The creation of the PRC also completed the long process of governmental upheaval in China begun by the Chinese Revolution of The Chinese Communist Party, founded in in Shanghai , originally existed as a study group working within the confines of the First United Front with the Nationalist Party.
Chinese Communists joined with the Nationalist Army in the Northern Expedition of —27 to rid the nation of the warlords that prevented the formation of a strong central government.
Frustrated by the focus of the Nationalist leader Chiang Kai-shek on internal threats instead of the Japanese assault, a group of generals abducted Chiang in and forced him to reconsider cooperation with the Communist army.
The Nationalists expended needed resources on containing the Communists, rather than focusing entirely on Japan, while the Communists worked to strengthen their influence in rural society. These undemocratic polices combined with wartime corruption made the Republic of China Government vulnerable to the Communist threat.
The CCP, for its part, experienced success in its early efforts at land reform and was lauded by peasants for its unflagging efforts to fight against the Japanese invaders. Since then, the number of financial institutions has increased rapidly. The number peaked in the early s, when there were over 60, banks and non-bank financial institutions. Gradual improvements were made to the financial system. The commercial banking functions of the People's Bank of China were transferred to the four major state-owned professional banks after their establishment in At the same time, the People's Bank of China, as China's central bank, was placed under the direct jurisdiction of the State Council.
However, it did not begin to function as a proper central bank until It was not until the enforcement of the People's Bank of China Law in March , that its status as a central bank, the monetary policy, and its areas of responsibility including supervision of financial institutions were fully specified Table 6. The four major state-owned professional banks were restructured into state-owned commercial banks with autonomous management rights.
The purpose of these changes was to separate policy finance from commercial finance. In July , the long-awaited Commercial Bank Law took effect. The basic framework of China's modern financial system now in place was thus developed. The state-owned commercial banks continued in their role as suppliers of funds to the state-owned enterprises, which were the main economic entities under the old planned economic system. The financial needs of the emerging non-state-owned business sector became the niche market for non-bank financial institutions and credit association, which were small and medium-sized financial institutions serving the urban and rural sectors.
With household savings expanding steadily, the supply of funds to support investment in economic development appears to have occurred relatively efficiently in China, when compared with Eastern Europe and Russia, although the oversupply of credit sometimes led to inflation. In fact, there are still many problems in China's current financial system, which is still yet unable to cope adequately with the diversified financial needs and risks that have emerged from the rapid economic growth that has resulted from the evolution of the Chinese domestic economy into a market economic system in the 20 years under the reform and open-door policy.
The following discussion of the Chinese financial system focuses primarily on the non-performing loan problems of the commercial banks, and on the problem of bankruptcies among non-bank financial institutions. However, at a press conference held in Beijing on March 11, , 17 People's Bank Governor Dai Xianglong stated that in China, the concept of "non-performing loans" was defined in terms of three categories: loans in arrears, loans in arrears by two years or more, and unrecoverable loans.
This means that "non-performing loans" are not necessarily loans that cannot be recovered. On this basis, the actual ratio of non-performing loans is about 7. At the end of , total loans made by all financial institutions amounted to 8, This total includes 6, Financial institutions appear to have accumulated those non-performing loans during the transition to a market economic system.
The majority of the non-performing loans resulted either from the collapse of the real estate bubble of the early s, or from problems with long-standing accumulations of loans to state-owned enterprises. China's problems with non-performing loans in the wake of its real estate bubble are similar to the problems experienced in other Asian economies.
What is unique to China is the problem of massive non-performing loans to state-owned enterprises, which have been the recipients of massive lending.
The high level of the non-performing loans can be explained by a number of factors. First, there is pressure from regional governments to continue lending to state-owned enterprises. Second, state-owned enterprises have loss loans. Third, state-owned enterprises have shown poor moral discipline in relation to loans and credit. Fourth, state-owned enterprises lack awareness of the importance of repayments.
Whatever the reasons for the problem, the disposal of non-performing loans will be a vital issue of the Chinese government's efforts to reform the financial system.
This incident has damaged the confidence of foreign financial institutions in China. Under the reform and open-door line that China has followed since , trust banking was advocated as a way of absorbing funds. The government began to consider the establishment of trust and investment companies since then, and in October , the Bank of China set up a trust and inquiry division.
Other banks subsequently set up trust banking operations, and regional trust and investment companies were also established. The number of such companies reached a peak of in Apart from CITIC, which is under the direct control of the central government, most of these companies are either owned by or structured as divisions of banks and regional governments.
The investment and trust companies derive about one-half of their funds from "trust deposits," which normally have maturities of one year or longer. Apart from the procurement of funds, the companies are also involved in lending and investment. Most also underwrite securities and engage in a wide range of other activities, such as trusts, guarantees, and project management. The establishment of so many trust and investment companies is explained by a number of factors.
First, the devolution of authority under the reform and open-door policy led to an increase in the amount of funds used outside of budgets controlled by the central and regional governments. This has generated the need for investment in projects resulting from regional initiatives, and the demand for fund-operating opportunities that would provide better results than interest rates on bank deposits.
Second, the shift to the reform and open-door policy led to the emergence of new financial needs. Banks established trust banking divisions or trust and investment companies as vehicles for an involvement in areas that were not approved as normal banking activities. Third, China wanted to experiment with the use of foreign bond issues and other mechanisms to obtain foreign currency funds. The circumstances that led to the creation of these trust and investment companies are reflected in the fact that they now play dual roles.
One is positive, the other negative. On the positive side, the trust and investment companies bridged a gap caused by inadequacies in China's existing financial system, which was unable to cope with the transition to a market economy under the reform and open-door policy.
Because of their access to local information, the non-bank financial institutions have been more successful than the state-owned commercial banks in monitoring borrowers and enforcing sanctions to ensure the repayment of loans. The system, whereby state-owned commercial banks attracted savings, which were then invested in the investment and trust companies in the form of loans, has worked effectively in the regions.
However, the investment and trust companies have also played a negative role as financial institutions that could be used to avoid regulations. During the transition to a market economic system, commercial banks and regional governments established numerous trust and investment companies to engage in subsidiary activities beyond the reach of regulation by the central government and the central bank.
During the financial upheavals that occurred in and , there was active investment in property, stocks, and other assets via a variety of trust and investment companies.
The government limited bank lending, but the trust and investment companies were beyond the scope of these restrictions and had continued to lend. This aggravated the turmoil that swept through the financial sector.
Table 7 shows the scale of assets and liabilities of trust and investment companies across the nation at the end of As is apparent from this data, the companies had renminbi liabilities of There have been a number of problems relating to the management of these trust and investment companies. First, their practice of borrowing and lending at high interest rates has disrupted China's financial order.
Second, huge amounts of investment and lending have become non-performing assets. Third, many trust and investment companies are exposed to serious liquidity risk because of cash flow problems resulting from the investment of short-term funds in speculative ventures and medium- and long-term deals.
The results of an inspection conducted by the People's Bank of China in showed that there were problems of inadequate equity ratios, high percentages of non-performing assets, and illegal operation among trust and investment companies. The People's Bank of China reported that large numbers of non-bank financial institutions were operating at a loss, and were in danger of becoming insolvent. In short, many trust and investment companies were on the verge of bankruptcy. For the Chinese government, the liquidation and restructuring of these trust and investment companies will be a crucial aspect of financial system reform.
To achieve this important goal, the Zhu Rongji cabinet has announced a number of specific targets, which are summarized below Table 8. According to the People's Bank of China Law, which was promulgated and took effect in March , the People's Bank must not allow interference by regional governments or government agencies at any level in the performance of its duties and responsibilities Article 7 , and it must apply uniform guidance and management to all of its subsidiary organizations Article In practice, however, regional organizations of the People's Bank of China were subject to constant interference and intervention by regional governments.
The result was a dual system in which control was exercised both by People's Bank headquarters and regional governments. This situation has severely limited the ability of the central bank to implement uniform financial policies, which were determined by the central government, at the regional level. Collusion between the government and business played a role in the financial crisis that hit South Korea. Recognizing that similar relationships exist between regional governments and state-owned enterprises, the Chinese government has realized the urgent need for financial system reform.
The People's Bank of China had branches at province, city, and county levels. It decided to close the provincial branches and to create "larger-region branches" based on economic blocks spanning several provinces.
This concept was implemented after the central financial conference in November Their non-performing loans, based on the new loan classification criteria, amount to As outlined below, there are four specific goals.
Organizational reform of state-owned commercial banks, therefore, is also inevitable. However, the diversification of banking structures since the mids is reflected in the growing contribution of financial institutions other than the state-owned commercial banks to new lending. In addition, the development of the capital markets has brought an increase in the percentage of direct financing, as well as inflows of foreign capital.
Changes such as these have rendered the ceiling on the loans made by state-owned commercial banks meaningless. These increases in the legal reserve ratio had helped to curb economic overheating.
Subsequently, however, they were used not to adjust the money supply, but rather to supply the funds needed for buying up agricultural products and financing priority projects.
Moreover, since the state-owned commercial banks could deposit funds with the People's Bank of China at higher interest rates than the normal deposit rate, they tended to leave funds cash reserves in the People's Bank in excess of the legal reserve ratio set to cover their liquid deposits. To avoid financial risk, they need to improve their equity ratios through special government bond issues.
The main aims of these changes to the management systems of state-owned commercial banks are to prevent financial crises and to strengthen the management foundation of the four major state-owned commercial banks. In the past, there were no clear dividing lines between these areas of business. To avoid financial risks, industry boundaries need to be defined more clearly, and separate management systems must be established to define areas of activity for each sector and ensure that financial institutions do not stray beyond their scope of activities.
The two main approaches in this area are the introduction of a five-tier loan classification criteria and the establishment of financial asset management companies. Until the introduction of the five-tier loan classification criteria, Chinese financial institutions had classified their loans into just two categories: normal and non-performing. Non-performing loans were then subdivided into three categories: in arrears, in arrears by two years or longer, and unrecoverable.
These classification criteria did not match international standards, and were used primarily for afterward recognition of non-performing loans.
In practice, normal loans also included loans that were at risk of becoming non-performing loans. Some financial institutions may also have used this criteria as a way of preventing non-performing loans from coming to light. The People's Bank of China decided, therefore, to change the loan classification criteria to match international standards. The aims of this move were to strengthen risk management and self-responsibility of each financial institution, to prevent the generation of non-performing loans, and to grasp accurately the present extent of non-performing loans The five-tier loan classification criteria is discussed later in this report.
The establishment of financial asset management companies was another response to the massive amounts of non-performing loans held by China's state-owned commercial banks. It became necessary to establish these companies to avoid financial risk and provide a mechanism for the disposal of non-performing loans. Some financial institutions had become insolvent and were unable to meet loan repayment obligations.
Urgent action is needed to liquidate or restructure these institutions. The financial collapse of non-bank financial institutions has gradually emerged as a serious problem since the economic overheating that occurred in Particularly after the onset of the Asian financial crisis in the second half of , improvements in financial order and the liquidation or restructuring of financial institutions became particularly urgent priority, because of the need to prevent the contagion of the financial crisis from spreading into China.
It then began to reorganize its regional branches. Starting with the Shanghai Branch, it closed its province-level branches in November and December, and instead, established nine "larger-region branches," each of which covers several provinces. The new management system was put into practice from January Table 9. The structure now consists of one headquarter, nine larger-region branches, two business administration divisions in Beijing and Chongqing , central branches, and 1, county-level branches.
Under this system, monetary policy decisions are centralized at headquarter level, while branches focus on the policy implementation and supervisory operations. As far as organizational restructuring is concerned, the state-owned commercial banks are currently consolidating their provincial branches and branches in provincial capitals.
This process is scheduled for completion during They are also streamlining their peripheral organizations. With regard to the loan ceilings, the People's Bank of China abolished, in January , the lending ceilings that previously limited the amount state-owned commercial banks could lend in each quarter and each financial year.
It also created a new management structure based on asset management responsibility and risk management. In addition, deposit rates were lowered three times in June and December , and in June Fourth, in August , the Ministry of Finance implemented a special government bond issue amounting to billion renminbi.
The issue was required because of a decision to inject public funds into the four major state-owned commercial banks, in order to strengthen their equity weakened by non-performing loans. The proposal to implement a special government bond issue was approved by the Standing Committee of the National People's Congress in February Maturity was set at 30 years and the interest rate at 7.
The bonds were issued to the four major state-owned commercial banks in August. The Chinese government is investing the billion renminbi raised in this way into the state-owned commercial banks in the form of capital funds. The CSRC took over responsibility for the appointment and dismissal of exchange presidents and vice-presidents.
The administrative reforms of resulted in the abolition of the State Council's Securities Committee, leaving the CSRC as the sole agency responsible for the supervision of the securities sector. The new law took effect from July 1, The Securities Law, which consists of articles in 12 chapters, will ensure the sound development of China's securities markets.
In the insurance sector, the China Insurance Supervision and Management Commission was established in November as an independent agency, separated from the People's Bank of China.
This move is expected to result in the gradual normalization of the regulation and supervision of the insurance industry in China. The creation of the Commision completed the establishment of separate management systems for banking, securities, and insurance sectors in China. The loan portfolios of banks, depending on their degrees of risk, were classified with reference to five ranks: "pass," "other assets especially mentioned," "substandard," " doubtful," and "loss. The task of classifying all bank loan portfolios under the five-tier system will be completed in June In addition, the Chinese authorities have been considering ways to dispose of the non-performing loans of the four major state-owned commercial banks, taking into account the experiences of other countries, including the role of the Resolution Trust Corporation RTC in the United States and developments in Japan.
In January , a People's Bank of China conference adopted a policy calling for the establishment of financial asset management companies.
Preparations are now being made for the establishment of similar companies for the Bank of China, the Industrial and Commercial Bank of China, and the Agricultural Bank of China. As part of their efforts to strengthen control systems for asset-liability ratios, the Chinese authorities have directed the state-owned commercial banks to reduce their non-performing loan ratios, which stood at 7.
The non-performing loans of rural credit associations have also become a serious problem. Table 11 shows targets for the reduction of non-performing loans, together with progress to date.
The amounts written off refer to loans from commercial banks to designated state-owned enterprises in cities designated for capital structure rationalization, which is a part of the state-owned enterprise reform process. Under the regulations for financial institutions, losses on loans to bankrupt borrowers in other regions and by other financial institutions are being disposed of. In the second half of that year, the procurement of funds from the interbank market was prohibited, and in , the central government had ceased providing guarantees when regional trust and investment companies raised funds offshore.
In its "decision concerning financial system reform" at the end of , the government adopted a regulatory policy designed to guide non-bank financial institutions in a sound development direction. Thereafter, closures and liquidations reduced the number of non-bank financial institutions to by the end of , from at the end of In December , the Chinese government announced that it would formulate and implement a restructuring plan to separate and transfer operations of companies owned and managed by the army, the police, the Party, and government agencies.
In principle, one institution would be retained in each province and municipality, and all others would be restructured through closures, amalgamations, transfers, and other methods into approximately 40 companies. As early as , the China Rural Trust and Investment Company and several other companies had already been shut down after becoming unable to repay their debts through insolvency. The period since has seen a series of liquidation or restructuring of several financial institutions, including the Hainan Development Bank, the Guangdong International Trust and Investment Corporation, and the China Investment Bank Table Interim Assessment of and Future Outlook for the Financial System Reform As is apparent from the preceding discussion and analysis, the main aims of "Zhu Rongji's three-year financial reform plan" were to dispose of non-performing loans and improve the financial order in order to prevent financial risk.
To what extent will the financial system reform help to achieve these goals, and how achievable are they? Obviously, the final verdict must await the conclusion of the three-year period covered by the plan, at the end of the year Our main aim in this section is to provide an interim assessment at the current point in time, based on the progress made under the plan.
We will also attempt to predict the outlook for financial system reform. The reform process was a way of keeping the bank independent from regional governments so that it could manage and supervise the financial system as a whole. Interference and intervention by regional governments were eliminated from all aspects of the bank's operations, personnel management, and financial activities in the areas under its jurisdiction. Its management and supervisory powers were thus strengthened, enabling it to centralize macro-level adjustments at its headquarters.
Second, reforms affecting the management systems of state-owned commercial banks resulted in a shift from direct control, based primarily on the quantitative limitation of lending, to reliance primarily on indirect controls. This was achieved through such measures as organizational reform of state-owned commercial banks and the abolition of lending ceilings. The People's Bank of China issues quarterly and annual fiscal year guidelines to state-owned commercial banks as macro-control indicators.
The commercial banks simply take these into account in their fund procurement planning and are able to invest the funds, of which they have raised, on the basis of their own judgment. These changes will facilitate the conversion of state-owned banks into commercial banks, and are expected to make a major contribution to the qualitative improvement of finance and the prevention of increases in the amount of non-performing loans. The commercial banks will benefit from the reform of the legal reserve system.
Since they will aggressively work to tap potential demand for funds and stimulate the economy, the deteriorating trend in their earnings will be mitigated. Unlike measures designed simply to promote financial easing, this change can be seen as a mechanism to encourage a more autonomous and aggressive lending stance on the part of the commercial banks. Third, the reform of separate management systems for banking, securities, and insurance sectors will make an important contribution in terms of avoiding financial risks.
Fourth, the introduction of the "five-tier loan classification criteria" has resulted in the reclassification of banks' non-performing loans according to international standards. This will enhance the ability of the People's Bank of China to supervise and regulate financial institutions.
It will also ensure that loans are managed in accordance with international standards, thereby making an important contribution to the facilitation of lending-risk control. The establishment of financial asset management companies to handle the disposal of non-performing loans reflects the determination of the Zhu Rongji cabinet to overcome this problem. Fifth, the liquidation and restructuring of financial institutions have centered primarily on the closure and amalgamation of non-bank institutions.
This process is now occurring widely. Particularly important from the viewpoint of avoiding financial risk are the liquidation and restructuring of major financial institutions, such as GITIC and the China Investment Bank. These moves are indicative of the Zhu Rongji cabinet's determination to commit to financial system reform in its true sense.
Government imposes one-child policy in effort to curb population growth. The official death toll is International outrage leads to sanctions. Preliminary construction work on the Three Gorges dam begins. It will create a lake almost kilometres miles long and submerge dozens of cultural heritage sites by the time it is completed in Rioting erupts in Yining, Xinjiang and on day of Deng's funeral Xinjiang separatists plant three bombs on buses in Urumqi, Xinjiang, killing nine and injuring Thousands of state-owned enterprises are to be restructured through amalgamations, share flotations and bankruptcies.
About four million civil service jobs to be axed. Large-scale flooding of the Yangtse, Songhua and Nenjiang rivers. Falun Gong, a quasi-religious sect, outlawed as a threat to stability. Fiftieth anniversary of People's Republic of China on 1st October. Beijing says its policy remains defensive. Jiang is re-elected head of the influential Central Military Commission, which oversees the armed forces. He replaces Jiang Zemin, who steps down after 10 years in the post. Strict quarantine measures are enforced to stop the disease spreading.
Two key Hong Kong government officials resign. The government shelves the bill. He opposed violent measures to end 's student protests and spent his last years under virtual house arrest. Aircraft chartered for the Lunar New Year holiday make the first direct flights between China and Taiwan since He is succeeded in June by Donald Tsang. New law on Taiwan calls for use of force should Taipei declare independence from mainland China. Government says pollution has degraded China's environment to a critical level, threatening health and social stability.
The US, Japan and others express concern at China's military build-up. Western rights groups criticise China for dealing with corrupt or abusive regimes. Both sides agree to try to iron out differences over their shared history. Food and drug scandals have sparked international fears about the safety of Chinese exports. Pro-Tibet activists in several countries focus world attention on the region by disrupting progress of the Olympic torch relay.
A European presence was allowed within the empire and Chinese merchants emigrated to locations outside the realm for the first time. The Qing Dynasty banned the drug, and a military confrontation resulted. British forces shut down Chinese ports, and Hong Kong was handed over to them. Spurred on by visions, Hong rampaged across China, taking Nanjing in , which he governed for 12 years.
Hong was found poisoned in The conflict claimed at least 20 million lives. Desperate to end the conflict, China signed a treaty giving the west more business power and the control of ports. As part of the defeat agreement, Taiwan was handed over to Japan. China lost the conflict, and the West imposed sanctions that permanently weakened Qing rule. Sun took control in , announcing the republic. After the Japanese captured Shanghai and Nanjing, a stalemate ensued until World War II and American support reframed the conflict into a theater in the larger war.
Tensions mounted between Chinese soldiers and Taiwanese citizens, erupting in violence in , and ending with Chiang sending further troops. Two months later, two million soldiers followed Chiang Kai-shek into exile to Taiwan where he set up a provisional government claiming to be the legitimate ruling body of China.
The plan failed to produce the necessary yield, and famine followed, leading to 56 million deaths, including 3 million by suicide. Schools were closed and Chinese youth directed to take the lead in change, resulting in youth gangs known as the Red Guards attacking undesirable citizens. Chaos led to martial law, Communist Party purges, and 1. By the end of his reign, Mao would oversee the slaughter of some 40 million people. For weeks, people have been protesting for freedom of speech and of press from the Chinese government.
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