The Peoples Bank of China Analysis

The Peoples Bank of China has carried out the role of a central bank for the past several decades as well as operating credit, savings, commercial and industrial business. But since 1979 China has embraced significant reforms in its financial markets that have propelled its opening to the global market. There has been consistent development in both the banking and finance industry.

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This was reflected in 2003 where the balance of savings in home and foreign currency was twenty-two thousand and thirty-six point four billion Yuan while that of loans in home and foreign currency was sixteen thousand nine hundred and seventy-seven point one billion Yuan. Following the separation of commercial and policy-related finance as well as the cooperation of different financial institutions functions, China has now created a financial system that is regulated, supervised and controlled by the central bank (Zimmerman, 2010).

In 1984 the People’s Bank of China majored in carrying out the role of a central bank of supervising the nation’s banking structure as well as macro-control and stopped its dealings with the credit and savings business. There has been a great transformation in the financial organization since 1996 whereby fully state-owned commercial banks have been converted into modern financial institutions dealing with currencies; more than a hundred small and medium-sized commercial banks have been recognized and financial enterprises in insurance and security sector have further been developed.

In early 2003 there was an official establishment of China Banking Regulatory Commission. From that time clear and distinguished responsibilities were allocated to the China Securities Regulatory Commission, China Banking Regulatory Commission, and China Insurance Regulatory Commission while ensuring that there is maximum coordination in the financial regulatory system (Reuvid, 2005).

Foreign financial institutions in China gained the promise of being allowed to operate all over china when the country joined the World Trade Organization in 2001. At this time foreign banks had developed to provide both consumer and business lending services. Most of them had majored in life and property insurance, asset management, consumer lending, and investment banking. There was a need for foreign banks to come up with business strategies on its activities to ensure that its operations are in line with China’s growing financial market.

China was likely to enforce regulatory measures that will limit the of speed foreign growth for fear of displacement of the social and economic sectors. The political structure on hand and delays that may result in implementing reforms within a given term might have created a hindrance to economic growth. Other factors that might have also impeded economic growth included e-commerce limitations, difficulties in human resource and regional inequalities.

There were more uncertainties due to the increased rate at which state-owned enterprises were being privatized and public preferences on other insurance and investment substitute products. Foreign banks such as Citibank had developed competitive advantage as well as success in underdeveloped countries which would be of great help to penetrate China’s market. The only dilemma was on how to extend these to other financial activities carried out by the foreign financial institutions (He & Fan, 2004).

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Allowing foreign banks to provide renminbi services to Chinese enterprises in 13 cities was one of the ways of showing that China was committed to keeping its promise created when it entered World Trade Organizations. These reforms were seen as a tool of facilitating the transfer of foreign funds and expertise which the nation’s leaders hoped will enhance corporate governance of China’s firms. Foreign banks acted fast to take advantage of the new opening created in the banking system.

Foreign banks have since then been allowed to invest with the foreign currency and have also been receiving incenses just like the domestic banks. There has been an expansion on the right to offer renminbi loans whereby some South Korean and Japanese banks have been permitted to offer renminbi services in Tianjin, Dalian, and Liaoning to individuals and foreign companies. As all these are being permitted restrictions have been put on the number of financial institution branches to be established every year by foreigners.

Only one branch is permitted per year and a high licensing fee is charged on the established branch. There were also interbank lending regulations that were proposed towards the end of 2002 which placed restrictions on renminbi access to foreign banks (Pigott, 2002).

Significant foreign investment in joint-stock banks in China was clear in 2002 where the World Bank’s International Finance Corp was consistently in the lead as the major stakeholder with new ventures in the Bank of Xi’an and the Bank of Shanghai. Citibank which formed part of Citigroup and Newbridge Capital Limited had also obtained strategic stakes in Shenzhen Development Bank Shanghai, Pudong Development Bank as well as Bank of Shanghai. These banks created a structure that was composed of joint-stock shareholders which facilitated investors with shares that were of great importance to regional and national networks. Foreign investors are mostly attracted to joint-stock banks because it protects them from non-performing loans (Xiaohu, 2005).

Renminbi’s savings deposits had increased by 17.8% towards the end of 2002. This created a great pleasure for both foreign and domestic banks as a viable venture that had emerged from China’s consumer finance business. Currently, eighty percent of the consumer’s loans are covered by mortgages. Sales of passenger cars have maintained a growth of more than fifty percent which is increasing at a higher rate than automobile financing. On entry to World Trade Organizations China has established measures that will allow an increase in foreign investment in auto financing while the People’s Bank of China ensures that required regulations on interest rates and collateral are adhered to (Pigott, 2002).

With the expected increase of foreign banks in the consumer finance industry domestic banks have developed strategies that will enable them to acquire their market share. The competitive market to offer mortgages and increasing auto loan interest has pushed the four major state banks that is; the Industrial and Commercial Bank of China, Agricultural Bank of China and the Bank of China to formulated wealth management and credit card services. This has created an opportunity for technological and expertise gain to domestic banks as a result of partnering with foreign banks. As the domestic banks are trying to fight for their market share some of them end up violating the interest rate restrictions created by the People’s Bank of China by charging lower interest rates. Investigations have been launched to stop this (He & Fan, 2004).

China is required to build a comprehensive system on national payment and an established credit assessment technique to facilitate efficient growth in consumer loans. There has been remarkable progress in the efforts to establish a standard payment system. Financial institutions in China invested two hundred million dollars in a network that will create a link between the payment systems and the ATMs of different banks all over the country in 2005. This was done through the help of UnionPay. The network was similar to Cirrus and found in the United States. Within one year forty cities had been incorporated in the network. As a reflection of what is expected in future total bankcard and UnionPay transactions increased by 49%. On the other hand, there was a tremendous increase in Renminbi bankcard account deposits of 439% (Xiaohu, 2005).

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References

He, L., & Fan, X. (2004). Foreign Banks in Post-WTO China:An Intermediate Assessment. China and World Economy , 3-16.

Pigott, C. A. (2002). China in the world economy: the domestic policy challenges. Paris: OECD Publishing.

Reuvid, J. (2005). Doing business with China. London : GMB Publishing Ltd.

Xiaohu, T. T. (2005). China business guide. Toronto: China Knowledge Press.

Zimmerman, J. M. (2010). China law deskbook. New York: American Bar Association.

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