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China – Banking System

The banking sector in China is highly concentrated, with the five largest commercial banks (the fifth largest being the Communication Bank of China) controlling about half of the total assets in the banking industry. They are all owned predominantly by the government. The largest category of banks are the 12 “joint-equity banks”, 12 banks which make up about 16% of total banking assets. Then there are also the three policy banks —the Agricultural Development Bank of China, the Export-Import Bank of China, and the China Development Bank—which make up 8% of total bank assets and are responsible for funding state led development projects. As of the end of 2010, there were an additional 349 commercial, township banks, 85 rural commercial banks, 223 rural cooperative banks, and about 2,650 rural credit cooperatives operating in China.

By the end of 2013, banks from 51 countries and regions had established 42 locally incorporated entities, 92 foreign bank branches and 187 representative offices in China (CBRC 2013). Of the above listings, 36 locally incorporated foreign banks and 57 foreign bank branches were also approved to conduct RMB business. Six locally incorporated foreign banks—Bank of Tokyo-Mitsubishi, Mizuho Corporate Bank, Bank of East Asia, Development Bank of Singapore, Standard Chartered Bank and HSBC—had even been granted permission to issue RMB denominated bonds, and the Bank of East Asia, Citibank, Nanyang Commercial Bank and Standard Chartered Bank obtained approval in 2014 to issue credit cards.

The 37 listed banks collectively realized net profit totaling RMB 1,453.175 billion in 2016, up 3.65% year on year, growing faster by 0.8 percentage point as compared to 2015. It is the first time that the net profit growth of listed banks saw a rebound since 2011. For the 28 listed banks (including 25 A-share listed banks and 3 H-share listed banks) that have disclosed their performance in the first quarter of 2017, the total net profit increased by 3.69% against the first quarter of 2016, growing faster by 0.98 percentage point.

Both non-performing loan (NPL) balances and NPL ratios of the 37 listed banks continued to rise due to a combination of macroeconomic slowdown, increased risk exposure to industries burdened with overcapacity, and adjustments to commodity prices. As at 31 December 2016, NPL balances at the 37 listed banks totaled RMB1,240.296 billion, up RMB184.088 billion from the prior year-end, while the NPL ratio rose to 1.65% from 1.59% at the end of 2015, albeit at a slower pace. As at 31 March 2017, the total NPL balances at the 28 listed banks that have disclosed their quarterly performance reached RMB1,239.8 billion, up RMB24.0 billion from the 2016 year-end, while the NPL ratio dropped to 1.64% from 1.66% at the 2016 year-end.

The five largest banks in China are, in order of decreasing size, Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Agricultural Bank of China (ABC) and the Bank of Communications (BCOM). Together these banks account for around one half of Chinese banking system assets and deposits. These banks are majority-owned by the Chinese state, but have private sector shareholders through their listings on the Hong Kong stock exchange. They are also among the largest banks globally, by assets they were ranked 5th, 12th, 13th, 15th and 37th in the world in 2011.

The rest of the Chinese banking system is mostly accounted for by other domestically owned banks. This group includes 12 smaller listed commercial banks, three ‘policy’ banks, a postal savings bank, more than one hundred ‘city commercial’ (regional) banks, and around three thousand small credit cooperatives and rural financial institutions. There is also a small, but fast-growing, non-bank financial intermediary sector that includes finance companies and trust companies. Foreign-owned banks represent only a small part of the Chinese banking system, at less than 2 per cent of total assets. This is despite there being 37 locally incorporated foreign banks and 77 foreign banks operating under a branch licence at the end of 2011. Foreign banks have been unable to penetrate the Chinese market beyond this small share because they have had difficulty competing for domestic customers on price, quantity and product, and have faced regulatory restrictions on some activities.

The Chinese banking system is largely focused on traditional financial intermediation between savers and borrowers in China. Consistent with this, around two-thirds of Chinese banks’ income comes from these activities (CBRC 2011). Chinese banks largely fund themselves from domestic deposits (around 70 per cent of system liabilities); the share of banks’ funding sourced from debt capital markets is fairly small. About half of banks’ deposits are from non-financial corporations.

Chinese commercial banks have maintained strong profitability over recent years, recording aggregate after-tax returns on equity of 15–20 per cent per annum. Profit growth has been supported by rapid expansion in banks’ lending over this period. Banks have been able to largely fund this increased lending through deposit growth, which has been supported by robust economic conditions and high saving rates in China.

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