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The Development and Opening up of the Financial Industry
2009/10/27

 

 

In 1949, the People's Republic of China was founded.

During the 60 years since then, and, in particular, during the 30 years since the reform and opening up, the financial industry has constantly developed through reform and innovation. The number of institutions and employees has increased substantially and the financial scale enlarged obviously. Banking institutions of various natures are found throughout the country, engaged in accepting deposits and making loans. Insurance institutions have grown up and securities institutions have developed rapidly since their belated first appearance in China. A financial institution system with complete functions in banking, securities and insurance has been formed initially. The constantly growing financial industry plays an important role in optimizing resource allocation, supporting economic reform, promoting stable and rapid economic development and maintaining social stability.

 

I. Financial Industry: Key Industry in the National Economy.

 

The financial industry has developed into a modern financial system adapted to the requirements of the market economy from initially being one whose sole function was absorbing deposits and providing loans; it has effectively promoted economic growth and enlarged employment, becoming one of the key industries in the national economy. By the end of 2007, the number of financial units in urban areas reached 51,645, of which, banking units totaled 40,815; securities units 1,019; insurance units 8,574; and other financial units 1,237. In 2007, the added value of the financial industry hit 1,105.7 billion Yuan, 162 times more than 1978, with an average annual growth rate of 19.2 percent. Its growth rate was 2.8 percentage points higher than that of GDP for the same period. Deducting price factors, the actual average growth rate was 12.9 percent, 3.1 percentage points higher than GDP for the same period. As the added value of the financial industry increased faster than GDP, its proportion in total GDP rose to 4.4 percent in 2007 from 1.9 percent in 1978. During the period from 1979 to 2007, national GDP in comparable prices increased by 9.8 percent annually on average, with the financial industry contributing 5.4 percent of this growth.

 

II. Development of Banking Industry

 

During the first 30 years after the founding of the PRC, a planned economic system prevailed. To meet the demand of the established management system of a centralized uniform planned economy, a centralized uniform banking system was also established. The People's Bank of China established a vertical credit fund management system involving State banks.

However, during the 30 years since the implementation of the reform and opening up, banking has successfully been transformed into a modern bank system. Originally, there was only the PBOC, but now there are some 10,000 banking institutions in corporate form. There are both commercial banks and policy banks; both large commercial banks and medium and small-sized commercial banks; both urban credit cooperatives and urban commercial banks mainly providing service in urban areas and the rural credit cooperatives and rural commercial banks and cooperative banks mainly providing services in the countryside; both the traditional banking institutions and new-type banking institutions such as village banks, loan companies and rural mutual cooperatives; and both Chinese-funded and foreign-funded banking institutions. Financial services provided have also been enriched and improved constantly, changing from deposit, loan and remittance business into diversified and individual financial services. The traditional banking business mode has been significantly transformed and a financial supermarket function has begun to appear. Compared with the situation 30 years ago, the banking industry now has a sound organic system, varied kinds of institutions, sufficient market competition and complete service functions.

The overall strength of banking has been obviously strengthened and the total amount of assets increased rapidly. The latter was only about 500 billion Yuan in 1978, but surpassed 50,000 billion Yuan in 2008. The asset quality has constantly improved, bad loans declining from 30 percent in 1978 to the present level of eight percent. Of this, the average bad loan rate of State-owned banks that have carried out stock reform is only two percent, achieving or approaching the average level in international banking. Initially, banks faced a serious lack of capital and were even in debt. Through constant reform, they have now achieved an average capital adequacy rate of some 8.4 percent, while that of State-owned banks carrying out stock reform is 12 percent or so. By the end of 2007, there were 161 banks whose capital adequacy rate reached the required standard. The assets of the banks reaching the standard accounted for 80 percent of the total assets of all commercial banks. Hence, the overall strength of banking in China has undergone a qualitative change when compared to 30 years ago.

Before the implementation of the reform and opening up policy, the government adopted a fixed exchange rate that it set. In 1979, when the reform and opening up policy was carried out, China's foreign exchange management system gradually began to be transformed from highly centralized planned management to market management. Before 1993, a foreign exchange management mode combining planned management and market regulation was basically established. From 1994, China carried out a new round of reforms, further bringing the market mechanism into play and laying a foundation for Chinese access to the WTO and realization of RMB convertibility. On July 21, 2005, a floating exchange rate system was adopted based on market supply and demand and using a basket of currencies as reference. In response to domestic economic development and demands of the international situation, this major reform, under the principle of "active, controllable and gradual", led the RMB exchange rate formation system into the market. Meanwhile, to assist market entities to avoid exchange rate risk, a series of policies and measures were formulated to promote development of the foreign exchange market. Since the new system was operated, the RMB exchange rate has fluctuated with manageable limits; its market elasticity has constantly strengthened, maintaining basic stability at a rational and balanced level. At the end of 1996, China realized the convertibility of the RMB current account. Currently, a series of reforms are being carried out for the convertibility of capital accounts. In practice, most are now open to a large extent.

 

III. Rapid Development of Insurance

 

Profound changes have taken place in the economic society of China. In particular, insurance has been infused with new vital force and vigor. Initially, there was only one company in the insurance market with total premium income of only 460 million Yuan. In 2007, there were all together 120 insurance institutions with total assets of 2,900 billion Yuan and premium income of 703.6 billion Yuan. The market scale had increased 1,529 times. China is gradually becoming a new insurance power. The insurance status is also being elevated constantly.

Change is clearly evident in the system, mechanism, capital strength, expertise and technical means of the sector. The business structure of insurance agents is optimized and the operational and managerial level raised. Under the condition that a host of new companies have not yet reached the profit-earning period, preliminary statistics show the insurance industry made a profit of 63.34 billion Yuan in 2007. China Life Insurance Co., Ltd., for example, saw its rate of return on net assets increase to 16.5 percent in 2007 from the 5.1 percent in 2004, basically achieving the level of leading insurance groups in the world. Currently, the overall solvency of the insurance is adequate; the non-performing assets ratio is under one percent. Generally speaking, the insurance sector has made remarkable achievements.

 

IV. Development of Securities

 

Since 1978, the emerging securities industry has actively made innovations and played an important role in meeting the investing and financing requirements of enterprises and investors, optimizing resource allocation and promoting financial innovation. It has made significant contributions to accelerating development of the capital market and become an indispensable key force for promoting its continual development and is a vital force in the national economy. For 30 years, the newly emerging securities industry has been gradually improved and now stands at a new jumping-off point.

At the end of 2006, total assets of the securities industry reached 1,100 billion Yuan, with a staff of some 80,000. There were about 3,000 securities sales departments, dealing in 321 fund products. The business of the investment banks, brokerage business, securities investment business and the fund financing business provide medium services for the requirements in direct financing, trade and investment, forming a basic business chain for direct financing. The various businesses have spread all over the country.

The securities products are basically eligible in terms of performance, mainly shown in the three aspects of security, fluidity and profitability. Risk has been extensively reduced through improvements in the comprehensive management and the laws and regulations governing the industry. The construction of basic systems has proceeded steadily, significantly guaranteeing assets security of clients and guaranteeing customer deposits are basically kept independently.

The sector still lacks many basic systems and elements of production, needing constant implementation of reforms and innovation to realize normative development. The recent 20 years has seen deepening reform in marketization. Such measures have been taken to vigorously cultivate open-ended funds and improve the investment structure; to bring into full play the main consignees for good issuance; to implement an examination and approval system for the capital and stock increase of stock dealers to boost the strength of institutions; to develop on-line transactions to enlarge the investor scale; to carry out comprehensive management over securities companies to reduce risk and improve the basic systems for the normative operation of the securities companies; and to vigorously develop the institutional investors and widen the channel for funds to enter the market legally. Various reforms have made much headway.

According to the Company Law, most of the securities businesses are registered as limited companies, establishing a shareholders' committee, directorate and supervisory committee and a corresponding modern enterprise system. In line with the Guidelines for the Governance of the Securities Companies and the standards for modern financial enterprises, securities companies must establish an inner balanced mechanism to fulfill rights of shareholders, directors and supervisors to learn the truth, make proper decisions and supervise and exercise their rights in a proper manner. Meanwhile, according to the requirements of the Guidelines for the Internal Control of the Securities Companies, taking system construction, institutional establishment and technical improvement as the means, the management of clients' assets, independent securities operation and national debt repurchase as the main emphasis, securities companies, under the principle of abiding by the law and regulations and controlling risks, have established and improved their internal management and control mechanism, laying a solid organic basis for the companies to realize scientific and effective management.

The securities industry has always taken developing institutional investors as a strategic task even in hard times in the market. Efforts have been made actively to develop securities investment funds, steadily conduct the pilot work concerned with qualified foreign institutional investors (QFII) and commercial banks launching their own fund management companies. In addition, steps have bee taken to formulate policies regarding the direct investment of social security funds, insurance funds and enterprise annuities in the stock market. There were only closed funds in the market initially, but within three years open-ended funds were introduced. Shortly afterwards, bond-based funds, money market funds, series funds, principal funds and exchange traded funds were also introduced. The listed open-ended fund with Chinese native innovative characteristics was also developed smoothly. The fund industry successfully realized the three historical strides from close-ended to open-ended fund, from capital market to money market and from domestic fund management company to joint venture fund management company mode in a much shorter time than that taken by the developed countries.

In April 1998, the State Council further reformed the securities supervision and management system, specifying that the China Securities Regulatory Commission should conduct the centralized and uniform supervision over the national securities and futures market. According to the Law on Securities, the China Securities Regulatory Commission established 36 securities regulatory bureaus as assigned organs for supervisory duty. Hence, the supervisory system and duties and responsibilities of the securities industry have been basically established. A national uniform multi-layer supervisory framework has been initially formed, with the China Securities Regulatory Commission as the core and comprising the assigned organs, stock exchanges and securities associations.

Meanwhile, over 70 administrative rules and regulations and industrial rules supplementing the Securities Law were promulgated and the Law on Securities Investment Funds and six supplementary regulations were also promulgated and put into operation. The securities associations together issued 43 association regulations and self-discipline rules, initially setting up the self-discipline framework of the industry. A fairly complete supervisory law and regulation system and self-discipline rule system have been basically formed, making specific standards and systems for the qualification access of organs and personnel and behavior norms and main business activities. The securities industry of has began to based on a legal system and criteria.

The securities industry has been proceeding steadily in terms of reform and opening up, promoting the establishment of Sino-foreign joint venture securities management organs. It has strictly performed China's commitments to the WTO in terms in this regard. By the end of 2006, it had approved four joint-venture securities companies and established 21 joint-venture fund management companies following WTO access. There are 39 and 19 securities trading institutions directly dealing in B-share trade in the Shanghai and Shenzhen Exchanges.

To vigorously develop institutional investors, the securities industry prudently tries to implement the QFII system and has approved 52 overseas institutions to gain this qualification; all together 12 institutions have been approved as QFII custodian banks, of which five are foreign-funded. This was a transitional measure for opening the securities industry under the condition that the RMB had lacked convertibility under the capital account, going beyond the commitments of China to the WTO. In addition, the examination of Certified International Investment Analyst was introduced in 2006, further promoting the international development of the domestic securities industry.

China has signed the Memorandum of Regulatory Co-operation and Understanding in Terms of Securities and Futures with some 30 countries (regions). For example, the Securities Association of China and Korea Securities Dealers' Association frequently exchange visits. The Securities Association of China successfully joined the Asian Securities Forum, Asian Securities Analysts League, Association of Certified International Investment Analysts, International Investment Fund Association and Asian-Pacific Investment Fund Annual Meeting, to strengthen relations with the securities industry of many countries.

Though the financial industry has made great progress, there are still some problems. The marketization degree of the financial market is not high; the financial innovative capability and the overall competitiveness remain weak; the development of the financial market is unbalanced in terms of structure, with a low proportion of direct financing and unbalanced financial development between the rural and urban areas and among different regions; the financial services for the "agriculture, farmer and rural areas" and medium and small-sized enterprises are relatively weak; the governance, internal control and risk management of financial enterprises are expected to be further improved, while the operational mechanism still hasn't been fundamentally transformed. With the gradual improvement and further reform of the socialist market economic system, these problems will be ameliorated, however, and the financial industry will develop faster and more smoothly.

 

 

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