short-term loans for individual.

5.4 The current situation of domestic banks

5.4.1 Total asset and Liabilities

By the end of 2007, the total assets of the banking sector is RMB 52.6 trillion, compare with 2006, it increase the RMB 8.6 trillion or 19.7 percent of total assets in 2006. During the same time, the total liabilities of the banking sector reached RMB 49.6 trillion, an increase the RMB 7.9 trillion or 18.8 percent from 2006. The total owner’ equity of the banking sector increase to RMB 3.0 trillion. (Figure 2)

Figure 2 Total assets and Liabilities of banking institutions (2003-2007)

Source: CBRC 2007 report

5.4.2 The total deposits and loans

The China’s banks achieved a steady rise in its total deposits and loans (Figure 3)

Figure 3 the deposits and loans of banking institutions and loan-deposit ratio (2003-2007)

Source: CBRC 2007 report

According to the Figure 3, it can know the total banks’ deposits are RMB 40.1 trillion, compare with 2006, it increase RMB 5.3 trillion, it is 0.74 percentage point less on a year-on-year basis. The total banks loans also increase, it reached RMB 27.8 trillion, compare with 2006, it increase 16.4 percent of the total loans in 2006. In this number, the short-term loans reached RMB 22.9 trillion, and the Medium- to long-term loans were RMB 13.9 trillion. The individual consumer loans were RMB 3.3 trillion, an increase of RMB 869.9 billion from the end of 2006.

5.4.3 Capital adequacy of banking institutions

Table 11 capital adequacy ratio of commercial banks 2003-2007

Unit: number of banks, %

2003 2004 2005 2006 2007

Number of banks meeting CAR requirements 8 30 53 100 161

Share in total banking assets 0.6 47.5 75.1 77.4 79.0

Source: CBRC annual reports 2007

The CBRC established a regulation which is required the China’s commercial banks in China to keep their capital adequacy ratios above 8 percent. By the end of 2006, the reported 66 percent of the total banking institutions achieved this level. Some of the JSCBs are not progressed smoothly, then the central government is offer a direct bailout for them, the JSCBs gained the new money from the government and private sector, and foreign funds, hope these money can help them achieve this level. By the end 2007, 161 commercial banks met the capital adequacy ratio requirement of 8 percent. (Table 11) compare with 2006, increase the 61 banks. In this year, the weighted average capital adequacy ratio of all banking institutions reached for the first time to international regulatory level.#p#分页标题#e#

5.4.4 Asset quality

Because of the massive NPLs, in 2007, the commercial banks also continued their reform and restructuring, accelerated their write-offs of NPLs to improve their assets quality. 

Figure 4 NPL ratios of Major Commercial Banks

Source: CBRC

In 2007, the NPLs dropped 0.93 percentage point from the NPLs ratio in 2006, however, the quality of assets of Chinese banks remains not achieved ideal. In 2006, the average NPL ratio at the SOCBs had declined to 3.28 percent, in 2002 they were 20.62 percent. If they compare with the top world banks, the NPL ratios below 2 percent, the Chinese banks’ NPL ratios are still high. (Kumiko 2007)

5.4.5 Profitability

The profit of the SOCBs increased after 2004. However, when they compete with the foreign banks, the profitability of them are not strong enough, because they were supported by various tax exemptions in 2004 and 2005. Compare with top world banks. In 2005, the average ratio of ROA of the world’s seven largest banks is 1.05 percent, the top three banks was 1.39 percent, however, the Chinese SOCBs is highest ROA ratio only 0.94 percent. In 2007, the ROA of the banking sector were RMB 446.7 billion, 16.7 percent respectively. The Chinese banks explain they use larger investment in their network infrastructure and technology, so can not easy to reduce the costs. (Kumiko 2007)

5.5 Chapter summary

This chapter analysis the current domestic banking industry is including the measures of the domestic banks’ reform and the domestic banks’ structure and situation have been discussed. Faced the domestic banks become stronger and the open up all financial market, the foreign banks also have some strategies to expand their business. Next chapter will analysis foreign banks in China.

Chapter Six Foreign banks in China

6.1 Introduction

China is the large market, if in this market performance well; it can gain the considerable profits. The foreign investors gradually entry to China use different way invest, especially foreign financial institutions. After China’ WTO accession, foreign banks set many networks in China. Faces the policy broaden and the domestic banks’ accelerate reform. Foreign banks have the opportunities and new challenge in China.

This chapter will review the history of foreign banks in China. Then, analysis the foreign banks entry modes, finally discussed the current situation of foreign banks in China, the distribution, business scope, and consumer group will be discuses.

6.2 History of foreign banks in China

The foreign financial institutions have old history in China, the earliest period is 1840s, after opium war, the foreign financial institutions were first located at treaty ports and in Beijing. From 1949 to 1978, some of foreign banks were withdrawal. Some of the foreign banks were allowed to remain, such as the Hongkong and Shanghai Banking Corporation, the Standard and Chartered Bank. After “open door policy” in 1979, Chinese economy experienced the rapid growth; foreign banks were allowed to open representative offices and branches in China. From 1980s to early 1990s, foreign banks were allowed to open branches in SPZs.#p#分页标题#e#

After China’s economic rapidly growth, more and more foreign banks choose China as the investment target. Since 1996, the foreign banks were allowed to open branches all cross China. the Citibank is the first Amrican bank in Chinaapproved at the end of December 1996 to do RMB business in the Pudong New Area (Depilla,2003) after one year, 25 foreign banks have been permitted to do RMB business with foreign invested enterprises in Shanghai and Shenzhen. At the end of 1999, 13 foreign banks had set up wholly owned (6) or joint venture operations (7) in China. In addition, foreign banks were operating 157 branches in the country. The total assets of foreign banks in China amounted to 262.9b RMB or about 2% of total bank assets in 1999. Loans by foreign banks were 180.5b RMB and deposits equaled 43b RMB, Regarding local currency transactions, foreign banks made loans equal to 6.7b RMB or about 3.7% of their total lending and held deposits equal to 5.44b RMB or about 12.7% of their total deposits. (Bonin &Huang, 2001)

After China’s WTO accession, the foreign banks more interest investment into China. In addition, the Chinese government continued to encourage foreign investors entry into Chinese financial market. By the end of 2000, there are 177 foreign banks established banking business in China, that including the top 50 banks in the world. In China, they set up 155 branches and 429 representative offices. The foreign banks hold on 1.5 percent market share in China’s banking sector in terms of assets and loans. (HKTDC, 2001)

By the end of 2001, there were 157 foreign bank branches had been authorized to do the banking business in China. By the end of 2004, there were increased to 163 foreign bank branches including all the top 50 banks in the world had been authorized to conduct designated banking business in China. In 2007, the number of the foreign banks has increased to 74, and they have 186 branches.

6.3. Entry modes for foreign banks

 Mergers and acquisitions

The foreign bank may choice many forms to entry Chinese banking industry. In 1999, the Chinese government has adopted a policy” grasp large, release the small” to encouraging acquisition of small and medium-sized enterprises by foreign investors. The foreign banks gradually increase cross-border mergers and acquisitions in China.

 Target bank of Investment and cooperation 

Foreign banks have some strategies to investment in target bank. They invest capital in City Commercial Banks. Because this kind of banks has some networks in major coastal cities, it can easier to holding position, and they also invest capital in shares of public listed banks, these can make the foreign banks raise fund in Chinese security market. The other form is foreign banks cooperate with domestic banks. They can cooperate in the following areas: issuance of syndicated Loan to decentralize risks; trade finance, and RMB business. After China’ WTO entry, this form develop to a win-win deal with benefit both foreign banks and domestic banks. (Wang, 2004)#p#分页标题#e#

 Branch, joint-venture bank, and Wholly foreign-funded banks

After China’s WTO accession, the policy gradually rescind, foreign banks like to set up foreign bank branch and joint-venture bank in China. Since the local incorporation policy was adopted, many foreign banks chosen to transform their branches in China. (The status of foreign banks in China see Table 12)

Table 12 Foreign banks in China

Foreign banks Wholly foreign-funded banks Joint-venture banks

Head offices of locally incorporated banks 24 2

Branches and subsidiaries of locally incorporated banks 119 6

Foreign bank branches 117 

Sub-branches 9 152 8

Total 126 295 16

Source: the CBRC 2007

6.4 Current situation of foreign banks in China

6.4.1 Geography distribution 

After China opened financial market for the foreign financial institutions. The foreign banks will analysis the region for the China, such as the situation of the region economic, the development of the financial business. Then find the appropriate place to open the branch. By the end of 2006, the main distributing of the foreign banks were between big and middle-size cities, about 20 cities. They are concentrated in east of China, such as coastal area and center city. For example, Shanghai, Beijing, Guangzhou, Tianjin, Xiamen, Dalian, and so on. In Shanghai, it has 45 foreign bank branches, and 74 representative offices. The total capital is USD 22,625 million. In Beijing, there were 22 foreign bank branches, and 80 representative offices. Foreign banks have preference of large coastal cities which means they intended to move into interior regions step by step. In the 2007, the Midwest of China has some foreign banks branches, such as Chengdu, Chongqing.

6.4.2 Business scope of foreign banks

Since China joined the WTO, the authorized scope for their business has been expanding to some areas. After China joined the WTO within five years, the government opened the all of the financial market for foreign banks; they have the same treatment like domestic banks. So in recent year, the foreign banks have been most active in the following selected areas:

 Retail marketing

Some of the foreign banks provided deposit-taking and credit-lending services to Chinese clients, either in foreign currencies or in Chinese currency. In some cities, the foreign banks also provide some services to foreigners who are live in China, for example, the investment financing in real estate and account management. It appears “marketing strategy on high-end customer” that means, some of foreign banks have erected a certain threshold of accepting customers, different from the common practice of the Chinese banks. This strategy can help foreign banks balance on cost-benefit considerations. In recent year, the foreign banks had made significant or fundamental changes to their retail strategy, such as incorporate domestically all plan to offer Yuan-denominated mortgages, wealth management products and deposit and loan services.#p#分页标题#e#

 Corporate banking

In recent year, this business of foreign banks in China has some edge over the domestic banks, especially in liquid asset management, international factoring, and after-credit services. The foreign banks have the clear positioning on their client category. They attract clients with their advantages products. However, the main clients of the foreign banks also are multi-nationals in China and all types of the foreign invested enterprises. Some services for the domestic enterprises only at the beginning period.

 Financial derivatives marketing

Some large international banks are active and agencies in international financial derivatives markets. Meanwhile, there are an increasing number of the Chinese firms have become users of international financial derivatives products to hedge the increasing market risk. So this trend can give the foreign banks provide the financial derivatives services in China.

 Bank card marketing 

Before, some of foreign banks have made partnerships with Chinese financial institutions, especially banks, to promote credit card services. After China’s WTO accession package, the banking card market will be fully open to foreign institutions in 2007. On 6 May 2008, Bank of East Asia announced its debit card system had passed central bank testing, making it the first foreign lender to be authorized. After this, other foreign banks are also preparing to launch RMB debit cards. The clients in China will soon have more choices for bank cards.

 Cross-selling of the investment and insurance products

Many foreign banks have run the cross-selling business by providing banking, investment, and insurance products to the same client in their home country. This business can gain the high return. Because of the current regulatory separation principle between” banking, investment, and insurance operation” this business is difficult to operation by both domestic and foreign financial institutions.

6.4.3 Customer group 

Despite there is national treatment between the domestic banks and foreign banks, the consumers of the foreign banks less than domestic bank. People in China can free to choice banks, however, the less know about foreign banks make them prefer to save their money in traditional Chinese banks. The personal customers for foreign banks are mainly from foreign citizen resident in China. in 2007, the foreign banks had about 173,200 customers. For the corporate business, the foreign banks focus the domestic industries which is foreign invested, and wholly foreign invested enterprises. The businesses of the SOEs were controlled by domestic financial institutions. In recent year, the foreign banks utilize their high technology products to attract high quality consumer to make the profits.

6.4.4 Financial review

For the foreign banks financial figures, the publication was limited, so there adopted the CBRC annual reports by 2007 to analysis. After China’s WTO accession, more and more foreign banks invest in China. China gradually increases by every year. Despites achievement of foreign banks in China were not prominent, the foreign banks increased these every year.#p#分页标题#e#

 Total assets and total liabilities 

Table 13 the assets of foreign banks in China (2003-2007)

2003 2004 2005 2006 2007

Assets (RMB 100 million) 4,159 5,823 7,155 9,279 12,525

Share of the total banking assets in China (%) 1.5 1.84 1.91 2.11 2.38

Liabilities (RMB 100 million) 3,751.4 5,329.1 6,530.1 8,531.6 11,353.0

% of the total banking Liabilities in China 1.4 1.7 1.8 2.0 2.2

Suorce : CBRC 2007

In 2007, the total assets of foreign banks were 2.38% of total banking assets in China, this figure were small proportion of total banking assets, however, the amount reached the RMB 1,252,500 million; moreover, this figure was steady increased. The total liabilities of foreign banks in China were increased as same as total assets of foreign banks.

 Profit before tax 

Figure 5 Profit before tax of foreign banks in China (2003-2007)

RMB 100 million 

Source : CBRC 2006, 2007 annual report

The profit before tax of foreign banks was steady increased, compare with the previous years. This can know the foreign banks performance well. In these number, there were one problem need mention. This number including the all the foreign banks in China, however, every year, the number of the foreign banks were different, so this figure was not accurate.

 The NPLs of foreign banks in China

Table 14 foreign banks in China 2006-2007

Unit: RMB 100 million, %

2006 2007

Outstanding balance of NPLs 37.9 32.2

Substandard 21.6 20.4

Doubtful 9.3 7.7

Loss 7.0 4.1

Share in total loans 0.8 0.5

Substandard 0.4 0.3

Doubtful 0.2 0.1

Loss 0.1 0.1

Source: CBRC annual report 2007

The NPLs of the foreign banks in China was very less, it achieved the international standard level 8 percent. The reasons of this is the foreign banks in China’s open the all business only in few years, the risk management of the foreign banks have the advanced management framework, so they can control the risk very well. In addition, compare with the NPLs 2006, the NPLs of foreign banks were decrease 0.3%.

6.5 Chapter summary

This chapter described the historical developing process and analyses the current circumstances of foreign banks in the Chinese financial market. After China’s entry into WTO, the foreign banks enjoy national treatment as same as the domestic banks. Faced the domestic banks become stronger and the foreign banks also have some strategies to expand their business. Domestic banks and foreign banks will face to drastic competition. Next chapter will use the two case studies (one is CCB, another one is HSBC) to compare the operation and performance between the domestic banks and the foreign banks.

Chapter seven Compare and contrast between domestic banks and foreign banks

7.1 Introduction

In Chinese banking system, the domestic and foreign banks are main roles. In this system, these two types of banks face the same situation, they will use the different way to solve, and they use the different strategies to compete with each other, gain market share. This chapter will use the case study to analysis, understanding who is the winner in Chinese banking market.#p#分页标题#e#

To compare the operation and performance between domestic and foreign banks, first choose two banks to representative each bank. After early research, the China Construction Bank is one of the State-owned commercial banks, it use case for CCB to representative the domestic bank, and use HSBC representative the foreign banks in China, because HSBC have long history in China. In this chapter, it will adopt two case studies to analysis their strategies and performance, then compare and contrast between these two banks. Finally, use the SWOT analysis the foreign banks and domestic banks, respectively summarize the advantages and disadvantages by each type of the banks.

7.1 Case study: China Construction Bank

7.1.1 Corporate profile

China Construction Bank (CCB) was established in 1954, is the one of the state-owned banks; provide a comprehensive range of commercial banking products and services. The development of the CCB is very quickly, they have the extensive customer base, extensive network and the branches. In addition, some branches were established overseas, such as Singapore, Frankfurt, Tokyo and so on. The CCB under the PRC Company Law, in September 2004, the CCB was formed as a joint-stock commercial bank, and separation procedure undertaken by their predecessor. After the China Banking Regulatory Committee’s approval on September 14, 2004, the CCB was separated into bank and Jianyin. On 27 October 2005, the bank’s H-share was listed on Hong Kong stock exchange, and on 25 September 2007, the bank’s A-share were listed on Shanghai stock exchange. (source: www.ccb.com)

7.1.2 Corporate Strategy

The CCB seek to become a world-class bank, they want to provide the best services and product to customers, gain maximizing profit value, and give excellent career opportunities to employee. In detail, the main strategies on the following: (source: www.ccb.com)

 Customer

The CCB will strengthen their relationships with their larger corporate customers, such as the industry leaders on power, telecommunications, oil, gas, and infrastructure, major financial institutions and government agencies. In the same time, the CCB selectively developing the small- and medium- size enterprise customers. In the personal banking area, they try to increase their revenue from high-income retail customers. 

 Product

The CCB will develop their wholesale and retail products with a focus on fee-based business, payment and settlement services, personal wealth management and corporate treasury management. In addition, the CCB focus on residential mortgages and diverse savings products to grow proactively personal banking business, and build the industry leading credit card business.

 Geographical regions

The CCBs will focus on developed geographical markets, such as the Yangtza River Delta, Pearl River Delta and Bohai Rim regions. the CCBs also seek to accelerate the development in the capital cities of inland provinces in China.

7.1.3 Corporate Governance and risk management

After the CCB were listed on Shanghai stock exchange, the CCB has improved the governance structure in accordance with the Company Law, the Commercial banks of the PRC, and other laws and regulations. It consist of the shareholders’ general meeting, board of directors, board of supervisors and senior management, and formulated checks and balance mechanism among the decision marking body, supervising body and management. (corporate governance report, 2007)

Figure 6 the corporate governance of the CCB

Source: corporate governance report 2007 

The board convenes regular meetings, not less than four times per year, and all directors keep the good communication with the secretary to the board, they ensuring compliance with board procedures and all rules or regulations. Currently the bank has six independent non-executive directors, who are they do not have any business or financial interests in the bank. By the other words, they are independent directors, they can have the fair with corporate governance.

For the risk management, the CCB continued to reinforce the reform of its risk management system. By the end of the 2007, the CCB was awarded “Best financial risk management of China” by Asiarisk magazine. The CCB appointment of all risk supervisors in tier-one branches and risk heads in tier-two branches, the bank completed its delegation of the managers to country-level branches. The CCB jas fully implemented the parallel operation structure to its large and middle-sized corporate customers, and some of branches use this structure to the credit business of retail customers. The key achievements of the CCB’s development of risk management tools were as follows:

 Implementation of total funds pricing management

 Implementation risk limits monitoring by industry 

 Optimisation of economic capital management

However, the CCB’s credit risk management needs to enhance. The CCB was aware of this point; the banks decided future enhanced its credit risk management level.

7.1.3 Financial review 

 Total asset and liabilities

Figure 7 the total asset and total liabilities (in million of RMB)

Source: CCB annual report, 2007

In the total assets amounted to RMB 6,598,177 million, compare with the pervious year, the ratio is increased 21.10%, the Gross loans and advances to customers increased to RMB 3,272,157 million. Main because is the bank expanded investment in financial assets under reverse repo agreement with an aim to better utilizes short-term funds. The amount of banks and non-banks financial institution increased RMB 20,208 million that are bank rise in money market placements. (CCB 2007 annual report) The total liabilities were RMB 6,175,896 million, compare with the previous year, it have an increase of 20.66%. the deposits from customer remained the CCB’s primary source of funding. These amount increased by RMB 619,060 million. This growth rate down to 13.11%.#p#分页标题#e#

 Profitability

Table 15 the profit before tax of the CCB

2007 2006

Amount (in million of RMB) % of total Amount (in million of RMB) % of total

Corporate banking 61,391 60.89 26,642 55.76

Personal banking 26,146 25.93 10,655 16.21

Treasury operations 13,347 13.24 18,348 27.92

Other and unallocated (68) (0.06) 72 0.11

Profit before tax 100,816 100.00 65,717 100.00

Source: CCB annual report 2007

The CCB’s main business segments are corporate banking, personal banking, treasury operations, and others and in allocated operations (including equity investment and overseas operations) By the end of the 2007, the CCB’s profit before tax achieved RMB 100,816 million, and the net profit was RMB69, 142 million, compare with previous year, the profit before tax increase 53.41%, however, the profit of the other and unallocated operations was negative. The net profit was also increased of 49.27%. However, the growth rate of net profit was lower than that of profit before tax, which means the deferred tax items changed, leading to an increase of RMB1, 512 million in income tax expense. The return on average assets and return on average equity were 1.15 % and 19.50%, they also have increased of 0.23 percent and 4.50 percent over the previous year.

 Asset quality

Before the government required the SOCBs distribution five-category of the loans, the CCB divided into normal loan, special mention loan, sub-standard loan, doubtful loan, and loss loan, the CCB defined the non-performing loans (NPLs) include sub-standard, doubtful and loss loans.

Table 16 the NPLs of the CCB

2007 2006

Amount (in millions of RMB) % of total Amount (in millions of RMB) % of total

Sub-standard loans 25,718 0.79 29,261 1.02

Doubtful loans 48,159 1.47 55,983 1.95

Loss loans 11,293 0.34 9,155 0.32

NPLs 85,170 94,399 

NPLs ratio 2.60 3.29

Source: personal set, according the CCB 2007 annual report

The CCB worked together to find solution for large NPLs, with strengthened efforts in liquidity enhancement, recovery, and writing-off of the existing NPLs, the quality of assets continued to improve. As the result of 2007, the NPLs was RMB 85,170 million, compare with 2006, a decreased by RMB 9,299 million. The NPLs ratio was decrease of 0.69 percent compare with 2006, however, the Loss loan in 2007 was higher 0.02 percentage point than the Loss loan ratio in 2006.

 Capital adequacy

By the end of 2007, the capital adequacy ratio was 12.58%, compare with the ratio in 2006, it increased 0.47 percent. The capital adequacy ratio is calculated by dividing the total base after deductions by risk-weighted assets. In 2001, the growth rate of total capital base after deductions exceeded that of risk-weighted assets, it growth ratio was 23.71%, however, the growth ratio of risk weighted assets was 19.15%. So it led to higher capital adequacy ratio.

7.2 Case study: HSBC in China#p#分页标题#e#

7.2.1 Corporate profile 

In the 1865, the Hongkong and Shanghai Banking Corporation Limited were established in Hong Kong and Shanghai, they are the founding member of the HSBC Group. This group is one of the world’s largest banking and financial services organization with around 10,000 offices in 83 countries and territories. (source:www. hsbc.com.cn) The Hongkong and Shanghai Banking Corporation Limited have continuous to operation for 143 year in mainland China. It’s one of the largest investors amongst foreign banks in mainland China; they invested over USD 5 billion. On 2 April 2007, HSBC Bank (China) Company Limited (HSBC China) started operation. After China entry into WTO within five year, the China open the fully financial market, HSBC China started provide a range of RMB service in 15 Mainland cities. In addition HSBC China provided wide range of foreign currency services to Chinese, local enterprises, foreign invested enterprises, and foreign passport holders. So the development of the HSBC China is very well, now, they have more than 5000 staff, 98% of them are local people. They also have largest network among foreign banks in mainland China.

HSBC China provide their customers with the full rang of the financial and baking services, which include:

 Corporate, institutional and commercial banking: business finance, corporate deposits and loans, cash management, trade services, custody and clearing, treasury and capital markets. 

 Personal financial services: deposit services, loan service, credit cards and automated teller machine services (ATMs)

 Private banking : RMB and foreign currency banking, wealth management serves, and bespoke private banking solution ( QDII, an array of structured product)

7.2.2 Corporate strategy 

HSBC has the different strategies on their key businesses: ( source: www.hsbc.com),

 Global banking and market: emerging markets-led and financing focused wholesale bank, positioning for next solution to make global growth.

 Private banking: building on intra-group refrrals

 Commercial banking: do the best small business, and strengthening international links to achieve the leading international business bank 

 Personal finance services: use the business models, their global scale and local knowledge to grow profitably in selected markets.

For the HSBC’s business models, they believe can give them “right to win” they defined these to the three aspects. Firstly, it’s businesses with international customers where emerging markets connectivity is critical. Secondly, it’s businesses with local customers where efficiency can be achieved through global scale. They use this to refer their SME customers in commercial banking and the mass market in financial services. Finally, it’s the products where global scale is critical to effectiveness in terms of efficiency expertise and brand. Now, HSBC planed to continue develop the two products: credit card and direct banking, and the HSBC aspiration they can have six totally worldwide standardized products: two asset, two liabilities and two insurance products.#p#分页标题#e#

In addition, now HSBC China is the largest network among foreign banks in China, they has 66 service outlets. However, the HSBC China will focus on Bohai Rim, Yangtze River Delta, Pearl River Delta and Western region to expand network.

7.2.3 Corporate Governance and risk management

For the corporate governance, the HSBC is committed to high standards of corporate governance. They have complied with the applicable code provisions of the combined code on corporate governance issued. The board committees consisting group management board, group audit committee, remuneration committee, nomination committee, and corporate sustainability committee. The directors are responsible for internal control in HSBC, and reviewing its effectiveness. The procedures of internal control have been designed for safeguarding assets against unauthorized use or disposition; maintaining proper accounting record; ensure the reliability of the financial information used within the business or for publication and so on. These procedures are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement, errors, losses or fraud. (source: www.hsbc.com)

For the risk management, the HSBC have a well- established risk governance and ownership structure to ensure oversight, the accountability, the effective management of risk at group, regional, customer and operating entity levels. The group management board have responsibility for this, they convened risk management meeting to set the risk appetite and approving definitive risk policies and controls. It monitors all categories of risk, receives reports, determines action to be taken and reviews the efficacy of HSBC’s risk management framework. (source: report of the director: the management of risk 2007) the HSBC’s group risk function provides the high-level centralized oversight and management of credit risk, and report the detail for the risk management every year.

7.2.3 Financial review

The HSBC China is 100 percentage subsidiary of the Hongkong and Shanghai Banking Corporation Limited, and they were established on 2 April 2007, they didn’t solely published the financial report, so the financial results will adopt the report of the Hongkong and Shanghai Banking Corporation Limited. (including the Hongkong )

 Total asset and liabilities

Table 17 the total asset and liabilities (HK$ millions)

2006 2007

Total assets 3,048,466 3,843,595

Total liabilities 2,985,395 3,706,005

Source: 2007 annual report HSBC

Since 31 December 2006, the total assets increase by HK$ 801 billion, or 25.4 percent, to the HK$ 3,843,595 million. In this number, cash and short-term funds increased by HK$ 277 billion; the trading assets rose by HK$ 22 billion or 6.5 per cent, and the net advances in Hong Kong rose by HK $34 billion, Mortgage lending increased by 3.2 per cent due to successful campaigns by the bank in Hong Kong. The total liabilities were HK$ 3,706,005 millions, compared with 2006, an increase by HK$ 820,610 millions.#p#分页标题#e#

 Profitability

Figure 8 the profit before the tax of the HSBC (HK $ millions)

Source: 2007 annual report

By the end of the 2007, the profit before tax was HK$ 78,761 millions, compare with the ratios in 2006, there was an increase of HK $ 26,745 HK$ millions or 51.4 per cent. These numbers were including the personal financial services, commercial banking, global banking and markets, private banking and other profits. In 2007, the profit of each group was increased compare with the previous year. Table 11 will show the number in detail:

Table 18 profit before tax of the customer group ( HK$ millions)

Personal financial services Commercial banking Global banking and markets Private banking Other

2006 21,889 14,945 15,243 6 (67)

2007 32,786 18,754 24,804 (7) 2,434

Increase rates

49.8% 25.5% 62.7 % -- --

By the end of 2007, the return on average equity was 32.1 percent; it has an increase by 1.0% compare with 2006. The return on average total assets also increase 0.32% percent to 1.78% in 2007.

 Asset quality

Table 19 Loan impairment charges and other risk provisions

2007 2006

US$ m % US$ m %

Hong Kong 231 1.3 172 1.6

Rest of Asia-Pacific 616 3.6 512 4.8

Source: 2007 annual report by HSBC Holding

In 2006, loan impairment charges in Hong Kong remained low, and in 2007, Hong Kong continued at a low level of loan impairment charges. This can reflected Hong Kong has the good credit quality and robust economic condition. Despite the amount of these increased US$ 59 million compare with 2006, a decreased about 0.3 percentage of these. In Rest of Asia-Pacific, loan impairment charge rose by 17 per cent to US $ 616 million. However, in this area, the loan impairment charges were low in Taiwan compare with 2006. Because Taiwan have experienced credit deterioration during 2006. The government regulatory intervention in the card market, HSBC banks were imposition of government debt negotiation scheme, allowed customers to extend and heavily discount repayment term, leading to market-wide credit losses. (HSBC Holding’s annual report, 2007)

 Capital adequacy

By the end of 2007, the Hongkong and Shanghai Banking Corporation Limited submitted the capital adequacy ratio to the Hong Kong Monetary Authority. It was 11.6%, after some regulatory purposes groups have consolidation, there is no relevant capital shortfall in any of the group’s subsidiaries.

7.3 Compare and contrast between CCB and HSBC

Base on China’s economy grew steadily and rapidly. Industrial production growth accelerated. Consumer demand was strong, household income, and corporate profits, etc all increased. The GDP rose by 11.4%, and CPI rose by 4.8%.

Faced with this situation, the Chinese financial market can gain some opportunities, including the domestic banks and foreign banks. They have the some macro- environment, however, different background and operation, dissimilar product and strategy make them gain the different market share. It will use continued to apply case study to compare and contrast them.#p#分页标题#e#

7.3.1 Geographical distribution

The HSBC China has the 67 outlets in mainland China. In these area, they have 17 branches in the Beijing, Shanghai, Guangzhou and so on. These area are rich people concentrated cities or economic developed cities. In this mean, these cities have potential financial benefits to foreign banks. Now the HSBC China began to expand the net work in the west of China’s modern cities. However, compare with the CCB which is the one of earliest and largest state-owned commercial banks, HSBC China’s network less than that in the CCB. The CCB has the long history in mainland China, now they have the net work of approximately 13629 branch outlets, it cover every region of China, such as rural, town, small and medium-sized cities, and modern cities. The extensively net works is benefits in personal retail services. Because the ATM, branches can give the clients bring the convenient services. 

7.3.2 Corporate governance and risk management

After the CCB reform, there is an improve of the corporate governance and risk management system compare with past years. Compare with the HSBC China, the CCBs’s governance and risk management also need adjust and gradually ameliorate. Because HSBC China is belong to HSBC group. HSBC group is world’s largest banking and financial services organisations; they completed set of the normative risk management system and the regulations of governance. Focus on the risk management system, there are some different between the CCB and HSBC China.

Firstly, it is the organization or framework. the HSBC China’s risk management very comprehensive, they established many specialization departments to control and management the credit risk. However, the CCB’s systems were more simplex, the less communications between the departments and committees.

Secondly, it is the consciousness of the risk control. The HSBC China recognition the risk control, however the CCB recognition the write-off NPLs. HSBC China will adopted many measures to control the financial risk. They will analysis the clients’ condition in detail, such as scale of company, manager’s experiences, capital of shareholders and so on. They will choice the clients very strict. However, the CCB did not have comprehensive measures to control them. Despite the CCB set the risk classify system, they only analysis and check at the beginning of year, this can’t timely reflect the financial risk.

Thirdly, it is the deal with NPLs. The HSBC China recognition the transform NPLs. When the loan have some problems, the manager will set the specialize group help the client analysis market capability, competitor and some conditions in details, help client resolve problems to reduce the NPLs. However, the some condition was occurred in the CCB. The CCB will dispose guaranty.

7.3.3 Financial talent 

When the government roundly opens the banking sector to meet its WTO commitments, the human resources battle for the best and brightest in the financial sector has escalated as well.#p#分页标题#e#

In early 2007, HSBC expects to grow its headcount from 3,000 to 4,000 in China, and the HSBC China Chief Executive Richard Yorks said if the bank finds enough experienced staff and training them adequately, it can has the toughest issue confronting other banks. (Xu 2007) after HSBC China’s established, they need the vastly talents in different specialist expertise and skills. HSBC can use the high- salary, and go aboard opportunities to attract talents.

For the CCB, is the one of the SOCBs, because of government intervene in past years, some of employees have low education and low technology skills. For the staff academic qualification of the CCB, in there only has 0.06% of the staffs got doctor’s degree, the most number of the staffs got associate degree, about 41.23%, in there also have 11.06% of staffs only got high school degree or below. (2007 annual report by CCB) After interview for CCB’s manager who works in Chengdu CCB Human Resources Department, it can know some of the employees have the high technology and experiences also choice the foreign banks, because they can have the high salary and good work environment in the same position. 

7.3.4 An evaluation of the performance of two banks 

The compare and contrast the CCB and HSBC, it has one problem, they have the different units. The CCB is RMB, the HSBC is HK$ and US$. The financial figures were based in 2007 and 2006, and the exchange rate changed every day. After research by the People’s Bank of China, it can use the average number. In 2007, the US$: RMB is 7.5: 1, the HK$: RMB is 0.96: 1; in 2006, the US$: RMB is 8.07: 1, the HK$ RMB is 1.04: 1. The performance between the CCB and HSBC were listed below (after transform to same unit RMB):

 Total asset and liabilities

Figure 9 the total asset and liabilities of the CCB and HSBC from 2006 to 2007 (RMB million)

Total assets total liabilities 

For the figure 9 it can know the total asset of the CCB is higher than HSBC form 2006 to 2007. Although HSBC has been substantially less than CCB, the HSBC growth ration was higher than ratio of the CCB. The growth ratios of the CCB were 21.1 percent, the total assets of the HSBC increased 25.4 percent compare with 2006. The situation of the total liabilities of two banks as same as total assets, the amount of HSBC can not more than the CCB. Compare with 2006, an increased by HSBC 21.2 percent, it also higher than increased ration 20.66% in the CCB.

 Profitability

Table 20 ROA and ROE of the CCB and HSBC(per cent)

ROA ROE

2006 2007 2006 2007

CCB 0.92 1.15 15.0 19.50

HSBC 1.46 1.78 31.1 32.1

Data on bank profits in Table 14 reveal that the CCB in particular showed substantially lower ROA and ROE in 2006. After one year, the ROA and ROE have the increased; especially the ROE increased 4.5 per cent to 19.5%. The ROA and ROE of HSBC were higher than the CCB in these two years; however, the growth ratio in ROE was less than CCB. Because the CCB increased foreign participation has contributed. The institutional reform of corporate governance, international operation and experienced pushed the CCB’s ROA and ROE fleetly increased.#p#分页标题#e#

 Asset quality

The HSBC bank is the foreign banks, when they entry into China, they will improve the quality, and availability of financial services in the domestic financial market by enabling the application of more modern banking skills and technology (Levine, 1996) According to research by the HSBC, it is not has the NPLs ratios, so for there, use the loan impairment charges and other credit risk provisions to comparison. In 2007, the HSBC loan impairment charges to customer advances were RMB 1,041 million. For the CCB, the provisions made for impairment losses on loans and advance were RMB 20,106 million, the allowances for impairment losses on loans and advances to customers were RMB 88,928 million. the CCB’s assessed allowances were higher than the HSBC, reflecting higher customer lending volume, and releases and recoveries were lower. In 2007, the CCB improve the way to write-off the NPLs, compare with 2006, the CCB’s NPL decreased by RMB 9,299 million. In recent year, despite the CCB improve the risk management very quickly, the HSBC set the comprehensive framework, high technology, and experienced to risk control. So the asset quality of the HSBC was better than the CCB’s.

 Capital adequacy 

After the government injected capital and reform, the capital adequacy ratios were increased. In 2006, the capital ratio was 12.11% and in 2007 it was 12.58%. In 2007, the HSBC used the different way to calculated, so the numbers are therefore not strictly comparable. On the 2007 annual report analysis, the HSBC in 2006 the capital adequacy ratio was 13.5%, in 2007 this number was 11.6%. So the capital adequacy of these two banks hard to comparison.

7.4 SWOT analysis: foreign banks versus domestic banks 

The China’s WTO accession, give the Chinese financial system brings the opportunities and challenge to foreign banks and domestic banks. In this chapter provide the analysis about the CCB and HSBC, and compare and contrast them. There will use the SWOT analysis, give the summaries to each type of the banks.

7.4.1 Strength and weakness

The strength and weakness for the domestic banks and foreign banks were interacted in Chinese financial market. The domestic banks’ strength is weakness of the foreign banks. Contrarily, the strength of the foreign banks is the weakness of the domestic banks. In the Chinese financial market, the strength and weakness of the domestic banks and foreign banks in the following:

Table 21 the strength and weakness of domestic banks and foreign banks

Domestic banks Foreign banks

History Long (S) Short (W)

Exist consumer Large number (S) Small number (W)

Network Extensive (S) Limited (W)

Social culture Well-informed (S) Unfamiliar (W)

Services standards Low (W) High (S)

products Not too much (W) Diversity (S)

Market share High (S) Low (W)

Governance and risk management Weak (W) Advanced (S)

Political burden Heavy (W) Light (S)#p#分页标题#e#

Source: by personal collected. S = strength, W= weakness

The domestic and foreign banks have the strength and weakness. (see table 21) the domestic banks have the long history, so they have the many exist consumers, and gain the high market share, set up the extensive networks in China. Compare with the foreign banks, their governance and risk management, services standards and products were more weakness than foreign banks. In addition, in the past year, the government intervene make the domestic banks especially the SOCBs have heavy burden, such as tax, NPLs. 

7.4.2 Opportunity

 Domestic banks

After China’s WTO accession, the large number of foreign banks entry into China, these give the domestic banks many opportunities. Firstly, it can improve the governance standard of domestic banks. After compare between the CCB and HSBC, it can know the foreign banks have advanced governance and risk management experienced. Foreign banks’ entry is means they bring the strong competition pressure to the domestic banks, they also can push the domestic banks increase their competition ability, study foreign operation and management modes, it is benefit for push domestic banks’ reform and modernization.

Secondly, increase the external funds. After foreign banks entry to China, it bring the foreign capitals. These can good for the enterprises in China, especially, the foreign investment industries. Because before only the SOCBs can provide their financing services, the huge financial need force on the SOCBs, make the SOCBs have high risk. After foreign banks’ entry, they can help enterprises increase capital, simultaneity, they can reduce the lending pressure for the SOCBs.

Thirdly, they are advantageous to domestic banks to expand oversea business. Base on WTO principle of reciprocity, at the time of allowing the great number of the foreign banks into China, the domestic banks entry to oversea financial market will reduce the restriction. This create the good condition to domestic banks, in other words, some good operation commercial banks have extensive existence space on the international financial market, to expand their business.

Fourthly, the equal tax level. Before China supports the foreign investment, so the government give the foreign financial institutions some tax special discount, such as they can enjoy reducing business tax, income tax or no-tax in China. Under the different tax level, domestic banks’ competition ability was weakened. However, after China joined WTO, the government canceled the tax special discount. The domestic banks and foreign banks have the equal tax level, the domestic banks can equal to competition. 

 Foreign banks

According to the WTO accession commitment, China opened its financial market to foreign financial institutions. This can give the foreign banks some opportunities to expand the business in China. Foreign banks enjoy national treatment, they allow foreign banks to operate all over the China, and open the RMB business for all the clients and enterprises. The foreign banks can use their product and good services to attract clients, to expand the business in China. Some areas allowed the foreign banks expand, for example, the RMB business, foreign exchange, settlement business, wholesale, and retail business. The foreign banks also can rapidly expansion in China.#p#分页标题#e#

Secondly, increase the high-quality clients. After the Chinese opened then financial market, the foreign banks have the chance to gain high-quality clients. These clients have the high education, know about the financial and banks knowledge, high salary and high reputation. The number of the clients in the foreign banks have less than domestic banks, moreover, they difficult to exceed the domestic banks. If the foreign banks use their high technology product and services to attract the high-quality clients, they also can bring the considerable profits to foreign banks.

Thirdly, the floating RMB exchange rate. Since Chinese government announced that RMB became float and no longer to peg the dollars again, the RMB market will become more vigorous and complex. This mean is the demand of the financial hedge will go up as long as the increase of international trade. the foreign banks are good for the technology, and management, so the floating RMB exchange rate create more opportunities for their treasury departments.

7.4.3 Threat

 Domestic banks

After China’s WTO accession, the China’s banking system is going to face the fierce competition from foreign banks. Most of them are world famous banks, they have good operation, management, assets and adequacy capital. The domestic banks face some threat.

Firstly, the market shares and high-quality clients. China opened wholly financial market to foreign financial institutions with China’s WTO agreement. Foreign banks can do the RMB business to clients. Some foreign banks have good reputation, the clients can free choice the banks. The domestic banks’ market share for the RMB saving services, foreign currencies saving services were reduce, if the domestic banks no suitable strategy. It also will reduce some number of the high-quality clients.

Secondly, reduce the profitability. Accompany with the decrease the market share and high-quality clients. The SOCBs will loss some benefit business and district. The domestic banks especially the SOCBs have the long history, when they opened or expand new business, they must be considering nation’s benefits. Therefore, these factors will seriously influence the profitability of the domestic banks.

Thirdly, increase the difficulty for macro-adjustment. The foreign banks utilize gain capital from the international financial market to boycott the influence of monetary policy, moreover, when the foreign banks entry into Chinese currency market, they aggrandizement wave conduct of the international financial market, make the Chinese Central banks hard to adjustment. After China opened the wholly financial market, the foreign banks provide the financing services to each kind of Chinese enterprise, this mean RMB currency and foreign currency were commixed, the international capital flow will more frequent, the Chinese central bank also hard to control the risk of capital flow.

 Foreign banks

Some threats of foreign banks need to face:

Firstly, the competition with the domestic banks and international banks. Even some people are not satisfied with some Chinese banks’ services; the domestic banks still have considerable strength in Chinese market. For example, the SOBCs have already had more than half of the market share, networks over the China. After China’s domestic banks reform, the domestic banks improve their technology; improve their services to meet the need of increase the market competition. so domestic banks stronger than before. So the foreign banks have not ignore the strength of domestic banks. Furthermore, the competition exists within foreign banks. For example, the Citibank and HSBC also have the long history in China as most well know foreign banks in China. They also want to gain more market share in China, so in the foreign banks, they also have the challenge for compete with other foreign banks. However, for the foreign banks, they also have the good condition for advanced services system and management methods, under the Chinese financial market opened, their competition will becoming intensification.#p#分页标题#e#

Secondly, the financial talent. The financial talent is importance property for the each bank. They are very eager to get training and acquire knowledge, looking for good opportunities. Foreign banks understanding this property is importance, so make high salary to attract talent. However, in China, the financial talents very limited. They are sensitive to the emoluments and expect foreign enterprise to pay higher salaries, if the foreign enterprise’s salaries less than other multinational organizations, the financial talent will choice other organizations.

Thirdly, the political risk of the Chinese financial market. China has the special banking system, after foreign banks entry to China enjoy the national treatment. They must be comply Central Bank law. The Central Bank has responsibility for all the financial organizations in China. The political risk is an unforeseen risk; it can influence the banks’ influence. According to understanding the Chinese financial background, it is not difficult to find that the policies and law for financial structure have changed a lot in past years. So this factor is the potential threat by foreign banks.

7.5 Chapter summary

After use the case study, SWOT analysis to compare and contrast between domestic banks and foreign banks, it can know in the Chinese financial market, neither the domestic banks nor the foreign banks are winner. They have their own strength to compete with each other. The relationship between the domestic banks and foreign banks are interacting. Domestic banks can study foreign banks’ advanced governance and services to make themselves more motorization. The foreign banks also can use their predominance cooperate with domestic banks to conquer external factors. Next chapter will conclude the full dissertation and give some recommendation.

Chapter Eight Recommendation and Conclusion 

8.1 Recommendation 

8.1.1 Recommendation for Chinese banking system

Under WTO accession commitments, China opened wholly financial market to foreign investors. The strong competition pressure on domestic banks, they must improve their performance, continue to reform. In the future, the reform for the Chinese banking system may from some aspects as following:

 Financial innovation

The PBC should push the banking future reform, controlling the competition, improve the financial innovation. The domestic banks need to develop the new product and services, make the domestic banks have the diversified products and services. For the domestic banks need to continue reducing NPL ratio, increasing capital adequacy, improving credit and risk control system, expand the overseas financial institutions.

 Human resource management 

The financial talent is important for the development of the banking. The domestic banks need to improve the human resource management. Firstly, they need to recognition financial talent, adjust the inner talent framework. Secondly, expand the training for staffs; make them understanding current financial concepts, good operation in practice, more professional in financial area. Thirdly, set up scientific guerdon system, give the high salary to good staff, and avoid loss the financial talent.#p#分页标题#e#

 Improve regulatory effectiveness

The CBRC need improve the regulatory effectiveness, they need set up the comprehensive system to supervise the domestic banks, such as operational risk, credit risk, and market risk, etc. Required the banks strictly implement the liability mechanism, published the real and exact financial report, control the bank crimes.

8.1.2 Recommendation for foreign banks in China

Base on the WTO accession, the foreign banks have many opportunities and potentially market share in China. However, the foreign banks need to develop their strategies to exploiting them. Following show some recommendation on foreign banks can develop or succeed in the future:

 Building the brand recognition 

The brand recognition may importance for expand the business in China. Some people didn’t know the foreign banks’ name. They didn’t know their reputation. According to the survey in some financial institutions, 63.63% of the people whose age above 46, they claimed even though foreign banks were provide better services, they will not save money into the foreign banks. They thought the foreign banks will bankrupt, but the Chinese banks are quite safe, because the SOBCs were guaranteed by the government.

The foreign banks need overcome this mistrustful, make the customer loyalty. Then make the consumers know this brand, make more consumers understanding their competitive strength, and capital adequacy. The foreign banks need to spend time and money to propagandize their service and product and brand recognition.

 Increase profitable clients 

The foreign banks need find the potential client. For the Chinese traditional banks have the long history and market share. They provide the quite familiar services to consumers. However, some of clients were not satisfy to services of the domestic banks. The foreign banks need catch this point, have effective communication with them, and make their open new account in their banks.

To achieve this purpose, the foreign banks need understanding the Chinese market, Chinese people and culture. In some circumstances, they need to change their bank services to suit the taste of the Chinese clients. Hence, the foreign banks need to find the way to attract them, and analysis the clients’ condition, create and increase profitable clients.

8.2 Conclusion

This dissertation introduces Chinese banking system reform and analysis the performance and operation of both Chinese domestic banks and foreign banks after China’s entry into WTO. It attempts employ the numbers of the data to analysis the situation of banking industry. The literature, the WTO factor, Chinese banking reform, major problems of Chinese banking sector and so on, has been presented.#p#分页标题#e#

China is the largest population, one of the biggest economies in the world, it transform its economic to the market economy system. Since 1979, China has reform its banking system in order to achieve the modernization services and development requirement. After more than twenty years’ reform, the banking system has experienced remarkable changes, includes the SOBCs, the policy banks, the large number of other commercial banks, and other financial institutions. They improve quality of product and services, face the foreign banks’ entry, they improved their performance. However, a lot of problems remained unsolved.

After China entry WTO, the China need open the financial market to foreign financial institutions. China allowed foreign banks can do RMB business with Chinese corporation when China entry WTO within three year. After five year, China allowed the foreign banks enjoy the national treatment. this will significant influence Chinese banking system.

China’s WTO accession, introduce the many foreign banks entry Chinese financial market, they bring the strong competitive pressure on China’s banking sector, moreover, they bring the modern banking management expertise, advanced technology to China. These pushed the Chinese domestic banks accelerated reform, make the domestic banks become more vigorous. When China opened wholly financial market, the domestic banks and foreign banks also have many opportunities and challenge. 

Chinese domestic banks have advantage of long history, and extent network and consumers which is difficult for foreign banks to compete. Despite the problems of NPLs, the products and the risk management have resolve before, competitive with foreign banks, they needs to continuously reform, delegate more power to the SOBCs, development of the supervisory system by central bank.

WTO accession gives foreign banks great opportunities to expand there business, such as foreign exchange, RMB business, settlement business, retail and wholesale business. They can use their advanced technology, diversify products, and good services to attract clients. However, when foreign banks competition with domestic banks, these are some problems should concern by the foreign banks. They lack of the social culture, regulatory and legal environment will interrupt the development of the foreign banks, brand name recognition perhaps influence the foreign banks’ wider launch into the retail banking space.

Opening up the country’s financial market, make the banking sector appears the potentially lucrative market. More international competition will not give the domestic banking reform process more discipline, however, it also encourage the development of a banking environment to achieve the international standard. More and more foreign banks entry to China, if they overcome obstacles, they will be successful in market in the future. Simultaneity, Chinese domestic banks can not manage to improve their performance in deal, Chinese banking market may lose market share in retail market to foreign competitions.