China Mono-Banking System

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1. Introduction

1. The evolution of banking risk management in china

Previously, China adopted the mono-banking system where there was virtually no need for banking risk management. During then, every step involving the supply and utilization was predetermined by the Chinese government. People’s Bank of China (PBC), being the only bank simply received instructions from the government about the allocation of the funds.[1]

However, things took a change when the four specialized banks namely the Industrial and Commercial Bank of China, the Agricultural Bank of China, Bank of China and the China Construction Bank were converted into state-owned commercial banks in the late 1970s. With the transformation, commercial loans were being made and this brings the banks to the issue on risk management.

1.2 Credit and liquidity risk

Therefore, this term paper sets to explore on how banks in China practices banking risk management. In light of the Central Bank’s recent aggressive stance in curbing loans, this paper will highlight on credit risk and liquidity risk. The former is an increasing concern for the Chinese banks. It should also be noted that the Chinese economy is still operating under a relatively conservative banking climate. The rules and regulations set by the banks are tightly linked with the government’s policies.

2.1 Time line of Chinese banks curbing loans (2004-2010)

Important Events:

2003: In order to rein in the obviously excessive credit growth, the PBC raised the required reserve ratio by one pp on September 21, 2003. ICBC set up an industry research center in 2003 to improve its risk control management.

2004: effective on April 25, 2004 bank reserve ratio was increased by 0.5% to 7.5%. Chinese firms are financed by banks at a rate of 98 per cent but often fail to pay back their loans, as a result, there are almost half of the bank’s assets are unpaid, caused half of the banks insolvent. In 2004, there was US$ 45 billion used to save China’s second and third largest banks, the Bank of China and the China Construction Bank. Subsequently, another US$ 100 billion were used to save the Industrial and Commercial Bank of China and the Agricultural Bank of China. [2]

2006: On April 28, the People's Bank of China (PBOC) raised lending rates for the first time since October 2004, boosting the one-year benchmark rate by 27 base points to 5.85 per cent, as part of efforts to curb the overheating in some sectors such as real estate.

2007: With effect on june 5 2007, the bank reserved ratio is to increase by 0.5% to 11.5%. Bad-loan ratio fell again in 2007 after tight credit monitoring.

2008: The reserve ratio was increased by 0.5% to 12% on starting August 15,2008

Jan 2010: The central bank raised the reserve requirement ratio by 0.5% with effective day on 18 Jan 2010. It's a clear sign that it was determined to drain excessive liquidity in the market and curb lending.

Time Line:
|Time |Change in reserve ratio |Direction |Notes | |1987 |10% to 12%  |Up | | |1988 |12% to 13%  |Up | | |1998-03-21 |13% to 8%  |Down | | |1999-11-21 |8% to 6%  |Down | | |2003-09-21 |6% to 7%  |Up | | |2004-04-25 |7% to 7.5%  |Up | | |2006-07-05 |7.5% to 8.0%  |Up...
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