Banking Structure in China

Chinese banks play a central role in financial intermediation in China and

possess such global weight that their development has implications to
everybody outside China. In a period of just over thirty years, Chinese
banks have changed from socialist money tellers to modern financial
institutions with a healthy and market-oriented outlook.

Overview
For a long time the Chinese banking system was organised around the
Peoples Bank of China (PBOC), which was established in 1948 and for
some 30 years assumed the functions of commercial bank, supervisor and
government treasury. The bank was based on the consolidation of the
Huabei Bank, the Beihai Bank and the Xibei Farmer Bank. The
headquarters was first located in Shijiazhuang, Hebei, and then moved to
Beijing in 1949. Between 1949 and 1978 the PBC was the only bank in the
People's Republic of China and was responsible for both central
banking and commercial banking operations.
In the 1980s, as part of economic reform, the commercial banking
functions of the PBC were split off into four independent but state-owned
banks and in 1983, the State Council promulgated that the PBC would
function as the central bank of China. Mr. Chen Yuan was instrumental in
modernizing the bank in the early 1990s. Its central bank status was
legally confirmed on March 18, 1995 by the 3rd Plenum of the 8th National
People's Congress. In 1998, the PBC underwent a major restructuring. All
provincial and local branches were abolished, and the PBC opened nine
regional branches, whose boundaries did not correspond to local
administrative boundaries. In 2003, the Standing Committee of the Tenth
National People's Congress approved an amendment law for strengthening
the role of PBC in the making and implementation of monetary policy for
safeguarding the overall financial stability and provision of financial
services

The Banking Structure

Introduction to the Peoples Bank of China (PBC)

The Peoples Bank of China (PBC) was established on 1 December 1948
based on the consolidation of the former Huabei Bank, Beihai Bank and
Xibei Farmer Bank. In September 1983, the State Council decided to have
the PBC function as a central bank. The Law of the People's Republic of
China on the People's Bank of China passed by the Third Plenum of the

Eighth National People's Congress on 18 March 1995 legally confirmed

the PBC's central bank status.
In March 2003, the First Plenum of the Tenth National People's Congress
approved the Decision on Reform of the Organizational Structure of the
State Council, separating the supervisory responsibilities of the PBC for
the banking institutions, asset management companies, trust and
investment companies and other depository financial institutions.
Instead, the China Banking Regulatory Commission was established to
supervise the financial industry.
On 27 December 2003, the Standing Committee of the Tenth National
People's Congress approved at its Sixth Meeting the amendment to the
Law of the People's Republic of China on the People's Bank of China, which
has strengthened the role of the PBC in the making and implementation of
monetary policy, in safeguarding the overall financial stability and in the
provision of financial services.

Departments of PCB
The PBC consists of 18 functional departments (bureaus) as below.

General Administration Department

Legal Affairs Department

Monetary Policy Department

Financial Market Department

Financial Stability Bureau

Financial Survey and Statistics Department

Accounting and Treasury Department

Payment System Department

Technology Department

Currency, Gold and Silver Bureau

State Treasury Bureau

International Department

Internal Auditing Department

Personnel Department

Research Bureau

Credit Information System Bureau

Anti-Money Laundering Bureau (Security Bureau)

Education Department of the CPC PBC Committee

The following enterprises and institutions are directly under the PB.

China Anti-Money Laundering Monitoring and Analysis Center

PBC Graduate School

China Financial Publishing House

Financial News

China National Clearing Center

China Banknote Printing and Minting Corporation

China Gold Coin Incorporation

China Financial Computerization Corporation

China Foreign Exchange Trade System

The Functions of PBC

Under the guidance of the State Council, the PBC formulates and
implements monetary policy, prevents and resolves financial risks, and
safeguards financial stability.
The Law of the People's Republic of China on the People's Bank of China
provides that the PBC performs the following major functions:
1.
2.
3.
4.
5.

Issuing and enforcing relevant orders and regulations

Formulating and implementing monetary policy
Issuing Renminbi (RMB) and administering its circulation
Regulating inter-bank lending market and inter-bank bond market
Administering foreign exchange and regulating inter-bank foreign
exchange market
6. Regulating gold market
7. Holding and managing official foreign exchange and gold reserves;
managing the State treasury
8. Maintaining normal operation of the payment and settlement
system
9. Guiding and organizing the anti-money laundering work of the
financial sector and monitoring relevant fund flows
10.
Conducting financial statistics, surveys, analysis and forecasts
11.
Participating in international financial activities in the capacity
of the central bank; performing other functions specified by the
State Council

The Independence of PBC

The PBC performs its functions and carries out business operations
independently according to laws and free from intervention by local
governments, government departments at various levels, public
organizations or any individuals.

Institutional Arrangement of PBC

The PBC needs to report to the State Council its decisions concerning the
annual money supply, interest rates, exchange rates and other important
issues specified by the State Council for approval before they are put into
effect. The PBC is also obliged to submit work report to the Standing
Committee of the National People's Congress on the conduct of monetary
policy and the performance of the financial industry.
All capital of the PBC is invested and owned by the State.

Management and Organizational Structure of PBC

The top management of the PBC is composed of the governor and a
certain number of deputy governors. The governor of the PBC is appointed
into or removed from office by the President of the People's Republic of
China. The candidate for the governor of the PBC is nominated by the
Premier of the State Council and approved by the National People's
Congress. When the National People's Congress is in adjournment, the
Standing Committee of the National People's Congress sanctions the
candidacy for the governor of the PBC. The deputy governors of the PBC
are appointed into or removed from office by the Premier of the State
Council.
The PBC adopts a governor responsibility system under which the
governor supervises the overall work of the PBC while the deputy
governors provide assistance to the governor to fulfil his or her
responsibility.
The head office of the PBC is located in Beijing, the nation's capital and
consists of 18 functional departments (bureaus).

MONETARY POLICY IMPLEMENTATION

Monetary Policy Committee
Article 12 of the Law of the People's Republic of China on the People's
Bank of China provides the People's Bank of China is to establish a
monetary policy committee, whose responsibilities, composition and
working procedures shall be prescribed by the State Council and shall be
filed to the Standing Committee of the National People's Congress.
The Monetary Policy Committee shall play an important role in
macroeconomic management and in the making and adjustment of
monetary policy.
Rules on Monetary Policy Committee of the People's Bank of China
stipulates that the Monetary Policy Committee is a consultative body for
the making of monetary policy by the PBC, whose responsibility is to
advise on the formulation and adjustment of monetary policy and policy
targets for a certain period, application of monetary policy instrument,
major monetary policy measures and the coordination between
monetary policy and other macroeconomic policies. The Committee plays
its advisory role on the basis of comprehensive research on
macroeconomic situations and the macro targets set by the government.
The Composition of Monetary Policy Committee
The Monetary Policy Committee is composed of the PBC's Governor and
two Deputy Governors, a Deputy Secretary- General of the State Council,
a Vice Minister of the State Development and Reform Commission, a Vice
Finance Minister, the Administrator of the State Administration of Foreign
Exchange, the Chairman of China Banking Regulatory Commission, the
Chairman of China Securities Regulatory
Commission, the Chairman of China Insurance Regulatory Commission,
the Commissioner of National Bureau of Statistics, the President of the
China Association of Banks and an expert from the academia.
The Monetary Policy Committee performs its functions through its regular
quarterly meeting. An ad hoc meeting may be held if it is proposed by the
Chairman or endorsed by more than one-third of the members of the
Monetary Policy Committee. The opinions expressed in the meeting of the
Monetary Policy Committee will be recorded in the form of meeting
minutes.
Such minutes or any resultant policy advice, if approved by more than
two-thirds of the members of the Monetary Policy Committee, should be
attached as an annex to the proposed decisions of the PBC on annual
money supply, interest rates, exchange rates or other important monetary

policy issues to be reported to the State Council for approval. In the case
the PBC files its decisions on other monetary policy related issues with the
State Council, it should enclose the meeting minutes or policy advice of
the Monetary Policy Committee at the same time.
Objective of the Monetary Policy
Monetary Policy
Instruments
The objective of the monetary policy is to maintain the stability of the
value of the currency and thereby promote economic growth. The
monetary policy instruments applied by the PBC include
Reserve requirement ratio, central bank base interest rate, rediscounting,
central bank lending, open market operation and other policy instruments
specified by the State Council.

The Frequency of MPC Meeting

The Monetary Policy Committee performs its functions through its regular
quarterly meeting. An ad hoc meeting may be held if it is proposed by the
Chairman or endorsed by more than one-third of the members of the
Monetary Policy Committee.

CHINA BANKING REGULATORY COMMISSION

(CBRC)
The China Banking Regulatory Commission (CBRC) is an agency of
the People's Republic of China (PRC) authorised by the State Council to
regulate the banking sector of the PRC except the territories of Hong Kong
and Macau, both of which are special administrative regions. In response
to their swelling debt loads, undercapitalization and non-transparent
business practices, the government of China recapitalized the banks and
set up the CBRC as the countrys independent banking regulator in
2003. Liu Mingkang was appointed its first chairman and served until
2011, when he was replaced by Shang Fulin.

Its major functions are:

To stipulate regulations and provisions for banking supervision; draft

laws, and administrative regulations and make proposals for their
drafts and amendments;

To approve the establishment, amendment, termination and

business scope of banking institutions and their subsidiaries;

To supervise banking institutions on and off the spot, and punish

those of unlawful behaviours according to law;

To examine the qualifications of senior managers of banking

institutions;

To compile statistics and reports of banking institutions in the whole

country, copy to the Peoples Bank of China and publish them in
accordance with government regulations;

To offer opinions and proposals together with the Ministry of Finance

and the Peoples Bank of China, with regard to how to deal with
emergency risks of deposit banking institutions;

To be responsible for the routine management of supervisory boards

of major state-owned banking institutions.

The commission consists of fifteen departments:

General Affairs Office
To organize and coordinate daily work of the commissions
headquarters; to be responsible for drafting documents, organizing
important conferences, taking care of confidential documentation,
preparing documents, filing documents, handling letters and visits,
maintaining secrets, compiling information, releasing news to the
press and maintaining security.
Policy & Regulation Department
To draft regulations and provisions for supervision of banking
institutions; draft laws and administrative regulations, make
proposals for drafts or amendments; be responsible for
administrative reconsiderations and responding to charges;
supervise and coordinate the executions of laws and regulations;
conduct legal consultation, organize legal education and publicity
for the banking industry; investigate and study important issues in
the reform, development and supervision of the banking industry,
make proposals for policies on the development of the banking
industry; in accordance with unified arrangement, organize the
performance of banking reform programs and make proposals for
deepening reforms; draft documents for important conferences;
compile and issue information, releases and statements.
1st Department for Banking Supervision
Responsible for supervision of state-owned commercial banks, it
examines the establishment, amendment, termination and business
scope of relative institutions in accordance with the laws; drafts
supervision regulations; conducts supervision of relative institutions
on and off the spot; supervises the operational management,
internal control and risks such as the ratio of assets and liabilities,
quality of assets, business activities, and financial payments;
investigates and punishes those of unlawful behaviors; and
examines the qualification of senior managers.
2nd Department for Banking Supervision
Responsible for supervision of share-holding commercial banks and
city commercial banks, it examines the establishment, amendment,
termination and business scope of relative institutions in accordance

with the laws; drafts regulations on supervision; conducts

supervision of relative institutions on and off the spot; supervises
the operational management, internal control and risks such as the
ratio of assets and liabilities, quality of assets, business activities,
financial payments; investigates and punishes those of unlawful
behaviors; and examines the qualification of senior managers.

 3rd Department for Banking Supervision

Responsible for the supervision of policy-oriented banks and foreign
banks, it examines the establishment, amendment, termination and
business scope of relative institutions in accordance with the laws;
drafts regulations on supervision; conducts supervision of relative
institutions on and off the spot; supervises the operational
management, internal control and risks such as the ratio of assets
and liabilities, quality of assets, business activities and financial
payments; investigates and punishes those of unlawful behaviors;
and examines the qualification of senior managers.
Supervision Department for Non-banking Financial
Institutions
Responsible for the supervision of non-banking financial institutions
(excluding institutions of securities, futures and insurance), it
examines the establishment, amendment, termination and business
scope of relative institutions in accordance with the laws; drafts
regulations on supervision; conducts supervision of relative
institutions on and off the spot; supervises the operational
management, internal control and risks such as the ratio of assets
and liabilities, quality of assets, business activities and financial
payments; investigates and punishes those of unlawful behaviours;
and examines the qualification of senior managers.
Supervision Department for Co-operative Financial
Institutions
Responsible for co-operative financial institutions for rural and urban
saving business, it standardizes the management of co-operative
financial institutions, studies and promotes the reform of cooperative financial institutions; drafts regulations of supervision for
co-operative financial institutions in their management of ratio of
assets and liabilities, quality of assets, risks control, interest rate,
supervises the risks, urges and supervises them in their internal
supervision and restrictions; drafts management measures on the
establishment, business scope and qualification of legal person of
co-operative financial institutions and organizes the executions of
the measures; and investigates and punishes those of unlawful
behaviours.
Statistics Department

To compile statistics from banking institutions of the whole country

and make financial reports, copy to the Peoples Bank of China and
publish them in accordance with government regulations; compile
statements on finance and loans of banking institutions and copy to
the Ministry of Finance; draft regulations on compiling statistics;
analyze statistics from banking institutions; organize the build-up of
data base and the information system of China Banking Regulatory
Commission.

 Accounting Department
To manage the accounting work of China Banking Regulatory
Commission, prepare annual financial budget and final financial
statement of the Commission.
International Department
To conduct official and business contacts between China Banking
Regulatory Commission and international financial institutions,
supervisory institutions of financial sectors in relative countries and
regions; and manage foreign affairs of the Commission.
Supervision Department
To supervise and examine the execution of state laws, regulations
and policies by banking institutions; in accordance with laws and
disciplines, investigate and punish those of behaviors against state
laws, regulations and disciplines, handle accusations, charges and
appeals; and be responsible for supervision work in institutions of
China Banking Regulatory Commission.
Personnel Department
To draft regulations and measures for management of human
resources in China Banking Regulatory Commission and its
agencies; be responsible for personnel management in the
Commission and its agencies and departments concerned; in
accordance with regulations, be responsible for the routine
management of senior managers of relative financial institutions; be
responsible for the training of employees in the Commission and its
agencies.
Publicity Department
To be responsible of the publicity work within China Banking
Regulatory Commission and its agencies.
Masses Work Department
To be responsible for instructing and coordinating the mass work in
China Banking Regulatory Commission and its agencies.
Working Department for Supervisory Boards

To be responsible for specific managerial work of supervisory boards

of banking institutions; draft regulations for the work of supervisory
boards; re-examine and transfer reports from supervisory boards,
and be responsible for the coordination of supervisory boards with
other departments concerned.

Other affairs
With regard to the division of labour and responsibilities in financial
supervisions, China Banking Regulatory Commission and the
Peoples Bank of China shall observe the principles of
complementing macro-control with financial supervision, mutual
promotion, timely information sharing, and establishing a
cooperative working system and a mechanism of mutual assistance
through the division of labor.
China Banking Regulatory Commission sets up supervisory bureaus
at the provincial level, sub-bureaus at the prefectural (municipal)
level and representative offices at the county (city) level depending
on the necessity of implementing supervision. The Commission
directly runs its agencies in local areas.

Domestic Players in Chinese Banking

State-owned Commercial banks
In 1995, the Chinese Government introduced the Commercial Bank Law to
commercialize the operations of the four state-owned banks, theBank of
China (BOC), the China Construction Bank (CCB), the Agricultural Bank of
China (ABC), and the Industrial and Commercial Bank of China (ICBC).
The Industrial & Commercial Bank of China (ICBC) is the largest bank in
China by total assets, total employees and total customers. ICBC
differentiates itself from the other State Owned Commercial Banks by
being second in foreign exchange business and 1st in RMB clearing
business. It used to be the major supplier of funds to China's urban
areas and manufacturing sector.
The Bank of China (BOC) specializes in foreign-exchange transactions and
trade finance. In 2002, BOC Hong Kong (Holdings) was successfully listed
on the Hong Kong Stock Exchange. The USD2.8 billion offering was oversubscribed by 7.5 times. The deal was a significant move in the reform of
Chinas banking industry.
The China Construction Bank (CCB) specializes in medium to longterm credit for long term specialized projects, such
as infrastructure projects and urban housing development.
The Agriculture Bank of China (ABC) specializes in providing financing to
China's agricultural sector and offers wholesale and retail banking services
to farmers, township and village enterprises (TVEs) and other rural
institutions.
Policy banks
Three new "policy" banks, the Agricultural Development Bank of
China (ADBC), China Development Bank (CDB), and the Export-Import
Bank of China (Chexim), were established in 1994 to take over the
government-directed spending functions of the four state-owned
commercial banks. These banks are responsible for financing economic
and trade development and state-invested projects.
ADBC provides funds for agricultural development projects in rural areas;
the CDB specializes in infrastructure financing, and Chexim specializes in
trade financing.
Second tier commercial banks
In addition to the big four state-owned commercial banks, there are
smaller commercial banks. The largest ones in this group include the Bank
of Communications, China CITIC Bank, China Everbright Bank, Hua Xia
Bank, China Minsheng Bank, Guangdong Development Bank,Shenzhen

Development Bank, China Merchants Bank, Shanghai Pudong

Development Bank and Industrial Bank. The second tier banks are
generally healthier in terms of asset quality and profitability and have
much lower non-performing loan ratios than the big four.

City commercial banks

The third significant group in Chinese banking market is the city
commercial banks. Many of them were founded on the basis of urban
credit cooperatives. The first one was Shenzhen City Commercial Bank in
1995. In 1998, PBOC announced that all urban cooperative banks change
their name to city commercial bank. And there are 69 city commercial
banks set up from 1995 to 1998. In 2005 there were 112 city commercial
banks in all of China. This number has increased through additional
transformations to 140 in 2009. Most city commercial banks have strong
ties to their local government and are majority or wholly state owned.
Since 2005 some city commercial banks diversify their shareholders,
inviting Chinese and international private companies to take minority
shares, merging and cross-shareholding. Some of the banks have listed
their shares. The city commercial banks market orientation is towards
supporting the regional economy, but also towards financing local
infrastructure and other government projects. Since 2008 a strong trend
has emerged for city commercial banks to extend business beyond their
home region. They are also often the main shareholder behind village and
township banks (VTB). Some have founded so called small loans units to
serve smaller business clients better. Taizhou City Commercial Bank, Bank
of Beijing and Bank of Ningbo are examples for city commercial banks.
Trust and investment corporations
In the midst of the reforms of the 1980s, the government established
some new investment banks that engaged in various forms of merchant
and investment banking activities. However, many of the 240 or so
international trust and investment corporations (ITICs) established by
government agencies and provincial authorities experienced
severe liquidity problems after the bankruptcy of the Guangdong
International Trust and Investment Corporation (GITIC) in late 1998. The
largest surviving ITIC is China International Trust and Investment
Corporation (CITIC), which has a banking subsidiary known as China CITIC
Bank.

Joint-Stock Banks
These banks are incorporated as joint-stock limited companies under the
People's Republic of China's Company Law. Most, however, still have fairly
concentrated and predominantly state-dominated shareholding
structures.2 There are currently 11 shareholding banks, which include
well-known names such as Bank of Communications, China Minsheng
Bank, China Everbright Bank, China Merchants Bank, Shanghai Pudong
Development Bank and Shenzen Development Bank. They are allowed to
engage in a wide variety of banking services including accepting deposits,

extending loans as well as providing foreign exchange and international

transaction services.
Given their smaller size and a corporate culture oriented more to the
private sector, they are more nimble than the state-owned counterparts
and have been successful at gaining market share at the expense of the
big four. They have made inroads particularly into the small and medium
enterprise (SME) loan market, the area in which the state-owned banks
are traditionally weak.
They also tend to be more profitable, recording higher ROA. Joint-stock
banks have recently been the preferred joint-venture partner of
international banks trying to gain access to Chinas banking sector.
Their expanding role will be instrumental in nurturing Chinas budding
private sector, particularly the SME segment, which is essential for laying
a firm foundation for the market economy in China.

Credit co-operatives:
The co-operatives typically provide credit to small and medium-sized
enterprises and individuals. The cooperative sector is divided into urban
credit co-operatives and rural credit co-operatives. Together there are
close to 50,000 of them, accounting for around 11% of total bankingsector assets. The rural credit co-operatives were formerly supervised by
the Agricultural Bank of China (ABC) and then by Chinas central bank, the
Peoples Bank of China (PBC). A new regulatory agency, the China Banking
Regulatory Commission (CBRC), has taken over the supervisory functions
in 2003 and also supervises the urban credit cooperatives.
Due to their collective-ownership status, both types of credit co-operatives
are subject to state control, thus their loan extension is still influenced by
local policy considerations. Some private analysts estimate that the NPL
level at rural credit cooperatives is around 50% of total lending, and there
is a growing concern that rural credit co-operatives will face heavy losses
when
Chinas agricultural sector opens up under WTO requirements. Given the
significance of the rural sector in China, with around 800 million people
(almost two-thirds of the total population) living in rural areas, the
government has been explicit about its intention to provide financial
support for the rural credit co-operatives in need.

Foreign banks
There are close to 200 foreign banks operating in China, most of which are
branches of foreign banks, and the rest is a handful of locally incorporated
banks (either joint ventures orwholly foreign-owned banks). Foreign banks
currently account for only around 1% of total banking-sector assets as
their role is still constrained by Chinas domestic law. However, WTO
requirements will gradually allow foreign banks greater access to Chinas
domestic banking business.
The local currency business (based in Chinese yuan CNY) was until some
years ago closed to foreign banks. The original role of foreign banks was
to provide foreign currency intermediation in order to facilitate the
operations of foreign investors and manufacturers in China. The CNY
business has been opened only gradually since 1996 when foreign banks
were first allowed to provide CNY services, but only to foreign companies
and individuals in Shanghai and Shenzen. Since China gained WTO entry
in December 2001, the geographical restriction has started to be phased
out, while rules on the type of customer to whom foreign banks can
provide CNY services will start to be relaxed soon.By December 2006, all
geographical and customer-related restrictions must be lifted. Despite
WTO norms, however, experience indicates that additional
domestic regulations or requirements may effectively constrain the ability
of foreign banks to engage in CNY-related business.
For example, a foreign bank branch may need as much as CNY 600 m (or
a hard currency equivalent) in operating capital to support its activities in
both hard currency and CNY businesses. In addition, the PBC requires a
capital adequacy ratio of 8% on top of that amount.4 Furthermore, the
PBC announced in July 2002 that interbank borrowings would be capped at
40% of total CNY liabilities, which limits the CNY liquidity for foreign
banks.
In early 2006, licensing requirements were brought more or less into line
with those for Chinese institutions, and the requirements for business lines
and for the qualifications of directors and managers are broadly similar.
The rules the banks had to follow: Liquid assets must make up more than 25% of liquid liabilities.
Assets of a branch by currency should amount to more than the
liabilities in the corresponding currency.
60% of the banks operating capital shall be invested as follows: half
in forex deposits and the other held in local currency government
bonds or times deposits maturing in less than six months.
Interbank market loans can make up a maximum of 150% of the
branchs capital.

 A loan to deposit ratio of 75% must be complied with

Banking Reforms
The First Stage of Reform
During the first stage (which began in 1978 and continued until 1992), the
main goal was changing the mono-banking system into a plural-banking
system consisting of a central bank and various kinds of financial
institutions.
From 1978 until 1984, the four state-owned specialized banks were reestablished or separated from the PBC; each was assigned a special
function:
The Agricultural Bank of China (ABC) undertook financing the rural and
agricultural
sectors.
The Bank of China (BOC) undertook financing foreign trade and
investment.
The Peoples Construction Bank of China (PCBC), which was renamed the
China Construction Bank (CCB) in March 1996, undertook financing
construction and fixed-asset investment.
The Industrial and Commercial Bank of China (ICBC) undertook financing
the business
activities of the SOEs

The Second Stage of Reform (Implementing Market-Oriented

Policies)
Market-oriented policies were widely introduced during the second stage
of reform, which ranfrom 1993 to 1997. After the concept of the socialist
market economy was formally recognized at the 14th National Congress
of the CPC in 1992, the government began large-scale experimentation
with financial markets. A series of arrangements were made to implement
this policy.
The government set up three policy banks in 1994 (China Development
Bank,17 the Export and Import Bank of China, and the Agricultural
Development Bank of China) to separate policy lending from commercial
lending, and the four existing specialized banks became known as stateowned commercial banks (SOCBs).
The promulgation of the Law of the Peoples Republic of China on
Commercial Banks (also known as the Commercial Bank Law) in 1995 was
an effort to enhance the independence of the commercial banks.

1997 Asian Crisis

The Asian financial crisis started with the devaluation of Thailands Bath,
which took place on July 2, 1997, a 15 to 20 percent devaluation that
occurred two months after this currency started to suffer from a massive
speculative attack and a little more than a month after the bankruptcy of
Thailands largest finance company.
The Chinese currency, the renminbi (RMB), had been pegged to the US
dollar at a ratio of 8.3 RMB to the dollar, in 1994. Having largely kept itself
above the fray throughout 19971998 there was heavy speculation in
the Western press that China would soon be forced to devalue its currency
to protect the competitiveness of its exports vis-a-vis those of
the ASEAN nations, whose exports became cheaper relative to China's.
However, the RMB's non-convertibility protected its value from currency
speculators, and the decision was made to maintain the peg of the
currency, thereby improving the country's standing within Asia. The
currency peg was partly scrapped in July 2005 rising 2.3% against the
dollar, reflecting pressure from the United States.
Unlike investments of many of the Southeast Asian nations, almost all of
China's foreign investment took the form of factories on the ground rather
than securities, which insulated the country from rapid capital flight. While
China was unaffected by the crisis compared to Southeast Asia and South
Korea, GDP growth slowed sharply in 1998 and 1999, calling attention to
structural problems within its economy. In particular, the Asian financial
crisis convinced the Chinese government of the need to resolve the issues
of its enormous financial weaknesses, such as having too manynonperforming loans within its banking system, and relying heavily on trade
with the United States.
Fortunately, China was not directly affected by the crisis and it managed
to maintain its financial and economic stability, thanks to the moderate
financial policy and a series of measures against financial risks that it
took.
To ease off the financial crisis, the Chinese Government adopted a series
of pro-active policies. They included:
It actively participated in the IMF-organized aid projects for some Asian
countries. In the wake of the financial crisis in 1997, the Chinese
Government provided Thailand and other Asian countries with over 4
billion US dollars in aid, within the framework of IMF or through bilateral
channels. It offered Indonesia and other countries export credit and
emergency medicine given gratis.
The Chinese Government, with a high sense of responsibility, decided not
to devaluate its Renminbi in the overall interest of maintaining stability
and development in the region. It did so under huge pressure and at a big

price. But it contributed considerably to the financial and economic

stability and to the development in Asia in particular and the world at
large.

While sticking to its non-devaluation policy, the Chinese Government

adopted the policy of boosting domestic demand and stimulating
economic growth. This policy played an important role in ensuring a
healthy and stable economic growth at home, easing the pressure on the
Asian economy and leading it into recovery.
China actively participated in and encouraged regional and international
financial cooperation together with the relevant parties. President Jiang
Zemin put forward a three-point proposal at the Sixth Informal Leadership
Meeting of APEC. He proposed to stop the spread of the crisis through
enhanced international cooperation, reform and improve the existing
international financial system, and respect the choices made by the
relevant countries or regions to overcome the financial crisis. Vice
President Hu Jingtao stressed at the Second Informal Leadership Meeting
among ASEAN, China, Japan and the Republic of Korea (or 9 plus 3) and
the meeting between ASEAN and China (or 9 plus 1) in Dec. 1998 that
East Asian countries should take an active part in the reform and
readjustment of the international financial system. He pointed out that the
most pressing task then was to control and monitor the flow of short-term
capital. He proposed that East Asian countries should exchange views on
financial reform and other macro issues. In this regard, Vice Ministers of
Finance and Deputy Governors of the Central Banks of the countries
concerned should engage in dialogue within the framework of 9 plus 3.
When necessary, an expert group could be set up to study the flow of the
short-term capital and specific means to control the flow. This proposal of
the Chinese side was well received

Financial Crisis of 2008

Faced with the dramatic fall of GDP growth, the Chinese Government took
action swiftly. In November 2008, the Government introduced a Rmb4
trillion stimulus package for 2009 and 2010. The prescribed dosage of the
stimulus is very large, at 14 per cent of GDP in 2008. In March 2009, the
Peoples Congress approved the Governments new budget for 2009.
According to this budget, in 2009, total government expenditure (central
plus local) would be 7.635 trillion Yuan, up 22.1 per cent over the previous
year. In 2009, the total government deficit would be 950 billion Yuan
(US$139 billion), the highest in six decades, compared with 111 billion
Yuan in 2008. The Central Government deficit will be 750 billion Yuan, 570
billion Yuan more than last year. The State Council will allow local
governments to issue 200 billion Yuan worth of government bonds through
the Ministry of Finance. The expected budget deficit will be about 3 per
cent of GDP in 2009.
Monetary expansion
Since 2009, the Peoples Bank of China (PBOC) has adopted a very
expansionary monetary policy to support the expansionary fiscal policy. In
the first half of 2009, bank credit increased by 7.3 trillion RMB, which was
above the official target for the full year. Credit growth was surprisingly
high, and the same was true of the broad money supply, M2, which grew
at a record rate relative to GDP. As a result, the inter-bank money market
has been inundated with liquidity. In contrast, the annual increases in
bank credit in 2006 and 2007 were 3.18 trillion Yuan and 3.63 trillion Yuan
respectively. Previously, corresponding to the rapid increase in liquidity
caused by the PBOCs intervention in the exchange market, which was
aimed at offsetting the appreciation pressure on the RMB created by the
persistent trade surplus (and capital account surplus), the PBOC sold a
large amount of central bank bills to mop up the excess liquidity. Since the

fourth quarter of 2008, the PBOC has almost stopped selling more bills. As
a result, liquidity has inundated the inter-bank money market, and once
even made the interest rates in the inter-bank market lower than interest
on deposits with commercial banks with the same terms of maturity. This
phenomenon was described in Chinas banking circles as flour being more
expensive than bread.
Chinas financial conditions have been very different from those in the
United States and Europe during the global financial crisis. China had just
completed overhauls of its banking system by writing off non-performing
loans and injecting a large amount of capital. Its banking system was
relatively safe and sound when the
Western banking system was on the edge. As a result, there was no
liquidity shortage, no credit crunch, and the monetary multiplier in China
has not fallen as dramatically as in the United States. Therefore, the
dramatic increase in liquidity in the inter-bank money market has been
duly translated into a rapid increase in bank credit and broad money

Implementation of Basel Reforms

China has taken active steps to promote the implementation of advanced
approach of Basel II in the banking sector. The CBRC has introduced a
series of guidance on the Basel II adoption, and
has accepted the application of 6 major commercial banks for
implementing Basel II in 2011.
Given the issuance of Basel III, China has conducted the QIS on domestic
banks, and made great efforts in improving the banking capital and
liquidity framework, introducing differentiated
reserve requirement to reflect the deviation of credit extension from the
economic development objectives, establishing forward looking and
dynamic loan loss provisioning mechanism, improving the supervision
over the SIFIs, and intensifying corporate governance and risk
management of banks.
Going forward, China will further participate in the reform of international
financial reform, amend and formulate relevant rules and regulations, and
strengthen policy coordination to ensure the full implementation of Basel
III framework.

Basel 3 requirements

Conclusion