Legal Reflections on Innovation and Development in China's Banking Industry

Author: Guo Li / Country: Mainland China
Publisher:
Publish Date: 2006-07-01
Features: Since the beginning of the 21st century, especially after joining the WTO, the reform and innovation of China's banking sector have accelerated. On one hand, China has actively fulfilled its commitments made upon joining the WTO. As soon as it joined, it opened up foreign exchange services. By the end of 2003, it expanded the client base for RMB business of foreign-funded banks to Chinese enterprises. By the end of 2004, it had successively opened RMB business in 16 cities, including Shanghai, Shenzhen, Tianjin, Dalian, Guangzhou, Zhuhai, Qingdao, Nanjing, Wuhan, Jinan, Fuzhou, Chengdu, Chongqing, Kunming, Xiamen, and Beijing. By the end of 2006, all geographical restrictions would be lifted, and foreign-funded banks would be allowed to provide RMB services to Chinese residents, i.e., opening up retail RMB business. Beyond the commitments made upon joining the WTO, the following expansions were included: increasing the shareholding ratio of foreign-funded banks in domestic banks from 15% to 20%; reducing requirements for the size and tier of operating capital for foreign-funded bank branches; allowing foreign-funded banks to engage in derivative products; and permitting foreign-funded banks to provide custody services for foreign exchange funds of insurance companies used abroad. On the other hand, breakthrough progress has been made in reforms centered around the capital injection and restructuring of the four major state-owned commercial banks, as well as their listing. Around 2004, the central government unexpectedly allocated 45 billion U.S. dollars from its foreign exchange reserves to inject into Bank of China and China Construction Bank. Subsequently, the Ministry of Finance announced that the original 300 billion RMB equity capital of the two banks would be fully used to offset bad asset losses. After that, the two banks launched a series of large-scale financial restructuring measures aimed at listing, including selling suspected loans, issuing subordinated bonds, and introducing strategic investors. After the restructuring was completed, the capital adequacy ratios of both banks exceeded 8%, the provision coverage ratio was significantly improved, and the non-performing asset ratio dropped rapidly, laying a foundation for further restructuring and listing. In October 2005, China Construction Bank successfully listed in Hong Kong. In April 2005, the State Council approved the reform plan for China Industrial and Commercial Bank, providing 15 billion U.S. dollars through China Investment Corporation to supplement its capital, in addition to the original approximately 124 billion RMB state-owned capital, raising its core capital adequacy ratio to 6%. At the same time, it was allowed to issue subordinated bonds to supplement its supplementary capital, achieving an 8% capital adequacy ratio. Six months later, the China Industrial and Commercial Bank Shareholding Company was officially established. These practical measures undoubtedly contribute to promoting the transformation of China's commercial banks into market entities. Since joining the WTO, the reform and innovation of China's banking sector have accelerated, and in this process, many new issues have emerged. This book primarily adopts a legal and regulatory perspective, using comparative research methods to observe recent significant development initiatives in China's banking sector. It focuses on seven aspects: subordinated bonds, cross-industry operations, guaranteed wealth management, fund business, asset securitization, internationalization, and disposal of non-performing assets. By combining discussions on relevant international situations, it analyzes the legal obstacles encountered during the transformation process and proposes suggestions and advocacy for improving regulations and strengthening supervision. The research findings are as follows: The trend of cross-industry operations in China's banking sector has been further confirmed; the revision of laws such as the Commercial Bank Law has left room for business innovation, but the industry and regulatory fragmentation surrounding commercial trust still makes it difficult for various entities to smoothly engage in wealth management and asset securitization activities. How financial groups can truly achieve legal separation and risk isolation internally, prevent account mixing and profit transfer, continues to be one of the major questions regarding the success or failure of banking sector reforms. In dealing with non-performing assets, efforts must be made to prevent their generation and ensure effective disposal, striking a balance between adhering to basic principles and providing special treatment. During the innovation process, the pursuit of profits must be matched with risk control, and the government should cultivate the sense of responsibility and risk awareness among market participants.