China Mono-Banking System
100065 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
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