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Reform of the State-owned Financial Enterprises

Apr 16,2009

By Chen Daofu, Enterprise Research Institute of DRC

Research Report No. 182, 2008

I. Importance and Particularity of the Reform of the State-owned Financial Enterprises

China's state-owned financial institutions have, for many years, been the main body of its financial system. For quite a long period of time, the People's Bank of China had served as the only financial organ in the society, performing all financial functions. Later, it was the four major specialized banks who undertook to provide financial services. At present, although banks of various kinds and other non-banking financial institutions have increased their market shares gradually, the four major state-owned banks have still possessed an overwhelming majority of market share. Disposition of the financial resources and the financial services, in the final analysis, have been realized in China with the state-owned banks as the main body. Hence, the reform of the state-owned banks will inevitably be closely linked with the reform of China's financial system and with the disposition of its financial resources, rather than a mere reform of the financial institutions from a microscopic perspective. Sometimes the reform of China's state-owned financial institutions is by itself aimed at achieving some macroscopic targets and proceeds from the development and stability of the financial system. Nevertheless, imperfection of the micro-reform of the state-owned financial institutions has also triggered off macroscopic issues, for example, the reversed transmission of the pressure for easing monetary condition has resulted in inflation, etc. The reform of the state-owned banks has always been bound up with the macroscopic issues.

Historically, the state-owned financial enterprises had played a far greater role in the history of China's economic development than acting merely as financial enterprises and had ever played a unique role in promoting China's economic growth and in maintaining social stability. In other words, China's financial enterprises are imbued with fiscal functions to a certain extent, which has been evidently reflected by the causes of the formation of the non-performing loans of the state-owned financial institutions. According to the research by the central bank1, there were three main stages for the formation of China's non-performing loans: from 1980s to early 1990s, the non-performing loans resulted from the loans granted to old traditional industrial enterprises and loans for blind repeat constructions, accounted for about 1/3; the non-performing loans resulted from the loans released during the economic overheating period in early 1990s made up 1/3 or so; and the non-performing loans resulted from the bankruptcy, merger and restructuring of enterprises carried out by the state in mid- and late 1990s constituted approximately 1/3. Over time, the Chinese economy had been a quantity expansion pattern under the dominance of the government, and the wholly state-funded commercial banks were state specialized banks, giving out loans upon state instructions. After the institutional reform, though such a situation changed a bit, there still existed a lagging effect for quite a long period of time. At the same time, the wholly state-funded commercial banks paid cost for the transformation of the whole system, such as the merger and bankruptcy of enterprises, the restructuring of the enterprises in textile, coal, defense, foreign trade, supply and marketing industries, all giving rise to large amounts of non-performing loans. From 1997~2000 alone, banks cancelled after verification the bad debts totaling 182.9 billion yuan for the restructuring of state-owned enterprises.

II. Basic Logic and Phases for China's Financial Institutions Reform

Before the reform and opening up was carried out in 1978, China practiced an "all-in-one" financial system. The People's Bank of China and the rural credit cooperatives under its leadership were the only financial institutions, and the manpower, financial and material resources of various branches of the People's Bank were under the centralized and unified control of the Head Office with unified accounting. Bank loans were all brought under planned management, and the practice of "unified deposits and unified loans" was carried out, namely, the absorbed deposits were handed over to the Head Office for unified allocation and loans were released according to the plans and instructions of the Head Office. Financial appropriations and bank loans were rigorously divided. All fixed asset investments and the circulating fund quotas (the minimum fund quotas needed) of enterprises were from financial appropriations, and part of the circulating funds of enterprises for temporary turnover stemmed from bank loans. Such a fund allocation system conformed to the highly-centralized planned economy system exercised in China. The state distributed all resources of the society in a unified way, including financial funds, credit funds and materials. Simple and expanded reproductions conducted by enterprises were all determined by the state in a planned way, and currency served only as an accounting tool in the whole process of production without any financial functions. As a result, there were no financial enterprises and financial reforms then. Only in 1979 was the financial reform started in a real sense.

1.1979~1993: Financial reform in the reform of economicincrement----construction of a basic financial system based on economic needs

Such a financial reform during this period was meant to provide new resources for the reform while tallying with the new strategy for the reform.

(1) Widening the business scope of the banks

On the one hand, banks were not only able to grant a certain amount of circulating fund loans, but could provide loans for technical transformation and offer fixed investment loans. In 1983, shortages of the circulating funds needed by the state-owned enterprises were gradually made up by bank loans. In 1985, appropriations for China's budgetary investment in capital construction were all replaced with bank loans. Proportion of state budgetary appropriations for fixed asset investment in the units owned by the whole people accounted for about 2/3 before 1979 and only for 1/4 by mid-1980s. It was finally determined that loans could be provided for all economic activities capable of the repayment.

On the other hand, besides the state-run enterprises, loans could also go to privately-operated enterprises and to the self-employed as well.

(2) Establishing specialized banks and non-banking financial institutions

a. Resumption and establishment of state-owned specialized banks and insurance business (before 1984). In 1979, Agricultural Bank of China was re-designated as the specialized bank in charge of the financial business in rural areas, Bank of China was separated from the People's Bank of China and became an independent specialized foreign exchange bank, and China Construction Bank was reorganized and became a specialized bank handling fixed asset investment loans. In 1983, Industrial and Commercial Bank of China was established to undertake industrial and commercial credit and urban savings business previously handled by the People's Bank of China. In 1980, People's Insurance Company of China resumed the domestic insurance business.

b. Specialized banks operating as enterprises. Two aspects were highlighted. Firstly, institutional management was changed to corporate management, the reform of combining responsibilities, rights and interests was carried out in an all-round way and the practice of "eating at the big pot" in income distribution was broken down, so as to invigorate the financial system. Secondly, the practice of "eating at the big pot" in fund distribution was cast away, fund constraint from banks was gradually strengthened and the inter-bank business limits were ruled out.


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1Central Bank's President Zhou Xiaochuan: Reform of China's Banking Industry Scales New Heights.