China’s Banking and Finance Industry

Industry Overview

According to the president of PIM, Tom Ward, China’s banking and finance industry, which
includes financial markets and intermediaries, has been greatly changed over the last two
decades. PIM’s research shows that the whole industry has been transforming from a centralized,
state-owned and government-controlled provider of loans into an increasingly competitive
market with various types of banks. Though China’s banking industry has remained under the
government’s regulations, China’s banks have gained much more autonomy.

This particular industry was well developed before 1949 as Shanghai became one of the financial
centers of Asia during the first half of the 20th Century. After the foundation of the People’s
Republic of China in 1949, all of the capitalist companies and institutions were nationalized by
1950 and there was one single bank, the People’s Bank of China (PBOC), which served as both
the central bank and provided commercial services. It controlled approximately 93% of the total
financial assets of the country and handled almost all financial transactions. This situation was
not changed until China’s first main restructuring under Xiaoping Deng in 1978.

By the end of 1979, the PBOC was taken out of the Ministry to become an independent entity.
Meanwhile, the Big Four state-owned banks, Bank of China, the People’s Construction Bank of
China, the Agriculture Bank of China, and the Industrial and Commercial Bank of China,
assumed the commercial banking businesses from PBOC. The most important milestone for
China’s financial system in the 1990s was the inception and growth of China’s stock market. The
Shanghai Stock Exchange (SHSE) and Shenzhen Stock Exchange (SZSE) were established in
1990 as the two main domestic stock exchanges and grew rapidly during most of the 1990s in
terms of size and trading volumes. Gradually, PBOC was able to concentrate on monetary policy
issues because three policy banks, Agricultural Development Bank of China, China
Development Bank, and the Export-Import Bank of China, were established in 1994 to take over
the policy-directed lending functions, and the China Banking Regulatory Commission, which
was set up in 2003 to function regulatory.

As China’s playing an increasing important part in the world’s economy and trade, foreign
exchange is increasingly valued for cross-border business operations. These have all been
supervised and controlled by State Administration of Foreign Exchange (SAFE) since 1979. The
financial system was largely influenced by SAFE because its approval was required for foreign
exchange receipts and payments. It supervised external debt, and it monitored the foreign
exchange activities of financial institutions. Starting from January 2004, the Bank of China and
the China Construction Bank began the experiment of transforming to the shareholding system.
They established standardized corporate governance and an internal system of rights and
responsibilities in accordance with the requirements for modern commercial banks. Also, they
restructured the financial system by speeding up the disposal of non-performing assets, and
reinforcing minimum capital requirement to build up modern financial enterprises. Currently, the
six shareholding commercial banks and urban commercial banks in China have begun to accept
foreign investors as shareholders.
Thanks to the “open door policy”, some foreign banks have been permitted to open their doors in
major cities in China. Nevertheless, PIM’s research finds that most of them are just
representative branches, with only a few being permitted to carry out retail and commercial
branch functions in Shanghai and Shenzhen. Their limited participation in China’s financial
system has consistently been considered as the most difficult aspect of the Chinese banking
industry for foreign banks. Now there are 42 foreign banks in China with a market share of 1.8%
that is expected to rise.

Market Size

Figure 1 Monetary and Financial Statistics, 2007-2011, Unit: RMB Trillion

Source: National Bureau of Statistics of China

As can be seen in Figure 1, the outstanding broad money supply (M2), which covers cash in
circulation and all deposits, rose 13.6% year-on-year by the end of 2011 to RMB 85.2 trillion.
Meanwhile, the narrow measure of money supply (M1), which covers cash in circulation plus
demand deposits, was up 7.9% from last year to RMB 29 trillion. According to National Bureau
of Statistics of China, new loans in 2011 were RMB 58.19 trillion as saving hit RMB 82.67
trillion. China’s money supply was rising. Last year, PBOC became the world’s largest central
bank in terms of total assets, which was RMB 28 trillion by the end of 2011. Furthermore, PIM’s
research calculates that M2 was increasing faster than M1 from 2007 to 2011, which indicated
the investment and intermediate markets to be very active during this period of time.

Customer Analysis
Over the past decades, China has changed enormously. It surpassed Japans as the World’s 2nd
largest economy, and consequently, Chinese consumers were more sophisticated and cautious.

Customers from the tier one cities, including Beijing, Guangzhou, Shanghai, and Shenzhen, were
shifting away from the Big four banks, which accounted for 75% of primary banking
relationships in Tier one cities, down from 86% in 2004. Nationwide, the Big four’s share of
total retail deposits fell to 58%, compared to 66% in 2004. Both PIM’s findings indicated that
Chinese customers were offered more choices and the Big 4 banks were no longer their first
choice. After the global crisis in 2008, customers are more willing to go local.

Competitive Landscape

China’s Equitized Commercial Banks Market Capital

Source: Bank of China Annual Report 2011

Note: Agricultural Bank of China (ABC), Bank of China (BOC), China Construction Bank
(CCB), Industrial and Commercial Bank of China (ICBC)

Previously wholly state-owned, the equitized commercial banks have diversified their financial
services to include corporate and personal financial services, and invest overseas as well.
Because of their size, these five equitized commercial banks continue to dominate China’s
banking industry with their market share reaching 49.2%.

Since most banks have been transforming into mixed ownership entities, there are now only the
Agricultural Development Bank of China, China Development Bank and Export Import Bank of
China remain fully state-owned. These three banks in China account for 8% market share.

 
References

China Banking Association

National Bureau of Statistics of China

Bank of China