The Chinese banking sector [Elektronische Ressource] : an institutional perspective / Author: Tim Prange

Tim Prange

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• Publié par: humboldt-universitat_zu_berlin
• Publié le: 01 janvier 2010
• Nombre de lectures: 52
• Langue: English
• Poids de l'ouvrage: 1 Mo

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Humboldt-Universität zu Berlin
School of Business and Economics

The Chinese Banking Sector -
An Institutional Perspective


Dissertation
to obtain the academic degree:
doctor rerum politicarum



Author: Tim Prange
Dean: Prof. Oliver Günther, Ph.D.
First Advisor: Prof. Dr. Dr. Christian Kirchner, LL.M. - Humboldt
University, Berlin, School of Business and
Economics, Institute for Institutional Economics
Second Advisor: Prof. Dr. Joachim Schwalbach - Humboldt
University, Institute for Management
Submitted: 23. November 2007
Graduation (Promotionsdatum): 22. February 2010 Inhaltsverzeichnis

I Introduction 6
1. Thematic Background
2. Definitions 8
2.1. Institutions and Organizations
2.2. Banking Sector 10
3. Literature and Data 11
4. Methodology and Structure 12
II Institutions and Distressed Banking Sectors 16
1. Standard Macroprudential Early Warning Systems for the Banking Sector 16
1.1. Aggregated Microprudential Indicators
1.1.1. Capital Adequacy
1.1.2. Asset Quality 17
1.1.3. Management Soundness 18
1.1.4. Profitability 19
1.1.5. Liquidity
1.1.6. Spreads and Sensitivity to Market Risk 20
1.2. Macroeconomic Indicators 21
1.2.1. Fiscal Policy
1.2.2. Monetary Policy 22
1.2.2.1 Interest Rates
1.2.2.2 Exchange Rate 23
1.2.3. Balance of Payments 24
1.2.4. Lending and Asset Prices 25
1.2.5. Economic Growth 26
1.2.6. Contagion
2. Integration of Macroprudential Indicators into an Institutional Framework 27
2.1. Formal Market-Regulating Institutions 28
2.1.1. Formal Preventive Measures
2.1.1.1 Competition
2.1.1.2 State Ownership 29
2.1.1.3 Accounting and Disclosure Requirements 30
2 2.1.1.4 Capital Adequacy and Liquidity Requirements 31
2.1.1.5 Insolvency Procedures 32
2.1.2. Formal Protective Measures 34
2.1.2.1 Lender of Last Resort
2.1.2.2 Government Guarantees and Deposit Insurance
2.2. Formal Market-Stabilizing Institutions 35
2.2.1. Capital Markets
2.2.2. Fiscal Policy 36
2.2.3. Monetary Policy 37
2.2.3.1 Interest Rate Regime
2.2.3.2 Exchange Rate Regime 38
2.3. Informal Market-Regulating Institutions 39
2.3.1. Networks and Politicization
2.3.2. Governance 40
2.3.3. The Rule of Law 41
2.4. Informal Market-Stabilizing Institutions 42
2.4.1. Credibility and Trust Levels
2.4.2. Mentality and Innovation 43
3. Applied Aspects of New Institutional Economics 44
3.1. Common and Conflicting Interests and Institutional Patterns
3.2. Instruments to Identify Informational and Incentive Problems 47
3.2.1. Contractual Analysis 47
3.2.2. Property Rights Approach 50
3.2.3. Agency Approach 55
III Institutional Settings in the Chinese Banking Sector 60
1. Legal Institutions and Market Participants
1.1. Legal Institutions and Government Agencies
1.1.1. The Central Bank Law and the People's Bank of China
1.1.2. The Law on Bank Regulation and Supervision and the CBRC 62
1.2. Legal Institutions and Financial Institutions 64
1.2.1. The Commercial Bank Law
1.2.1.1 State Commercial Banks 67
1.2.1.2 State Policy Banks 70
1.2.1.3 Joint-Stock Commercial and City Commercial Banks 71
31.2.1.4 Credit Cooperatives 73
1.2.1.5 Non-Bank Financial Institutions 75
1.2.2. China's WTO Accession and Foreign Banks 77
2. An Institutional Analysis of the Chinese Banking Sector 82
2.1. Formal Market-Regulating Institutions
2.1.1. Formal Preventive Market-Regulating Institutions
2.1.1.1 Competition 82
2.1.1.2 State Ownership 84
2.1.1.3 Accounting and Disclosure Requirements 86
2.1.1.4 Capital Adequacy and Liquidity Requirements 89
2.1.1.5 Insolvency Procedures 91
2.1.2. Formal Protective Market-Regulating Institutions 93
2.1.2.1 Lender of Last Resort
2.1.2.2 State Guarantees and Deposit Insurance 94
2.1.3. Institutional Analysis of Formal Market-Regulating Institutions 95
2.2. Formal Market-Stabilizing Institutions 113
2.2.1. Capital Markets
2.2.2. Fiscal Policy 118
2.2.3. Monetary Policy 120
2.2.3.1 Exchange Rate Regime
2.2.3.2 Interest Rate Regime 123
2.2.4. Institutional Analysis of Formal Market-Stabilizing Institutions 127
2.3. Informal Market-Regulating Institutions 140
2.3.1. Guanxi - Networks and Politicization
2.3.2. Governance 142
2.3.3. Rule of Law 144
2.3.4. An Institutional Analysis of Informal Market-Regulating Institutions 146
2.4. Informal Market-Stabilizing Institutions 159
2.4.1. Credibility and Trust Levels
2.4.2. Mentality and Innovation 161
2.4.3. An Institutional Analysis of Informal Market-Stabilizing Institutions 164
IV Conclusion 169

4 Annex 1 Matrix Assumptions 178
Annex 2 Results 181
Annex 3 List of Abbreviations 184
Annex 4 Cash Income of Financial Institutions in Mainland China 2004 185
Annex 5 Sources of Deposits in Mainland Banks 2004 186
Annex 6 Use of Funds (Loans) of Mainland Banks 2004 187
Annex 7 Financial Institutions and Employees in Industries in Mainland China 2004 188
Bibliography 190
Acknowledgement: 214







5I Introduction
1. Thematic Background
For almost three decades of economic reform and transition the banking sector in the People’s
Republic of China has provided funding to cushion the consequences of the reform process
initiated by Deng Xiaoping. Government recourse to the state-owned banks has been common
on all levels which has left banks with a vast amount of non-performing loans estimated to
range between 25 and more than 50 percent of total domestic assets. Severe governance
problems and incoherent policy mixes contributed to the impression of many observers that
the Chinese banking sector was doomed to fail on a broad scale. However, slowly but steadily
since 2003, market sentiment and the perception of Chinese banks has shifted to the more
optimistic.
In the last quarter of a century, the People's Republic of China (PRC) has quadrupled its gross
domestic product. The number of people living in poverty fell from 250 million to around 50
million and life expectancy increased from 64 years in the 1970ies to 70 in the late 1990ies.
The economic structure also seems to be better balanced than feared by many analysts with a
larger proportion of services contributing to the Chinese gross domestic product. Most
surprising for many observers, the almost three decades of economic growth were generated
in the absence of major political reforms and in an environment of only little liberalization,
insecure property rights, corruption and a lack of rule of law. And despite the still dominating
position of the big four state-owned banks - i.e. Industrial and Commercial Bank of China
(ICBC), China Construction Bank (CCB), Bank of China (BoC), and Agricultural Bank of
China (ABC) - the degree of competition in the Chinese banking sector has increased and is
significant. To further stabilize domestic banks, China's central bank has since the mid-
1990ies injected 1.4 trillion Renminbi (RMB) in loans, and has transferred an additional 60
billion US Dollars to the Bank of China, the China Construction Bank and the Industrial and
Commercial Bank of China. Around 168 billion RMB have been given to rural credit
1cooperatives .
Despite these reform efforts and visible positive developments there are indications that
financial distress could continue to be a threat while at the same time foreign investors are
willing to pay large amounts for small stakes and even less control in Chinese banks. For
example in June 2005 the National Development and Reform Commission admitted that the
banking sector still faces severe challenges concerning credit, interest rates, operations and
liquidity. The strong economic data may consequently not only imply positive news for the
6 still fragile Chinese banking sector. Despite cooling measures, fixed investment is growing
rapidly and partly companies are generating significant industrial losses. The Chinese
exchange rate regime obviously contributes to high liquidity levels on the Mainland which
fuel increasingly large lending volumes and asset inflation since alternative investment
opportunities are still rare.
An admittedly delicate comparison to banking sector distress in Japan also justifies caution
and ongoing monitoring of the Chinese banking system. Among the most important trigger
factors in Japan in the 1990ies were excess liquidity, deregulation, increased competition,
2property speculation , the lack of investment opportunities, risk management failure at
investor and bank level as well as government failure to address excessive market
3movements . Today, all these factors can also be observed in the Chinese banking sector. In
China the still poor credit culture, governance deficits, strong state ownership, and an
uncertain policy and legal environment add further stress factors. Hence, the institutional
framework of the Chinese banking sector is worth a closer examination.
The importance of institutions for economic development is widely acknowledged today even
4though the exact degree of their impact on economic indicators is still