The Peoples Bank of China

Introduction Chinese banks play a central role in financial intermediation in China and possess such global weight that their development has implications to everybody outside China. In a period of just over thirty years, Chinese banks have changed from socialist money tellers to modern financial institutions with a healthy and market-oriented outlook. Overview For a long time the Chinese banking system was organised around the People’s Bank of China (PBOC), which was established in 1948 and for some 30 years assumed the functions of commercial bank, supervisor and government treasury.

The bank was based on the consolidation of the Huabei Bank, the Beihai Bank and the Xibei Farmer Bank. The headquarters was first located in Shijiazhuang, Hebei, and then moved to Beijing in 1949. Between 1949 and 1978 the PBC was the only bank in the People’s Republic of China and was responsible for both central banking and commercial banking operations. In the 1980s, as part of economic reform, the commercial banking functions of the PBC were split off into four independent but state-owned banks and in 1983, the State Council promulgated that the PBC would function as the central bank of China.

Mr. Chen Yuan was instrumental in modernizing the bank in the early 1990s. Its central bank status was legally confirmed on March 18, 1995 by the 3rd Plenum of the 8th National People’s Congress. In 1998, the PBC underwent a major restructuring. All provincial and local branches were abolished, and the PBC opened nine regional branches, whose boundaries did not correspond to local administrative boundaries.

In 2003, the Standing Committee of the Tenth National People’s Congress approved an amendment law for strengthening the role of PBC in the making and implementation of monetary policy for safeguarding the overall financial stability and provision of financial services The People’s Bank of China The People’s Bank of China (PBC or PBOC) is the central bank of the People’s Republic of China with the power to control monetary policy and regulate financial institutions in mainland China.

The People’s Bank of China has the most financial assets of any single public finance institution ever The bank was established on December 1, 1948, based on the consolidation of the Huabei Bank, the Beihai Bank and the Xibei Farmer Bank. The headquarters was first located in Shijiazhuang, Hebei, and then moved to Beijing in 1949. Between 1949 and 1978 the PBC was the only bank in the People’s Republic of China and was responsible for both central banking and commercial banking operations].

In the 1980s, as part of economic reform, the commercial banking functions of the PBC were split off into four independent but state-owned banks and in 1983, the State Council promulgated that the PBC would function as the central bank of China. Mr. Chen Yuan was instrumental in modernizing the bank in the early 1990s. Its central bank status was legally confirmed on March 18, 1995 by the 3rd Plenum of the 8th National People’s Congress. In 1998, the PBC underwent a major restructuring.

All provincial and local branches were abolished, and the PBC opened nine regional branches, whose boundaries did not correspond to local administrative boundaries. In 2003, the Standing Committee of the Tenth National People’s Congress approved an amendment law for strengthening the role of PBC in the making and implementation of monetary policy for safeguarding the overall financial stability and provision of financial services. Management

The top management of the PBC is composed of the governor and a certain number of deputy governors. The governor of the PBC is appointed into or removed from office by the President of the People’s Republic of China. The candidate for the governor of the PBC is nominated by the Premier of the State Council and approved by the National People’s Congress. When the National People’s Congress is in adjournment, the Standing Committee of the National People’s Congress sanctions the candidacy for the governor of the PBC.

The deputy governors of the PBC are appointed into or removed from office by the Premier of the State Council. The PBC adopts a governor responsibility system under which the governor supervises the overall work of the PBC while the deputy governors provide assistance to the governor to fulfill his or her responsibility. The current governor is Zhou Xiaochuan.

Other high-ranking deputies include Wang Hongzhang, Hu Xiaolian, Liu Shiyu, Ma Delun, Yi Gang, Du Jinfu, Li Dongrong, Guo Qingping Structure The PBC has established 9 regional branches, one each in Tianjin, Shenyang, Shanghai, Nanjing, Jinan, Wuhan, Guangzhou, Chengdu andXi’an, 2 operations offices in Beijing and Chongqing, 303 municipal sub-branches and 1809 county-level sub-branches. It has 6 overseas representative offices (PBC Representative Office for America, PBC Representative Office (London) for Europe, PBC Tokyo Representative Office, PBC Frankfurt Representative Office, PBC Representative Office for Africa, Liaison Office of the PBC in the Caribbean Development Bank).

The PBC consists of 18 functional departments (bureaus) as below:[6] * General Administration Department * Legal Affairs Department * Monetary Policy Department * Financial Market Department * Financial Stability Bureau * Financial Survey and Statistics Department * Accounting and Treasury Department * Payment System Department * Technology Department * Currency, Gold and Silver Bureau * State Treasury Bureau * International Department * Internal Auditing Department * Personnel Department * Research Bureau * Credit Information System Bureau

* Anti-Money Laundering Bureau (Security Bureau) * Education Department of the CPC PBC Committee The following enterprises and institutions are directly under the PB. * China Anti-Money Laundering Monitoring and Analysis Center * PBC Graduate School * China Financial Publishing House * Financial News * China National Clearing Center * China Banknote Printing and Minting Corporation * China Gold Coin Incorporation * China Financial Computerization Corporation * China Foreign Exchange Trade System Organisation and structure of the banking landscape China Banking Regulatory Commission

The China Banking Regulatory Commission (CBRC) is an agency of the People’s Republic of China (PRC) authorised by the State Council to regulate the banking sector of the PRC except the territories of Hong Kong and Macau, both of which are special administrative regions. In response to their swelling debt loads, undercapitalization and non-transparent business practices, the government of China recapitalized the banks and set up the CBRC as the country’s independent banking regulator in 2003. Liu Mingkang was appointed its first chairman and served until 2011, when he was replaced by Shang Fulin. Its major functions are:

* To stipulate regulations and provisions for banking supervision; draft laws, and administrative regulations and make proposals for their drafts and amendments; * To approve the establishment, amendment, termination and business scope of banking institutions and their subsidiaries; * To supervise banking institutions on and off the spot, and punish those of unlawful behaviours according to law; * To examine the qualifications of senior managers of banking institutions; * To compile statistics and reports of banking institutions in the whole country, copy to the People’s Bank of China and publish them in accordance with government regulations;

* To offer opinions and proposals together with the Ministry of Finance and the People’s Bank of China, with regard to how to deal with emergency risks of deposit banking institutions; * To be responsible for the routine management of supervisory boards of major state-owned banking institutions. The commission consists of fifteen departments: * General Affairs Office

To organize and coordinate daily work of the commission’s headquarters; to be responsible for drafting documents, organizing important conferences, taking care of confidential documentation, preparing documents, filing documents, handling letters and visits, maintaining secrets, compiling information, releasing news to the press and maintaining security.

* Policy & Regulation Department To draft regulations and provisions for supervision of banking institutions; draft laws and administrative regulations, make proposals for drafts or amendments; be responsible for administrative reconsiderations and responding to charges; supervise and coordinate the executions of laws and regulations; conduct legal consultation, organize legal education and publicity for the banking industry; investigate and study important issues

in the reform, development and supervision of the banking industry, make proposals for policies on the development of the banking industry; in accordance with unified arrangement, organize the performance of banking reform programs and make proposals for deepening reforms; draft documents for important conferences; compile and issue information, releases and statements.

* 1st Department for Banking Supervision Responsible for supervision of state-owned commercial banks, it examines the establishment, amendment, termination and business scope of relative institutions in accordance with the laws; drafts supervision regulations; conducts supervision of relative institutions on and off the spot; supervises the operational management, internal control and risks such as the ratio of assets and liabilities, quality of assets, business activities, and financial payments; investigates and punishes those of unlawful behaviors; and examines the qualification of senior managers. * 2nd Department for Banking Supervision

Responsible for supervision of share-holding commercial banks and city commercial banks, it examines the establishment, amendment, termination and business scope of relative institutions in accordance with the laws; drafts regulations on supervision; conducts supervision of relative institutions on and off the spot; supervises the operational management, internal control and risks such as the ratio of assets and liabilities, quality of assets, business activities, financial payments; investigates and punishes those of unlawful behaviors; and examines the qualification of senior managers.

* 3rd Department for Banking Supervision Responsible for the supervision of policy-oriented banks and foreign banks, it examines the establishment, amendment, termination and business scope of relative institutions in accordance with the laws; drafts regulations on supervision; conducts supervision of relative institutions on and off the spot; supervises the operational management, internal control and risks such as the ratio of assets and liabilities, quality of assets, business activities and financial payments; investigates and punishes those of unlawful behaviors; and examines the qualification of senior managers.

* Supervision Department for Non-banking Financial Institutions Responsible for the supervision of non-banking financial institutions (excluding institutions of securities, futures and insurance), it examines the establishment, amendment, termination and business scope of relative institutions in accordance with the laws; drafts regulations on supervision; conducts supervision of relative institutions on and off the spot; supervises the operational management, internal control and risks such as the ratio of assets and liabilities, quality of assets, business activities and financial payments; investigates and punishes those of unlawful behaviours; and examines the qualification of senior managers.

* Supervision Department for Co-operative Financial Institutions Responsible for co-operative financial institutions for rural and urban saving business, it standardizes the management of co-operative financial institutions, studies and promotes the reform of co-operative financial institutions; drafts regulations of supervision for co-operative financial institutions in their management of ratio of assets and liabilities, quality of assets, risks control, interest rate, supervises the risks, urges and supervises them in their internal supervision and restrictions; drafts management measures on the establishment, business scope and qualification of legal person of co-operative financial institutions and organizes the executions of the measures; and investigates and punishes those of unlawful behaviours. * Statistics Department

To compile statistics from banking institutions of the whole country and make financial reports, copy to the People’s Bank of China and publish them in accordance with government regulations; compile statements on finance and loans of banking institutions and copy to the Ministry of Finance; draft regulations on compiling statistics; analyze statistics from banking institutions; organize the build-up of data base and the information system of China Banking Regulatory Commission. * Accounting Department To manage the accounting work of China Banking Regulatory Commission, prepare annual financial budget and final financial statement of the Commission. * International Department

To conduct official and business contacts between China Banking Regulatory Commission and international financial institutions, supervisory institutions of financial sectors in relative countries and regions; and manage foreign affairs of the Commission. * Supervision Department To supervise and examine the execution of state laws, regulations and policies by banking institutions; in accordance with laws and disciplines, investigate and punish those of behaviors against state laws, regulations and disciplines, handle accusations, charges and appeals; and be responsible for supervision work in institutions of China Banking Regulatory Commission. * Personnel Department

To draft regulations and measures for management of human resources in China Banking Regulatory Commission and its agencies; be responsible for personnel management in the Commission and its agencies and departments concerned; in accordance with regulations, be responsible for the routine management of senior managers of relative financial institutions; be responsible for the training of employees in the Commission and its agencies. * Publicity Department To be responsible of the publicity work within China Banking Regulatory Commission and its agencies. * Masses Work Department To be responsible for instructing and coordinating the mass work in China Banking Regulatory Commission and its agencies.

* Working Department for Supervisory Boards

To be responsible for specific managerial work of supervisory boards of banking institutions; draft regulations for the work of supervisory boards; re-examine and transfer reports from supervisory boards, and be responsible for the coordination of supervisory boards with other departments concerned.

Other affairs * With regard to the division of labour and responsibilities in financial supervisions, China Banking Regulatory Commission and the People’s Bank of China shall observe the principles of complementing macro-control with financial supervision, mutual promotion, timely information sharing, and establishing a cooperative working system and a mechanism of mutual assistance through the division of labor.

* China Banking Regulatory Commission sets up supervisory bureaus at the provincial level, sub-bureaus at the prefectural (municipal) level and representative offices at the county (city) level depending on the necessity of implementing supervision.

The Commission directly runs its agencies in local areas. Domestic Players in Chinese Banking State-owned Commercial banks In 1995, the Chinese Government introduced the Commercial Bank Law to commercialize the operations of the four state-owned banks, theBank of China (BOC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC). The Industrial & Commercial Bank of China (ICBC) is the largest bank in China by total assets, total employees and total customers.

ICBC differentiates itself from the other State Owned Commercial Banks by being second in foreign exchange business and 1st in RMB clearing business. It used to be the major supplier of funds to China’s urban areas and manufacturing sector. The Bank of China (BOC) specializes in foreign-exchange transactions and trade finance. In 2002, BOC Hong Kong (Holdings) was successfully listed on the Hong Kong Stock Exchange.

The USD2. 8 billion offering was over-subscribed by 7. 5 times. The deal was a significant move in the reform of China’s banking industry. The China Construction Bank (CCB) specializes in medium to long-term credit for long term specialized projects, such as infrastructure projects and urban housing development.

The Agriculture Bank of China (ABC) specializes in providing financing to China’s agricultural sector and offers wholesale and retail banking services to farmers, township and village enterprises (TVEs) and other rural institutions. Policy banks Three new “policy” banks, the Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim), were established in 1994 to take over the government-directed spending functions of the four state-owned commercial banks.

These banks are responsible for financing economic and trade development and state-invested projects. ADBC provides funds for agricultural development projects in rural areas; the CDB specializes in infrastructure financing, and Chexim specializes in trade financing. Second tier commercial banks

In addition to the big four state-owned commercial banks, there are smaller commercial banks. The largest ones in this group include the Bank of Communications, China CITIC Bank, China Everbright Bank, Hua Xia Bank, China Minsheng Bank, Guangdong Development Bank,Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong Development Bank and Industrial Bank. The second tier banks are generally healthier in terms of asset quality and profitability and have much lower non-performing loan ratios than the big four. City commercial banks The third significant group in Chinese banking market is the city commercial banks. Many of them were founded on the basis of urban credit cooperatives.

The first one was Shenzhen City Commercial Bank in 1995. In 1998, PBOC announced that all urban cooperative banks change their name to city commercial bank. And there are 69 city commercial banks set up from 1995 to 1998. In 2005 there were 112 city commercial banks in all of China. This number has increased through additional transformations to 140 in 2009. Most city commercial banks have strong ties to their local government and are majority or wholly state owned. Since 2005 some city commercial banks diversify their shareholders, inviting Chinese and international private companies to take minority shares, merging and cross-shareholding. Some of the banks have listed their shares.

The city commercial banks market orientation is towards supporting the regional economy, but also towards financing local infrastructure and other government projects. Since 2008 a strong trend has emerged for city commercial banks to extend business beyond their home region. They are also often the main shareholder behind village and township banks (VTB). Some have founded so called small loans units to serve smaller business clients better.

Taizhou City Commercial Bank, Bank of Beijing and Bank of Ningbo are examples for city commercial banks. Trust and investment corporations In the midst of the reforms of the 1980s, the government established some new investment banks that engaged in various forms of merchant and investment banking activities.

However, many of the 240 or so international trust and investment corporations (ITICs) established by government agencies and provincial authorities experienced severe liquidity problems after the bankruptcy of the Guangdong International Trust and Investment Corporation (GITIC) in late 1998. The largest surviving ITIC is China International Trust and Investment Corporation (CITIC), which has a banking subsidiary known as China CITIC Bank. Foreign Banks in China Since the economic reform of the People’s Republic of China (China) in 1978, foreign multinational banks (MNBs) (hereinafter also referred to as foreign banks) have re-entered the Chinese banking market.

However, foreign banks have penetrated into the local Chinese banking market only in a gradual way. Over the years, their total assets have been around only two per cent of the total assets of the whole Chinese banking sector. From 1978 foreign banks have been allowed back into China. However,in the period up to 2006 their business scope and geographic range was limited due to restrictive Chinese regulations, most of which have been eased gradually over the years. Foreign banks were attracted into China mainly because of the potential business opportunities. With improvements in the regulatory and legal environment, increasing numbers have established operations.

With the implementation of WTO commitments beginning in 2006,foreign banks could expand their business scope in terms of products,customers and geography. In the late 1990s, foreign banks were granted licences to make CNY denominated loans, and from 1998 they were allowed access to the interbanking market for refinancing. By the end of 2005, foreign banks could provide both CNY- and foreign currency-denominated financial products. With the entry into the WTO, China dropped a large number of limitations towards foreign entrants. To be able to enjoy the same rules and regulations as other Chinese commercial banks, foreign banks need to register a subsidiary.

2 Registration requires CNY1 bln in capital3 (with an additional CNY100 mln for each branch), a healthy banking group backing the entity (and at least USD10 bln in assets), previous profitability and experience in China, and compliance with the requirements for risk management and internal controls. Many banks have registered a subsidiary under the new rules, but have also kept their previous operations running, to benefit from both sides.

Since China’s entry into the WTO foreign banks can choose between full incorporation in China, establishing a branch or a representative office4 as before, or indirect entry with an equity stake5 in a local bank. Apart from the rules with which all banks in China have to comply, foreign banks are also subject to other specific regulations. Further to these, foreign banks need also to comply with provisions that apply to foreign enterprises in general as well as with those for foreign investors.

In early 2006, licensing requirements were brought more or less into line with those for Chinese institutions, and the requirements for business lines and for the qualifications of directors and managers are broadly similar. The rules the banks had to follow:- * Liquid assets must make up more than 25% of liquid liabilities.

* Assets of a branch by currency should amount to more than the liabilities in the corresponding currency. * 60% of the bank’s operating capital shall be invested as follows: half in forex deposits and the other held in local currency government bonds or times deposits maturing in less than six months. * Interbank market loans can make up a maximum of 150% of the branch’s capital. * A loan to deposit ratio of 75% must be complied with Performance of Foreign banks