Chinese Banking’s Performance and Future Prospects

Chinese Banking’s Performance and Future Prospects

Chinese Banking Background

            Chinese banking industry has undergone numerous changes in the recent past. This has led to banks in the country functioning like western banks. However, the industry has remained the hands of the government despite the fact that they have more autonomy. The banking system includes for major state-owned commercial banks (SCBs), that is, the Agricultural Bank of China (ABC), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC), and Bank of China (BOC). Other commercial banks similarly referred to as joint stock commercial banks (JSCBs) include Rural Credit Cooperatives (RCCs). They focus mainly on rural lending. Besides the deposit money banks, China also has other specific depository institutions. This includes, among others, China Export & Import Bank and China Development Bank (Wang, Lai, & Yen 2014).

The Chinese bank is very large. This can be attributed to the predominant role played by the bank, specifically, financial intermediation. The size of the economy has also played a major role in the expansion of the banking industry. China has also in the recent past been experiencing increased saving rates which in turn increases the demand for financial services (Tan 2014). In the same regard, capital account restrictions have also contributed a lot to the development of the industry. Basically, such restrictions normally restrict overseas investment. The four state-owned banks are ranked among the top 40 largest financial institutions in the world (Andréosso-O’Callaghan & Zolin 2010). Equally, they have been ranked as the largest banks in Asia excluding Japan. SCBs still own the largest market share in the industry. However, the recent years have seen JSCBs gain more market share increasing. Ultimately, RCCs have also been improving their market share. Specifically, they account for approximately 10 percent of the market’s deposits, claims on non-financial sector, and total assets as compared to the 60 percent owned by SCBs (Wang, Lai, & Yen 2014).

Both deposits and loans have been increasing in the recent past. More and more people are taking Renminbi loans for different purposes. Correspondingly, the banking industry has been experiencing increased deposits considering improved economic development. This also means that credit growth has also been evident (Tan 2014). This is trend that is expected to continue in the future. Chinese banks predominantly operate using the local currency. Foreign currency loans account for less than 10 percent of the total loans. However, they have been experiencing stead growth as a result of internationalization and globalization. Foreign currency deposits have also been increasing as compared to the case 10 years ago. Most loans offered by financial institutions in the country are still short-term (Wang, Lai, & Yen 2014). However, the market share of such loans has also been declining. This can be attributed to the fact that long-term and medium term loans have also been taking the center stage. Chinese consumers are getting attracted to loans that mature after a year. Other types of loans such as financial leasing, discount bills, and trust loans have also been increasing (Tan 2014).

The Chinese banking industry faces a number of challenges. One of the main dangers the industry is exposed to is the fact that banks will continue to lend less productive sectors of the Chinese economy including the government and state-owned enterprises as opposed to the private sector which has showed great performances in the recent past. This has been a major challenge to the industry for many years. The trend needs to be changed to enhance the industry’s performances. It is imperative for the Chinese banking system to focus more on fast growing sector such as the automobile sector and information technology (Tan 2014).

Chinese banks have also been facing challenges when trying to improve their financial position as well as strengthen their commercial orientation. The challenges are interrelated considering the fact that there is no way a company can be able to improve its financial health without improving its commercial orientation (Wang, Lai, & Yen 2014). Competition from foreign banks also poses a major threat to Chinese banks. Specifically, they are under constant pressure to improve their performances failure to which they can lose their competitive to the competition. SCBs may have an advantage over foreign banks considering their size and market share. However, they are known for concentrating on small loans and small depositors. This explains the reasons to why most foreign banks choose to concentrate more on large and well established enterprises. This has also been a plus to successful companies in the country as they are able to access funds with ease. On the contrary, SCBs must rethink their strategies as they are likely to lose their competitive edge to their competition (Yang & Kuhn 2007).

The challenges facing the Chinese banking industry can be best understand from a historical context. For one, the banks have in the past allocated credit based on government plans as opposed to commercially based lending decisions. For example, they allocated funds to state owned enterprises some of which now find it hard to repay the loans (Tan 2014). This has impacted on the profitability of the banks in a negative manner. Equally, such decisions left them in weak financial positions. In addition most banks in the country are still dealing with their traditional organizational structures, procedures, and operations. Research has shown that there are those that have been able to modernize. However, their modernization is yet to achieve full functionality. Basically, the historical legacy still haunts Chinese banks. The entire economy is still transitioning toward a market-based economy. The government has taken the necessary steps that will improve the competitiveness of the Chinese banking system. Nevertheless, its goals and objectives are yet to be fully realized (Wang, Lai, & Yen 2014).

Current Performance under International Environment

            The recent global financial crises underlined the need of effective supervision of financial institutions and systems to achieve global stability. International agreements have made it easy for countries to impose regulatory rule or supervise their banks without having a negative effect in their ability to compete (Barth, Tatom, & Yago 2013). International norms have been used by the Chinese government as an anchor for domestic reforms aimed at improving its banking sector. The Chinese government has constantly supported international discreet laws. This is evident considering the fact that it has made great efforts to including or integrating the same into its domestic financial system. Basically, the government has relied on international norms to ensure its financial stability. It also has a strong believe that this will enable it to ensure the competitiveness of its banks of a global space (Barth, Tatom, & Yago 2013).

Research has shown that many banks have been entering the global arena to enhance their market share as well as access more customers. This has been a common trend with large and well established banks especially from the western nations. Chinese banks have been sluggish in terms of entering the international market. This has been attributed to the fact that the big four banks are owned by the state. With this being the case, they have concentrated a lot on the Chinese market. However, they have been making efforts to penetrate Asian countries (Wang, Lai, & Yen 2014). This has led to them being ranked among the largest banks in the region. Nonetheless, Japanese banks have proved to perform best in the region and beyond. It is imperative for the banks to go global to secure a better future. They must focus more on entering developing markets considering the fact that most developed markets are saturated. Nevertheless, the time is now as other banks from other countries have already embarked on the road to expand more in emerging markets (Barth, Tatom, & Yago 2013).

However, Chinese banks have outperformed foreign banks operating on the Chinese market. Basically, they seem to have a great understanding of consumer needs and how to ensure continuous improvement. For example, they have outperformed Australian banks in trying to win more and more customers. Most Australian banks have attempted to export their home country practices to Chinese leading to low performances. This has also been a common trend among Asian markets. Chinese banks have a better chance of surviving most Asian banks as compared to their counterparts from parts of the world. They stand to compete even more better if they extent their understanding to western nations. Essentially, they must also stop exporting Asian banking practices and culture to other regions (Tan 2014).

Scholars have expressed their concerns in relation to China’s reliance on global prudential norms when developing its financial reforms. Specifically, they are of the view that the government can embrace some norms that can have a negative effect on the Chinese banking system. Fundamentally, there is the need for the government to review the norms before deciding which ones are applicable to the Chinese banking system (Barth, Tatom, & Yago 2013). They must also consider the implication this will have on the Chinese interaction with the rest of the world. The Chinese government has addressed concerns arguing that it has ensured that the norms it adopts are in line with the current status of the country’s financial system. Basically, the government is committed to improving the competitiveness of its banks in the global arena. However, it should not let this to cloud its judgment to the extent that it affects the system in a negative manner. The government plays a major role in the stabilization of the industry. Nevertheless, the banks must also be given some level of autonomy if they are to compete effectively in the international market (Andréosso-O’Callaghan & Zolin 2010).

Changes        

            The Chinese banking industry has undergone a number of changes for the best. The changes have contributed a lot to the modernization of the industry. It is evident that Chinese banks have been directed by the government in relation to their lending activities. This resulted into large sums of non-performing loans (NPLs) (Tan 2014). Central Bank’s reports show that non-performing loans accounted for 21.4 percent to 26.1 percent of the Chinese four big banks total lending in 2002. Four asset management companies (AMC) were formed in 1999 to transfer the assets from banks. The companies have plans to repackage the loans into viable assets that can be sold off to investors. NPLs affect the profitability of banks hence the need to offset them. This explains the reason to why the government saw the need to come up with AMCs.

The People’s Bank of China (PBOC) has been encouraging all banks to expand their portfolios. Specifically, it has encouraged them to ensure the same through increased services to the private sector. This is unlike before when many services were rendered to state owned enterprises. Banks have also been encouraged to extent their services to individual consumers to enhance their competitiveness not only on the local market but also the international market. Personal credit rating systems were launched in Shanghai in the year 2000 (Barth, Tatom, & Yago 2013). The systems are used to examine consumer credit risk. As a result, banks are also able to use the same to set rating standards. This is believed to be one of the major steps towards increasing banks loans offered to individuals. It has also aided a lot in improving the Chinese consumer credit industry. More and more individuals are able to access credit or loans, hence their ability to engage in investment activities that result into more deposits being made (Andréosso-O’Callaghan & Zolin 2010).

The central government has also allowed a number of small banks to raise funds or capital through stock issues and bonds. Listed banks such as China Minsheng bank are allowed to raise funds in a similar manner to ensure their continued expansion. More banks are expected to be listed to ensure their ability to raise capital in a similar manner. This is a move that is aimed at improving the bank’s capability to engage in activities that will enhance their competitiveness in the industry. Equally, it will also enable them to improve on the products and services rendered to customers (Tan 2014).

Reforms in the Chinese banking system have also been accompanied by PBOC’s decision to deregulate interest charges (Wang, Lai, & Yen 2014). Market based interest rate is expected to be used in the establishment of the pricing criteria in relation to the lending and deposit rates centered on market demand and supply. The central bank intends to continue adjusting and guiding the interest rate development. This will go a long way in allowing the market mechanism to play an integral role in the financial resource allocation. This is a move by the government to give banks more autonomy to make some decisions on their own. Changes in the banking system in the global market have also necessitated the changes being experienced in the Chinese banking industry (Andréosso-O’Callaghan & Zolin 2010).

Future Prospects

            The Chinese banking industry has been struggling in the past. However, the government has developed strong strategies that have enabled it to change its performances. The current trend shows clearly that the industry is destined for even greater things in the future (Barth, Tatom, & Yago 2013). Currently, China plays an integral role in the development of the global economy. As such, its banking industry can capitalize on the same to achieve a competitive edge in the near future. The government is expected to engage in even more deregulation to ensure banks are able to survive the future with ease. In the same regard, it Chinese banks are expected to enter more international markets to enhance their market share. Non-state owned Chinese commercial banks are expected to increase their market share. This can be attributed to the increased private consumption.

Bibliography

Andréosso-O’Callaghan, B & Zolin, M B 2010, Current issues in economic integration : can Asia inspire the “West“? Ashgate, Burlington, VT.

Barth, J R Tatom, J A & Yago, G 2013, China’s emerging financial markets : challenges and opportunities, Springer, New York, NY.

Tan, Y 2014, Performance, Risk and Competition in the Chinese Banking Industry, Chandos Pub, London.

Wang, M Lai, K K & Yen, J 2014, China’s Financial Markets: Issues and Opportunities, Routledge, New York, NY.

Yang, L & Kuhn, R L 2007, China’s banking and financial markets : the internal research report of the Chinese government, Wiley, Singapore.