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China’s banking reform: Issues and prospects for the future

Why do all care for China’s financial reform? An assessment of the banking reform so far Restructuring of SOCBs Financial liberalization Regulation and supervision How are banks doing? | China’s banking reform: Issues and prospects for the future Alicia García Herrero* Bank of International Settlements Representative Office for Asia and the Pacific CASS, Beijing June 7, 2007 *Opinions are mine and not necessarily those of the BIS Roadmap to the presentation Why do all care for China’s financial reform? An assessment of the banking reform so far Restructuring of SOCBs Financial liberalization Regulation and supervision 3. How are banks doing? 4. Suggestions for future steps 1. Why do all care for China’s financial reform? China’s outstanding growth performance justifies optimism And yet, such huge saving and investment ratios should yield even higher growth ► Banking system is the pillar (over 80%) but does not function properly: potential misallocation of resources ► But also a lot of self-financing key (60% ) and informal financing: risky!! Success of ongoing bank reform key: For China’s economic development For the rest of the world given China’s size & . | China’s banking reform: Issues and prospects for the future Alicia García Herrero* Bank of International Settlements Representative Office for Asia and the Pacific CASS, Beijing June 7, 2007 *Opinions are mine and not necessarily those of the BIS Roadmap to the presentation Why do all care for China’s financial reform? An assessment of the banking reform so far Restructuring of SOCBs Financial liberalization Regulation and supervision 3. How are banks doing? 4. Suggestions for future steps 1. Why do all care for China’s financial reform? China’s outstanding growth performance justifies optimism And yet, such huge saving and investment ratios should yield even higher growth ► Banking system is the pillar (over 80%) but does not function properly: potential misallocation of resources ► But also a lot of self-financing key (60% ) and informal financing: risky!! Success of ongoing bank reform key: For China’s economic development For the rest of the world given China’s size & interlinkages 2. An assessment of the reform so far a. Restructuring Organized in three waves, each of them with: Recapitalization Disposal of non-performing loans (NPLs) Partial privatization Issuance of subordinated debt a. Restructuring (con’t) Large capital injections to 3 of the 4 largest banks (state-owned commercial banks) In three waves 20-24% of 2004 GDP injected in the banking system: This amounts to over 110% of SOCBs capital Not really a bail-out since By and large only public-owned banks restructured Howeer, different public/semi-public entities covering the costs Distribution of costs not very transparent a. Restructuring (con’t) Even larger disposal of bad assets: NPLs transferred to Asset Management Companies (AMC): In first wave, bilateral transfer:one AMC per bank Disposal of assets aiming at highest recovery value and not speed: Not much recovered: about 10% of total face value Financing: 45% financed by PBC credit and 10 year bond issued by AMCs Not very high