CHINESE BANKING SECTOR

Chinese Banking Sector - Reform and Increasing Challenges

Case Study for Bank of China



TABLE OF CONTENTS

ABSTRACT4

CHAPTER 15

INTRODUCTION5

Purpose of the Study5

Problem Statement7

Background of the Problem9

Research Question13

Aims and Objectives of the Study14

Rationale15

Significance of the Study17

CHAPTER 219

LITERATURE REVIEW19

Reforms in China19

Bank Efficiency In China32

CHAPTER THREE36

METHODOLOLGY36

Research Method36

Qualitative secondary Research36

Case Study36

Literature Selection Criteria39

Search Technique39

Keywords Used40

Theoretical Framework40

CHAPTER 441

ANALYSIS AND DISCUSSION41

Issues47

Challenges49

CHAPTER 554

CONCLUIOSN54

REFERENCES62

Abstract

On many fronts, there is intense interest in banking in China. Chinese banks and the Chinese governments are focused on recapitalising certain large banks and executing restructuring plans to prepare for potential listing on domestic and foreign exchanges, including exchanges in New York and London. One goal of the restructuring plans is to modernise and compete more effectively with foreign banking institutions, which will be permitted to offer full banking services in China from 2007. The Bank of China and China Construction Bank have already had their restructuring plans approved and put into implementation. This research report analyses the case of Bank of China and the issues and challenges that the bank of China and the Chinese banking sector faces.



Chapter 1

Introduction

Purpose of the Study

The World Bank once claimed that China's financial sector was the soft-belly in the economy. Reform in the sector has long been argued as necessary to raise efficiency in the use of the capital and in rebalancing the economy toward consumption-based growth, without which the country's growth sustainability is in jeopardy. Indeed, not too long ago, China's state banks were deemed “technically insolvent” and whose survival hinged solely on the nation's abundant liquidity(Yi 1994). However, after an initial period of reform, profitability has returned to state commercial banks. Given the outsized economic growth of the last several years averaging about 10% per annum, it is probability too early to declare victory on banking reform as yet. Indeed, as economic growth begins to soften in 2008, banks are expected to navigate in a more difficult economic terrain than hitherto. The aim of this paper is not to appraise the record of banking reform, an analytical task probably better tackled after the completion of a complete credit cycle. Rather, our aim is to take stock on the progress in reforming China's state banks by reviewing the banking reform strategy and analyzing the strong post-reform financial performance, which cannot be entirely separated from reform efforts undertaken thus far(Chen 2000).

The banking sector has been playing an indispensable role in China's economic development. Various banking institutions, including state-owned commercial banks, joint-stock commercial banks, urban credit cooperatives, city commercial banks, rural financial institutions, foreign-funded banks, policy banks and non-bank financial institutions, serve different areas and different segments of the economy. Currently, the total assets of the banking sector registered RMB 62.4 trillion. The China Banking Regulatory Commission (CBRC) is the main regulator of the banking sector. Along with the CBRC, there are several other regulators holding different responsibilities(Farrell Lund 2006 pp.23).

China's desire to meet the Basel II requirements may offer the best hope of bringing China's banking sector up to international ...