CIAO DATE: 10/2008
September 2008
Peterson Institute for International Economics
China’s banking sector has been largely transformed over the past decade. Several of the largest banks have been restructured, recapitalized, and listed. Governance has improved, notably through the appointment of independent members to boards of directors. A vigorous new regulatory and supervisory agency, the China Banking Regulatory Commission (CBRC), has introduced new accounting standards, a revised risk weighting system for measuring capital, more rigorous loan loss criteria, heightened provisioning requirements, and other significant changes. Foreign banks have entered the market, both through their own branches and subsidiaries and through strategic investments in domestic banks, bringing better banking practices and much needed additional competition.
And by most metrics, financial performance of Chinese banks has improved. Nonperforming loans of major commercial banks fell from 17.9 percent of loans outstanding in 2003 to only 6.7 percent in 2007. The share of banking assets accounted by banks meeting the statutory capital adequacy requirement from 0.6 to 79 percent over the same period. By 2007 the return on assets and return on equity for the banking sector as whole rose to a relatively respectable 0.9 and 16.7 percent, respectively.
In one critical respect, however, the financial system appears have retrogressed. The central bank, the People’s Bank of China (PBC), controls interest rates in a way that has led to significant financial repression as inflation has risen in recent years. As explained in this policy brief, the distorted interest structure poses an obstacle to further reform of the financial system and to sustaining China’s rapid economic growth.
Resource link: Financial Repression in China [PDF] - 154K