The Banking Industry in Shanghai
The Banking Industry in Shanghai
1. Features of the Banking Industry in Shanghai since China’s Economic Reform and Opening-up
4. Non-Banking Financial Institutions
China’s banking industry has experienced rapid development since the reform and opening-up of China was initiated in the late 1970s. Great changes have taken place in the past few decades as reforms have been made in the banking industry, covering systems and mechanisms, business scopes, fund management, and loan systems. Also, some specialized banks have successively established their Shanghai branches. Through reform, the function and role of banks in raising and circulating funds have been remarkably enhanced. Additionally, the capital source for enlarged reproduction has shifted from the financial channels to the credit channels. The variety of bank loans has also increased constantly, and the banks’ business scope has expanded noticeably. In the initial period of China’s reform and opening-up, bank loans were restricted only to the provision of short-term, temporary, and above-quota working capital; but now, medium- and short-term equipment loans are also included. In the 1990s, when the policy of reform and opening-up was further implemented, the banking industry in Shanghai not only enlarged its scope of fundraising, but also made remarkable achievements in introducing market mechanisms and expanding the financial market.
In April 1990, the CPC Central Committee and the State Council made the decision to develop and open up Pudong. The report to the Fourteenth National Congress of the CPC held in 1992 stated, “With the development and opening-up of Pudong in Shanghai as the locomotive, the cities along the Yangtze River will be further opened and Shanghai will be built into an international economic, financial, and trade center as soon as possible, thereby bringing about a new leap forward in the economy of the Yangtze River Delta and the whole Yangtze River Basin.” This decision created a historic development opportunity for the take-off of the banking industry in Shanghai. Chinese and foreign banks responded to it immediately by setting up branches in Pudong, boosting the development of Shanghai’s economy and financial market.
After a dozen years of development, the business size of banking institutions in Shanghai has expanded steadily, their operating efficiency has improved gradually, and NPLs have been reduced year by year. Also, a development pattern featuring numerous Chinese and foreign banks, the concentration of commercial banks and their operating centers, and orderly competition and cooperation have emerged in the banking industry in Shanghai. Additionally, a diversified financial institutional system has been formed to ensure a common development for Chinese and foreign financial institutions, including banks, securities companies, insurance companies, trust investment companies, fund management companies, finance leasing companies, accounting companies, auto financing companies, currency brokerage firms, and futures brokerage firms. Furthermore, a financial service system has been set up that is based primarily on the bank and supplemented by non-bank financial institutions with abundant banking and financial products. Since China’s accession to the WTO, Shanghai’s banking industry has made boldly explored effective ways and means to serve Shanghai and the whole country. Remarkable achievements have been scored in ensuring a sound interaction between the banking industry and the economy as a whole.
1. Features of the Banking Industry in Shanghai since China’s Economic Reform and Opening-up
1.1 Financial Institutions have Increased in Number and Expanded in Scale
The number of financial institutions in Shanghai has increased dramatically over the past 15 years. In 1990, there were 1,300 banking institutions in Shanghai, of which only two were foreign owned—the local branches of HSBC and Standard Chartered Bank—and only two were funded by overseas Chinese—the local branches of the Overseas Chinese Bank Corporation and the East Asia Bank. There were also 33 representative offices of foreign financial institutions in Shanghai, but these operated only on a small scale. Yet, by the end of 2005, there were 2,963 banking institutions of all levels and types in Shanghai, more than double the number of 1990. Of the banks, 2,877 were Chinese banking institutions, and 86 were foreign-funded banking institutions, including 83 foreign banks, two auto financing companies, and one currency brokerage firm. There were additionally 100 representative offices of foreign banks, including the Shanghai branch of the India National Bank, and 27 operating centers of commercial banks. These operating centers included seven licensed business centers and 20 non-licensed operating centers, which are mainly credit card centers, fund transaction centers, bill centers, data processing centers, and R&D centers that operate as business departments. This sharp increase in the number of foreign and overseas-Chinese banks has further strengthened the structure and functions of the banking industry in Shanghai.
The business scale of the banking institutions in the city has maintained a sustained, steady expansion over the past 15 years. At the end of 1990, the balance of savings deposits in all financial institutions of Shanghai was only RMB 70 billion, and that of loans only RMB 90 billion. By the end of 2005, the balance of savings deposits totaled RMB 2,332.086 billion, almost 30 times that of 1990. The 2005 balance of loans totaled RMB 1,679.812 billion, an increase of nearly 20 times over the previous 15 years. Overall, the total assets of banking institutions in local and foreign currencies in Shanghai amounted to RMB 3.05 trillion, a significant increase for the banking industry.
1.2 Management and Innovation Capabilities have Improved due to Changes in Operating Concepts and Mechanisms
With further opening up, Chinese banks have enhanced their awareness of competition, accelerating reforms relating to business management, incentives, and restraining mechanisms. Currently, Chinese banks have acquired an enhanced sense of risk management and have adopted modern business operating concepts, such as being customer-oriented and maximizing stockholder value. Market mechanisms have been established that utilize the market as a guide, and emphasize efficiency and risk control. Furthermore, the awareness and capability of innovation has been remarkably enhanced.
In their competition and cooperation with their foreign counterparts, Chinese banks strive to draw upon advanced international management experiences, significantly enhancing their financial innovation. New businesses and products, including Internet banking, factoring, foreign exchange options, the back-purchase of assets, and structured foreign exchange business, are being launched in succession, enhancing Chinese banks’ competitiveness and service quality. These new businesses and products have become an exemplary model of innovation for the country.
1.3 Shanghai Banks’ Capacity for Risk Prevention and Control has been Enhanced and their Asset Quality Improved
Over the past few years, Chinese banks in Shanghai have vigorously pushed forward institutional reforms, strengthened management and control in line with the requirement for overall risk management, and stepped up efforts to reduce NPLs and check bad debts. In the meantime, regulatory departments have further enhanced their supervision and guidance over the banking sector’s risk management, and deepened their oversight over NPLs by adopting new monitoring methods. Statistical data based on the five grades of loan classification show that, by the end of 2005, the NPL ratio of Chinese and foreign banks in Shanghai (excluding the Shanghai Rural Commercial Bank) in local and foreign currencies was 3.03%, of which the NPL ratio of Chinese banks (state-owned commercial banks, policy banks, joint-stock commercial banks, and urban commercial banks) was 3.39%, down 12.03% from the beginning of the year. NPLs have been reduced in both balance and ratio for four years running, as seen in Figure 2.1.
1.4 Total Profits have Increased Significantly and Asset Profit Ratio Risen Steadily
Over the past few years, the earned profits of banking institutions in Shanghai have continued to rise annually as a result of enhanced asset risk management and internal auditing, reduced operating cost, and multiple income channels. As seen in Figure 2.2, the banking institutions in the city earned a pre-tax book profit of RMB 35.244 billion in 2005, an increase of RMB 22.429 billion from 2001. Also, the average asset profit ratio (the total book profit divided by the year-start and the year-end average asset) was 1.24%, an increase of 0.43% from 2001.
2. Chinese Banks
2.1 State-Owned Commercial Banks
Since the economic reform and opening-up of China, Shanghai’s economy has entered a historic stage of rapid but steady development. As the main players in the banking sector of Shanghai, the Shanghai branches of state-owned banks have become a leading force in promoting Shanghai’s economic development with their abundant resources, perfect functions, superior services, and advanced technology. Their lead was enabled by their vigorous growth in the 1980s, and bold reform and exploration in the 1990s and the early 2000s. At the end of 2005, the total assets of the Shanghai branches of the four state-owned commercial banks added up to RMB 1,330.108 billion, accounting for 50.68% of all banking institutions in Shanghai. The balance of these banks’ savings deposits reached RMB 1,162.507 billion, accounting for 56.43% of all savings deposits in all Shanghai banking institutions. The balance of loans provided totaled RMB 752.535 billion, accounting for 51.8% of loans extended by all the banking institutions in Shanghai. The total profit came to RMB 21.865 billion, and the NPL ratio stood at 4.11%. Both the NPLs and the NPL ratio have been reduced for four years running with improved asset quality.
Over the past 20 years, the Shanghai branches of state-owned banks have gone through three major stages in development by adhering to the principle of reform, opening-up, and sustainable development. The development of the state-owned banks has been in tandem with the redevelopment and internationalization of Shanghai.
2.1.1 Restoration and development of specialized state banks (1978–1994)
From the founding of the People’s Republic of China through 1978, the People’s Bank of China (PBOC) has monopolized almost all the financial services. However, beginning from 1979, the Shanghai branch of the Agricultural Bank of China (ABC), the Shanghai branch of the Bank of China, and the Shanghai branch of the Construction Bank of China (CBC) were reestablished successively. Also, in January 1984, the Shanghai branch of the Industrial and Commercial Bank of China (ICBC) opened for business, and was officially established in Shanghai in January of the following year. In line with the then concept of industrial management under a planned economy, the business scope of the four major banks was strictly carved out to monopolize four fields: the working capital of the industrial and commercial enterprises, the rural area, foreign exchange, and capital construction.
In the mid-1980s, the business of the Shanghai branches of the four specialized banks grew rapidly with expansion in organization and staff strength, playing a major role in supporting the economic development of Shanghai. In the 1990s, the four Shanghai branches of state-owned banks responded actively to a major strategic decision by the CPC Central Committee and the State Council concerning the development and opening-up of Pudong by quickly setting up their branches in Pudong. These branches had been given more decision-making power and flexibility in business operations, and thus provided diversified banking services for a new round of development and opening of Pudong.
2.1.2 Transition from specialized banks to commercial banks (1994–2003)
In December 1993, The Decision of the State Council on the Reform of Financial System clearly stated that China’s specialized banks would be transformed into true commercial banks. In the meantime, three policy banks were established to take over the policy-related financial business while the four major specialized banks began to conduct financial business as state-owned commercial banks. Beginning in 1994, the state-owned banks in Shanghai began commercialization-oriented reforms after spinning off their policy-related business. In order to build up a modern financial corporate system and turn themselves into world-class commercial banks in management, they made relentless efforts toward achieving the goal of becoming modern and internationalized, while remaining state-owned, commercial bank groups with complete functions, standardized management, and advanced services.
The first step in commercialization was the establishment of a separate policy-related business. Around 1994, following the separation from policy-related loan businesses and the handover of fiscal functions, state-owned banks in Shanghai achieved a smooth transition to commercial banks. In 1994, according to the reform requirements in terms of state investment and financing systems, the Shanghai Branch of CBC handed over its fiscal function and policy-related capital construction loan business to the Ministry of Finance and the State Development Bank respectively, a major step toward functioning as a modern commercial bank. In 1995, the Shanghai Branch of ABC separated itself from the agricultural policy-related financial business, in accordance with the policy of the State Council on the reform of rural financial system, and broke off its administrative relationship with the municipal rural credit cooperative. In 1998, the Bank of China’s Shanghai branch also completed the shift from a specialized bank of foreign exchange and trade to a state-owned commercial bank. At the same time, the Shanghai branches of the four state-owned commercial banks actively exercised control over the asset-liability ratio, unified fund transfer management, and implemented loan risk management on a trial basis. The system for unified legal entity management was intensified and the standardization and restraint of the systems for business operation and internal control were enhanced, contributing actively to the improvement of business management.
The second step in speeding the transformation toward commercial banks was to deepen the reform of management systems. Since the mid-1990s, the Shanghai branches of the four state-owned banks have accelerated their integration into international finance by setting a goal of building standardized commercial banks. A series of measures has been adopted to adjust credit structure, optimize asset quality, and reduce operating risks. The old method for loan scale management, previously adopted by state-owned banks, was cancelled, and asset-liabilities ratio management systems, a five-grade loan classification system, and prudent accounting systems were implemented. These actions initially established the operating mechanism of commercial banks, thus improving internal management and operating efficiency.
Further structural and managerial reforms of the state-owned banks were the result of China’s accession to the WTO. The four state-owned commercial banks adjusted their operational structure, improved their organizational framework, and intensified their risk management in light of the gradual integration of Shanghai’s finance with the international market and the increasing competition in the banking industry. All these efforts have offered strong support to the development of various business operations. Operational, customer, business, and income structures were adjusted in line with the requirements of modern commercial banks. Furthermore, greater efforts were made to serve the profit-making SOEs, three kinds of foreign-invested enterprises,1 and outstanding private enterprises. Housing loan businesses, individual consumer credit businesses, and business related to urban infrastructure projects were expanded vigorously. Additionally, paid services including personal banking, settlement, bankcards, telephone banking, and Internet banking were further developed.
1 Chinese-foreign joint equity enterprises, Chinese-foreign cooperative enterprises, and wholly foreign-funded enterprises.
To reform the organizational framework of the state banking institutions, intensified operational methods were explored and organizational structure and outlets were adjusted and steadily integrated toward the goal of a flattened managerial structure. Backstage administration was streamlined to expand the marketing force at the forefront of the bank, and the advantages of the outlets were given a fuller play in order to establish a market-oriented, quick-response management mechanism. Backstage businesses, including accounting and cash management, were subjected to concentrated management under the technical support of the comprehensive business system. At the end of 2002, the Shanghai branches of four state-owned commercial banks introduced a new counter business-operating mode that combined three posts (deposit clerk, accountant, and cashier) into one, and adopted the integrated over-the-counter clerk system, notably raising work efficiency.
In an effort to improve the risk management mechanism, the credit authorization and extension management system was improved constantly. A system of checks and balances between credit operation, approval, and risk control was implemented. This intensified control over credit operating procedures and responsibility restraint. Furthermore, a risk control barrier was built, and a comprehensive management system for internal risk control was put in place.
The third step in the transition toward commercialization was to enhance financial services and innovation, and the all-encompassing expansion of business to provide active support for the economic development of Shanghai. During this period, the Shanghai branches of the four state-owned commercial banks deemed it their own responsibility to support Shanghai’s economic development by improving and expanding their financial services and innovation. In light of the goal of reform and the development strategy in the new period, the state-owned banks in Shanghai adjusted their business operation policies and development plans in order to achieve the following four goals:
- Enlarge the effective market share of high quality services, promptly get involved in new markets, expand new customer groups, and implement a differentiated marketing strategy.
- Raise the input-output efficiency, adjust the product mix in line with customer structure, define the key industry structure, and optimize regional distribution.
- Establish a customer-centered internal management system and implement integrated marketing and management over savings deposits, long- and short-term loans, Chinese and foreign currency businesses, as well as corporate business and personal financial business.
- Introduce a customer manager system by appointing and training customer managers, and by providing key customers with differentiated services.
In terms of financial services and business innovation, the state-owned banks in Shanghai have always strived to become market leaders. Through incessant reform and innovation for more than 20 years, the business pattern of state-owned banks in Shanghai has shifted from offering just traditional services, such as savings deposits, loans, and foreign exchange, to offering comprehensive and diversified businesses which include international payments, securities transactions, borrowing and lending of funds, investment and leasing, and finance-derived transactions. The banks are now able to skillfully use internationally established credit instruments, such as joint loans, mortgage loans, land-use right mortgage loans, as well as international financial organization and government loans, providing high-quality and full-range financial services to help Shanghai build itself into a cosmopolitan city.
2.1.3 Initiating reforms centered on the shareholding system and establishing modern international commercial banks (2003–present)
Since 2003, the Chinese government has deemed the reform of state-owned commercial banks as the top priority in China’s financial reform. Part of China’s economic reform was the introduction of the shareholding system in line with the requirements for modern financial enterprises. On December 30, 2003, the state put US$45 billion into the Bank of China and the China Construction Bank as a foreign exchange reserve and part of a gold reserve through Central Huijin Investment Company to make up their capital adequacy. A shareholding system was instituted in the four state-owned commercial banks, and international strategic investors were introduced to boost the banks listing domestically and abroad.
On September 14, 2004, the Banking Regulatory Commission approved the division of CBC into the China Construction Bank and the China Construction Investment Bank Five initiating companies, including the Central Huijin Investment Company, proposed the setting up of the China Construction Bank and, on October 27, 2005, the CBC was successfully listed on the Hong Kong Stock Exchange, becoming the first of the four state-owned commercial banks to be listed on an international market. At the same time, the Industrial and Commercial Bank of China was also officially set up on October 28 of the same year. As of today, institution of the shareholding system in the state-owned commercial banks has been progressing smoothly. The Shanghai branches of three state-owned commercial banks are forging ahead with all reforms by switching their operating mechanisms conscientiously, and working hard to establish an internal control mechanism and risk management system in light of the arrangements of the head offices.
2.2 Shareholding Banks
Since 1990, noticeable achievements have been made in the development of shareholding commercial banks in Shanghai. For the first dozen years or so, shareholding commercial banks in Shanghai had to start from scratch, and vigorously expand from small to big along with the deepened reform and opening-up of the financial industry. In 1990, there was only one shareholding bank in Shanghai, the Bank of Communications, which had only a dozen outlets and whose scale of assets was almost negligible in the banking sector. However, by the end of 2005, Shanghai had 11-shareholding commercial banks (including the Bank of Shanghai) with 634 outlets and combined assets of RMB 903.7 billion. These banks account for nearly 30% of the total in the banking sector of the city. The development of shareholding commercial banks in Shanghai has the following features:
Incessant improvements in the organizational system
By the end of 2005, after 12 years of development, Shanghai set up three shareholding commercial bank legal entities, including the Bank of Communications, the Shanghai Pudong Development Bank, and the Bank of Shanghai. Also, four shareholding commercial banks headquartered in Beijing set up branches in Shanghai, namely CITIC, Everbright Bank, Minsheng Bank, and Hua Xia Bank. Additionally, four shareholding commercial banks headquartered in other provinces and cities, including the China Merchants Bank, CIB, Shenzhen Development Bank, and the Guangdong Development Bank, established branch offices in Shanghai. These 11 banks also set up 623 subbranches in Shanghai. Some of these banks have witnessed rapid development in the public business domain, and others are developing very well in the personal business domain. Still others are featured by their unique foreign exchange business or have established their reputation in the bankcard business. In short, these banks have improved their organizational systems and positioned their businesses well in the market, establishing a good pattern of competition and development.
Improved business management level and expanded business scale
Since 2005, each of the 11 shareholding banks have set up its own independent regulation department and established a basic regulation risk control mechanism. Employees have been trained in regulation culture. At present, most of the banks have completed the adjustment to a vertical management system with an internal system of checks and balances. Furthermore, in 2005, each bank successively improved its internal control system in combination with the launching of special programs for addressing specific cases. As a result, the employee’s job responsibility has been further clarified, business flow constantly optimized, and risk control strengthened.
These changes have had a positive effect on the growth of the 11 shareholding banks. By the end of 2005, the balance of savings deposits of the 11 banks amounted to RMB 787.36 billion, an increase of RMB 104.962 billion from the beginning of the year, with a growth of 15.38%. The balance of loans amounted to RMB 500.471 billion, an increase of RMB 50.461 billion from the start of 2005, with a growth of 11.21%. This was higher than the rate of other financial institutions, which was only 10.93%.
Raised profit-earning capacity
At the end of 2005, the NPL ratio of the 11 shareholding banks was 2.56%, down 0.65% from the beginning of the year. In 2005, the business income of the 11 banks kept increasing by a large margin with a book profit of RMB 9.117 billion, an increase of RMB 425 million over the previous year, with a growth margin of 4.89%. The main reason for the remarkable decrease in the growth rate from 2004 was that quite a few banks paid more attention to asset quality and profit authenticity, increased the drawing of reserve funds, and intensified the momentum of disposing NPLs.
Clearly defined market position
The shareholding banks’ consistent market position of mainly serving large customers is facing challenges arising from the implementation of macro control in China, the change of business conditions in Shanghai’s real estate market, and the increase of financing options available to big enterprises. As a consequence, most of the 11 shareholding banks have adjusted their customer positioning and business structure, which has affected the expansion of the retail business and the development of competitive products through business innovation. In view of the capital adequacy assessment and the great potential for retail business in China, most of the 11 banks have adopted the development strategy of giving priority to the retail business. Furthermore, the vigorous development of housing loans, the management of financial affairs in local and foreign currencies, and the credit card business have become the main features of business development within the shareholding banks in Shanghai in 2005. Through business innovation, these banks have developed competitive products, such as factoring, custody of enterprise pensions, notes discounts, transfer discounts, auto financing, goods escorting, management of financial affairs, and short-term financing notes underwriting.
Perfected corporate governance structure
Currently, there are two legal entity shareholding banks in Shanghai, the Shanghai Pudong Development Bank and the Bank of Shanghai. After a few years of endeavor, a sound organizational framework of “three boards and one level” has now been established. Independent directors and external supervisors have been introduced, board member structures optimized, and the rules for procedures and the decision-making process gradually standardized.
The risk management capacity of shareholding banks has continued to increase, thanks to four major improvements in risk management policy:
- Separation of the credit examination and approval from the post-loan risk management function, which increased the independence of examination and post-loan management. Some banks even practiced a vertical management of credit examination and approval.
- Strengthening of pre-loan investigation and post-loan management. Some banks have put into effect a full separation of pre-loan and post-loan investigation functions from that of marketing. Also, certain banks directly sent independent surveyors from the risk management department of the branch to their subbranches, or directly involved the credit manager in credit investigations, which increased the investigative independence and quality.
- Enhancement of daily monitoring and the early warning of credit risks. Most banks have strengthened the routine monitoring and early warning against credit risks. By establishing special work mechanisms, the risk management checkpoint has progressed. Additionally, efforts have been made to fully collect relevant information and dynamically monitor the loan to be followed with interest and the loan for major industry, so as to find out and defuse risks, and reduce losses in time.
- Optimization of credit flow from carrying out concentrated management and control to reduce operating risks in the credit links. For example, most banks have taken back the power to examine and approve the credit from the sub-branches, and the branches shall do so within its jurisdiction. The examination of credit conditions has been enhanced by the establishment of a loan center. Furthermore, bill centers, bill verifications, discount loans, and transfer discounts, have been unified in the whole bank. Moreover, the unified warehousing of mortgage and collateral for management, the unified verification of seals, and the inspection of accounts by the branch can also optimize the credit flow and efficiently prevent operating risks of the credit links.
“Six mechanisms” put in place
In recent years, all the banks in Shanghai have been further defining their market position and have persistently served SMEs with a deepened understanding of the types of loans extended to small enterprises. At the same time, they have adopted multiple measures to push forward and improve financing services for small enterprises. Some banks have actively adjusted their organizational structure, set up credit examination and approval centers especially for SMEs, and studied and proposed measures for credit management of SMEs. A series of organizational frameworks, financing modes, marketing modes, risk management modes, pricing mechanisms, and incentive mechanisms that conform to the characteristics of small enterprises, as well as the management frame for credit business of small enterprises, has been established through advances in systems and innovation in mechanisms. Currently, the pilot operation work for the credit business of small enterprises in these banks is in full swing, and the internal conditions for stepping up the credit business development of small enterprises have been met.
2.3 Shanghai Rural Commercial Bank
Shanghai Rural Commercial Bank (RCB) was set up in August 2005 and has become one of the most influential financial institutions in Shanghai. It is a shareholding commercial bank restructured from one municipal joint cooperative, 14 district and county joint cooperatives, and 219 credit cooperatives.
RCB will continue to serve agriculture, rural areas, and farmers as well as present itself as a community-type retail bank for a suburban economy on the basis of continuing its 50-plus years of development, service features, and cultural tradition of operating as a rural credit cooperative. Also, it will establish and improve the business operation systems and mechanisms of modern commercial banking, speed up business development, perfect internal control mechanisms and risk management systems, and repay society, customers, and shareholders. Its ultimate goal is to build itself into a modern rural commercial bank with adequate capital, tight internal controls, safe operation, superior service, good efficiency, and unique features.
The business scope of RCB is quite extensive. It includes the absorption of public deposits, and the extension of short-term, medium-term, and long-term loans. Also, RCB will incorporate the business of handling domestic and overseas settlements, as well as acceptance and discount of negotiable instruments. Additionally, the issuing and honoring of authorization, the underwriting of government bonds, and the buying and selling of both government and financial bonds will be part of the operations of RCB. Furthermore, the bank will be engaging in interbank borrowing and lending, the bankcard business, foreign exchange deposits, foreign exchange loans, foreign exchange remittance, international settlement business, interbank lending and borrowing of foreign exchange, credit rating, consulting, and the witness business. Finally, RCB will seek further dealings in commissioned receipts and payments, the insurance business, safe deposit box services, and other business operations as approved by the China Banking Regulatory Commission.
At present, RCB has 330 outlets with a total working staff of 4,000. By the end of 2005, its total assets amounted to RMB 127.4 billion, its balance of deposits stood at RMB 100.9 billion, and the balance of loans came to RBM 63.3 billion.
2.4 The Policy Banks of Shanghai
In order to carry out the state policy of industrial and regional development, China set up three policy banks in 1994: the China Development Bank, the Import and Export Bank of China, and the Agricultural Development Bank of China. Policy banks are financial institutions established or guaranteed by the government under special financing principles, and without the goal to make profits. With the incessant business development of Shanghai, the three policy banks set up branches in Shanghai and gradually become a leading force in the economic development of Shanghai.
The Shanghai branch of the China Development Bank
The Shanghai branch of the China Development Bank (CDB) was established in December 1998, with the main task of promoting developmental financial practice with priority given to infrastructure, basic industry, and pillar industry projects, as well as major technical transformations, and new high-tech industrialization projects. During the Tenth Five-Year Plan period, the accumulated projects developed by the branch came to RMB 300.9 billion. The bank signed medium-and long-term loan contracts amounting to RMB 149.0 billion, and successively provided medium- and long-term funds for a large number of infrastructural and environmental development projects. These projects included Shanghai’s rail transportation project, the Suzhou River treatment project, the Pudong garbage incineration plant, the Yangshan Deep Water Port, the Pudong airport, the Tong-San highway, the Xin-Feng-Jin highway, the Zhangjiang Industry Park, and the Qingpu municipal works.
For more than six years since its founding, the CDB Shanghai branch has enhanced its contact and cooperation with the Shanghai municipal government, Shanghai’s competent industry departments, other financial institutions, and large enterprises. It has also steadily advanced its traditional business, vigorously established or expanded new businesses, and maintained a strong momentum of growth. As a result, its various indicators (including assets and profits) grew stably with remarkable operating performance. By the end of 2005, the branch’s total assets surpassed RMB 100 billion, 6.5 times the amount it had started with. Furthermore, its profit has increased 9.3 times over the same period, and its assets-profit rate has doubled. Meanwhile, the branch has strengthened risk management and control, resulting in a 100% principal and interest recovery rate for four years running and a zero-nonperformance record for its credit assets for several years.
Over the past few years, the CDB Shanghai branch has spared no effort to seek innovation in its financial services. These services include the concluding developmental financial agreements with all levels of the Shanghai government to implement financial consulting services. Also, the branch has participated actively in projects of comprehensive supporting pilot reform in the Pudong New Area by proving multiple financial services. Furthermore, the branch has established extensive cooperative relations with various financial institutions inside or outside the area, developed an off-balance-sheet assets management business, and established a platform of asset and funds management to push forward the establishment of a credit asset transaction market. Additionally, the branch has established a financing platform for extending loans to science and technology SMEs and for supporting domestic enterprises to go global.
The Shanghai branch of the Import & Export Bank of China
In 1998, the Import and Export Bank of China set up a representative office in Shanghai, which was upgraded in August 2001 to a fully operational branch. Currently, its business service range covers the Shanghai Municipality, Fujian Province, Zhejiang Province, and Jiangxi Province. The branch mainly provides policy financial support for the import and export of capital goods, such as electromechanical products and complete sets of equipment. Its business scope covers export seller’s and buyer’s credit, the reloaning of foreign governmental loans, international businesses, and accounting settlements under loans.
Since its establishment, the Shanghai branch of the Import and Export Bank of China has played an active role in supporting the export of Shanghai’s new and high-tech products, and has implemented an overseas investment strategy within its scope of business. By the end of 2005, the outstanding balance of loans extended by the branch for new and high-tech products amounted to RMB 8.089 billion, accounting for 36.75% of the total loans. Also, the proportion of the loan for overseas investment projects is rising annually. Intensifying the support of overseas investment loan projects is one of the operating priorities of the Shanghai branch of the Import and Export Bank of China.
While continuing to optimize the export seller’s credit structure, the branch has also actively expanded its import credit business. The branch has also explored ways to develop loans for SMEs and farmers, as well as sideline products such as an export credit business. A healthy development of the policy financial business is ensured by the branch’s provision of financial services of good quality and high efficiency.
The Shanghai branch of the Agricultural Development Bank of China
Since its establishment in 1995, the Shanghai branch of the Agricultural Development Bank of China (ADB) has conscientiously implemented the grain industry policy, the regional development policy, and the macro-control policy of the state and the municipality of Shanghai. The bank has also increased its input of credit funds in agriculture, played a unique role of guiding the fund and resource flow into agriculture under the new market economy, and has become a major tool for the central and local governments to support and protect agriculture. Over the past ten years, the accumulated loans extended by the ADB Shanghai branch added up to RMB 84.2 billion, contributing considerably to grain safety and development of the grain industry in Shanghai, safeguarding farmers’ interests, and promoting agricultural production and stability of rural areas.
In 1998, the primary function of the Agricultural Development Bank was shifted to that of enhancing the supply and management of funds for the procurement of grain, cotton, and edible oil. The ADB Shanghai branch has carried out the closed management of procurement funds, effectively contained great losses of policy procurement funds for grain, cotton, and edible oil, and has promptly ensured the full supply of policy procurement funds. Simultaneously, the branch’s grain purchase business declined sharply due to the deepening reform of Shanghai’s grain circulation system, as well as the acceleration of urbanization and adjustment of agricultural industrial structure. The branch’s main function has gradually shifted to becoming the sole credit support for the enhanced state grain reserve system and the replenished local grain reserve. Through the ADB, the state and local grain and cotton reserves can be replenished, the capacity of the government to control the grain and cotton markets is enhanced, and the safety of state grain and cotton is guaranteed.
In recent years, with the approval by the State Council, the PBOC, and the CBRC, the ADB Shanghai branch included, in its scope of credit support, the leading industrialized enterprises that are based primarily on grain and edible oil production. This includes grain production, circulation, processing, warehousing, and logistics. Also, the loan enterprises have been expanded from state-owned grain enterprises to others operating under different modes of ownership.
3. Foreign-Funded Banks
3.1 The Course of Development in Shanghai
Before the 1990s
In the early 20th century, Shanghai was a major financial city in the Far East. For some time after the founding of the People’s Republic of China, the majority of foreign banks withdrew from the Chinese market. Before the development and opening of Pudong in 1990, there remained only four outlets of foreign banks in Shanghai. These banks, commonly referred to as the “Old Four,” have been engaged in banking business from the late 19th century or early 20th century, and even after the communist victory in 1948, outlets of these four banks remained in Shanghai to act as agents for some business by the Chinese government banks.
From the 1990s to China’s WTO accession
After the development and opening-up of Pudong in the 1990s, the Shanghai banking sector took the lead in attracting foreign capital and introducing advanced financial management expertise and competition mechanisms. The financial regulatory department promulgated the pilot measures for foreign banks in Shanghai, stipulating that qualified foreign banks are allowed to set up operating branches in Shanghai. The Old Four foreign banks once again started full business after obtaining new financial business licenses. During the seven to eight years before the 1997 Asian financial crisis, the foreign banks built their presence in Shanghai’s financial market at an average rate of five to six institutions per year. Not only did the number of foreign banks increase, their business scale also continued to expand into the local currency business.
After China’s accession to the WTO
After China’s accession to the WTO, the pace of the opening-up of the financial sector accelerated. To support China’s fulfillment of its commitments to open up its banking sector, the regulatory commission revised The Regulations of the People’s Republic of China on Foreign-Funded Financial Institutions and its Implementation Rules. In the year of China’s accession to the WTO, the foreign exchange business was fully opened to foreign banks that met the regulatory commission’s requirements. Thereafter, foreign banks became more active in building up their presence in the Chinese market, and the number of foreign institutions increased. Additionally, many foreign banks have since set up subbranches in the same city, and have intensively developed their personal business. At the same time, the RMB business was opened in certain cities as per China’s WTO commitments, and by the end of 2003, eligible foreign banks were allowed to provide RMB services for Chinese enterprises.
3.2 Overall Operations
By the end of 2005, there were altogether 84 outlets of foreign banks in Shanghai, an increase of 24 since late 2000. This number excludes two auto financing companies, one currency brokerage, and three bank subbranches in the strategy phase. In 2005, 16 business branches were added, including eight branches of foreign banks and legal entities, as well as eight subbranches in the same city. Also in 2005, there were 100 representative offices of foreign banks and non-bank financial institutions, including four general representative offices, but excluding foreign insurance companies and securities companies. This represents an increase of 21 more offices from that of 2000. By the end of 2005, the total number of employees at foreign banks in Shanghai had reached 5,696 (including 650 foreign employees), an increase of 1,646 employees over that the previous year and a growth of 40.64%.
3.3 Development Features
Higher concentration of institutions and differentiated development strategies
The year 2005 witnessed the greatest increase of foreign bank institutions in Shanghai. Sixteen additional business branches were opened over the year, including eight branches of foreign banks and legal entities, and eight subbranches in the same city. To seize the opportunity of the full-scale opening of China’s financial sector at the end of 2006, foreign banks sped up their distribution of outlets, adjusted their business development strategies, and occupied strategic positions of the Chinese financial market. For example, some foreign banks actively expanded their retail bank business by accelerating the establishment of subbranches in the same city, usually in the downtown area to provide retail sale services for high-end clients.
Diversified business and the increasing market share
By the end of December 2005, the total assets of foreign banks in Shanghai had risen by 25% from 2004, accounting for 12.81% of total assets of all financial institutions in Shanghai. The market share of foreign banks rose by 0.2% from the previous year, and loans by the foreign banks rose by 36.22% from 2004, accounting for 11.89% of total loans of all financial institutions in Shanghai. The balance of deposits rose by 32.83% from 2004, accounting for 4.72% of total deposits of all financial institutions in Shanghai. By the end of 2005, the balance of foreign exchange loans extended by foreign banks in Shanghai registered US$16.3 billion, an increase of 31% from 2004, accounting for 54.87% of total foreign exchange loan market share in Shanghai and representing an increase of 6.11% from 2004. Finally, the balance of the newly increased foreign exchange loans extended by foreign banks accounted for as high as 99% of total of foreign exchange loans in 2005.
Increasing RMB capital and business
In 2005, fourteen of the 42 foreign banks that were allowed to conduct RMB business in Shanghai filed applications for an increase in their operating capital of RMB. The cumulative amount of the applications came to RMB 2.148 billion, though the actual increase approved by the CBRC was RMB 1.424 billion. After capital increase, the balance of operating capital stood at RMB 8.763 billion, an increase of 26% from the previous year. With this remarkable enhancement in capital strength, the RMB business of foreign banks began to grow in all areas. By the end of 2005, the outstanding balance of RMB loans amounted to RMB 67.062 billion, a growth of 42.93% from 2004. Also, the balance of RMB deposits in foreign banks amounted to RMB 61.599 billion, a growth of 44.37% from that of 2004. Finally, by the end of 2005, the pre-tax profit of foreign banks in Shanghai from the RMB business had increased by 72% from 2004, amounting to RMB 1.021 billion.
Launching new businesses and products through innovation
The year 2005 witnessed the most extensive innovation in products made by foreign banks in Shanghai since the opening-up of China’s economy. To meet the ever-increasing demands of clients for fund management, preservation, and appreciation, foreign banks have successively launched various types of foreign exchange financial products. The variety of financial products in foreign currency has extended from linkage to exchange rates and interest rates to multiple targets, including stock indexes, commodity indexes, and bonds, all showing a gradual increase in diversity. Additionally, the intermediary business products produced by foreign banks cover QFII custodian services, overseas operations, and the custody of insurance companies’ foreign exchange funds, as well as agency insurance services and factoring. Furthermore, foreign-funded banks’ personal financial products cover personal account management, foreign exchange transactions, housing mortgage loans and settlements, and the sale of foreign exchange. Online banking services cover online banking trade services, online banking, and foreign exchange transactions. Moreover, foreign banks have been more active in promoting products through various channels, and can now rapidly make their brand names popular by setting up more business outlets, advertising through the media, selling directly through salesmen and online promotions, and participating in exhibitions and conventions.
Fast growing investment businesses
Over the past years, the RMB investment business of foreign banks has continued to grow, mainly targeting treasury bonds, central bank notes, and bonds of financial institutions. Some foreign banks have taken an active part in the interbank bond market, resulting in a fast rise in the turnover of bond back-purchase and trading of cash notes.
More lead reporting foreign banks in Shanghai
With the increasing number of branches of foreign banks in China, and the expansion of their business area, foreign banks have sped up the pace of allowing lead reporting banks to focus on managerial decision-making for the banks’ Chinese operations. As of today, 28 foreign banks have designated their Shanghai branches as their lead reporting banks, accounting for two-thirds of the lead reporting banks in China. Currently, four foreign banks have set up general representative offices, with the function of regional management offices, in Shanghai. One foreign bank has set up its China regional management office within the bank itself, and some other foreign lead reporting banks are actually shouldering the functions of concentrated management or the operation of different business lines.
3.4 Development Trends
China and Shanghai are becoming the focus of global strategic development for the parent banks of foreign banks. Parent banks of foreign banks usually regard China, especially Shanghai, as the key strategic area of the global market. They also project that the Chinese market will continue to maintain the position of preferential development in the years to come.
Financial groups of head offices continue to increase strategic investment in China and seek strategic cooperation with Chinese financial institutions. By the end of 2005, 25 foreign banks had invested US$20 billion in 20 Chinese banks. Additionally, the proportion of foreign banks in the total capital of domestic banks had surpassed 15%.
The scope of business development has been further clarified and business strategies formulated in light of the advantages of parent banks. Foreign banks will develop a client group of SMEs and local enterprises, and provide clients with high quality services on the basis of consolidating existing client groups centered on foreign-funded enterprises. In light of the full-scale opening-up of the financial sector at the end of 2006, foreign banks have expedited the development of retail sales bank businesses by establishing new private bank agencies and speeding up the distribution of subbranch outlets. With the establishment of new mechanisms for ascertaining exchange rates, and the acceleration of reforms to deregulate interest rates and make them subject to market forces, foreign banks will expand self-run fund businesses further, and enlarge the transaction scope and variety of products to meet the demands of clients while working hard to avoid risks. At present, several foreign banks have participated in the issuance of credit cards by Chinese banks in various forms. At the end of the five-year transition period specified by the WTO accession, China will honor its commitments to open up the bankcard industry. Already, many foreign banks have proposed developing the bankcard business in their development programs.
The distribution of all-purpose bank outlets has been expedited, and the distribution of large wholesale bank outlets has also been proceeding steadily. Every year, one or two branches will be set up in northeastern and western China, as well as in developed areas where clients are concentrated. The distribution of small wholesale bank outlets has been planned for specific needs of different areas, though some banks have no plans to increase outlets so far.
The RMB business will become a key growth area. Foreign banks generally think the next three years will witness reform and innovation going at the fastest pace in the Chinese financial market. With the acceleration of market growth and the diversification of clients’ demands, foreign banks will offer a greater variety of RMB financial products. Foreign banks will support their RMB business by enlarging the size of each branch. Apart from the development of ordinary credit businesses, priority will be given to providing institutional clients with risk management tools, as well as high-income and low-risk financial products in addition to cash management, online banking services, and supply chain services. At the same time, some RMB financial products may be launched for domestic individual investors.
Shanghai is becoming the prime location for management headquarters. In their three-year development plans, most foreign banks’ leading reporting banks propose further enhancing the status of their Shanghai branches as the management headquarters in China.
4. Non-Banking Financial Institutions
In the past, there were only two trust investment companies and one financial company in Shanghai, but that changed dramatically as Shanghai began to develop its financial industry. Currently, non-bank financial institutions in Shanghai mainly include six trust investment companies, nine enterprise group financial companies (including seven legal entities and two branches), two auto financing companies, and one currency brokerage firm. These institutions have enriched the financial services and products in the market.
4.1 Trust Investment Companies
In 1990, Shanghai had only two trust investment companies, but by 2005 that number had grown to nine. The trust investment companies that were permitted to register again in that year included the Shanghai International Trust Investment Company, Shanghai Aijian Trust Investment Company, Zhonghai Trust Investment Company, Huabaoxin Trust Investment Company, Zhongtai Trust Investment Company, and the Anxin Trust Investment Company. The overall business operations of each trust investment company are advancing towards the goal of steady and sustained operations.
By the end of 1990, the total assets of two Shanghai trust companies registered RMB 5.921 billion, with total liabilities of RMB 4.968 billion, and net assets of RMB 0.952 billion. By the end of 2005, the total self-operating assets of six trust companies added up to RMB 8.140 billion, an increase of 37.48% over that of 1990. Their total self-operating liabilities stood at RMB 2.087 billion, down 57.99% from that of 1990, while their owner’s equity came to RMB 6.053 billion, up 535.70% from that of 1990. By the end of 2005, the six trust companies in Shanghai obtained a total income of RMB 0.786 billion, an increase of 66.70% from 1990, which was only RMB 0.47 billion.
Since the promulgation and implementation of The Trust Law of the People’s Republic of China in 2001, great changes have taken place in the business scope of trust companies. The trust business has gradually grown from nothing to become the main line of each trust company. By the end of 2005, the trust property under custody of six trust companies totaled RMB 34.763 billion.
4.2 Financial Companies under Group Companies
Financial companies under group companies are the product of China’s economic and financial restructuring that evolved out of a national policy supporting the strategy of building big companies and large corporate groups. Compared with their foreign counterparts, China’s financial companies are mostly financed by their parent groups with service clients strictly restricted within the group. Such financial companies deem it their first goal to provide financial services to their parent groups and pursue the group’s overall interests.
Since the establishment of the first financial company in 1987 in China, financial companies have grown rapidly, showing a gratifying momentum of development. This new type of financial institution has become a major part of the non-bank financial institutions in China. The nine enterprise group financial companies (including seven legal entities and two branches) are affiliated to the enterprise groups that cover power, electric, petroleum, iron and steel, shipbuilding, automobiles, aviation, tourism, service and municipal works. These are the foundation industries and major fields of the national economy. They are the pillars of China’s national economy underlying the government macro control.
After 20 years of development, financial companies under enterprise groups in Shanghai, starting from scratch, have taken shape. By the end of 2005, the total assets of these financial companies in Shanghai (legal entity) amounted to RMB 65.613 billion with paid-in capital of RMB 3.806 billion and a total profit of RMB 0.595 billion. The asset return rate was 0.89%, capital return rate 15.63%, and the capital adequacy rate 17.60%, while bad assets accounted for only 0.3% of the total assets.
4.3 Auto Financing Companies
Auto financing companies are a new type of non-bank financial institutions that have emerged after the establishment of the CBRC. The main business scope of auto financing companies is to extend loans for auto purchase and loans to auto dealers for purchasing automobiles or operation-related facilities. Also, their main funding source is to borrow from financial institutions and attract domestic shareholders to deposit money.
By the end of 2005, GMAC-SAIC Automotive Finance Company and Ford Automotive Financial Services (China) Limited settled in Shanghai respectively. As the first auto financing company in China, GMAC-SAIC Automotive Finance Company was approved to make preparations in December 2003, and started business officially in August 2004 with a registered capital of RMB 500 million. This company was jointly invested in by Shanghai Automobile Group Financial Company and the American General Automotive Financial Service Company. Ford Automotive Financial Services (China) Limited was approved to make preparations in July 2004 and started official operations in June 2005 with a registered capital of RMB 500 million and it was invested by American Ford Automotive Credit Company exclusively.
By the end of 2005, the total assets of auto financing companies in Shanghai added up to RMB 4.55 billion, including RMB 2.47 billion of distributor loans, and RMB 1.028 billion of individual auto loans. Based on the five grades of loan classification, the ratio of NPLs is very low. The asset depreciation reserve coverage is 100%, whereas the total liabilities amount to RMB 3.56 billion, consisting mainly of the deposits of domestic shareholders and borrowings from financial institutions.
4.4 Currency Brokerage Companies
With the approval of the State Council, the CBRC promulgated the Measures for Trial Administration of Currency Brokerage Companies on August 11, 2005. On November 8, 2005, the CBRC officially approved the application of the first joint-venture currency brokerage company in China, the Shanghai Guoli Currency Brokerage Company. This marked the official beginning of currency brokerage service in the Chinese financial market.
As the main player of the currency brokerage system, a currency brokerage company is the transaction intermediary in the financial wholesale market, and its business involves the main products of the currency market, capital market, and foreign exchange market. The introduction of the currency brokerage system and the establishment of currency brokerage companies will play an active role in strengthening the liquidity and transparency of the market, raise the operation and distribution efficiency of capital in the financial market, and promote the healthy development of the financial market.
4.5 Asset Management Companies
With the continual progress of the reform in the economic and financial systems of China, deep-rooted conflicts in the national economy have begun to show up, and the NPL risk of state-owned commercial banks has become more pronounced. The central government decided to set up four financial asset management companies that would make full use of their special legal status and specialized advantages to recover NPLs, defuse financial risks, and support the reform and development of the state-owned enterprises (SOEs).
China Xinda Asset Management Company was established on April 20, 1999, in Beijing, the first of its kind in China. That same year, the China Oriental Asset Management Company, the China Great Wall Asset Management Company, and the China Huarong Asset Management Company followed suit on October 15, 18, and 19 respectively in Beijing.
The four asset management companies are wholly state-owned financial enterprises with an independent legal person status, and a registered capital of RMB 10 billion each, which is appropriated in full by the Ministry of Finance. Currently, the main businesses of the four asset management companies are to acquire and operate NPLs in local and foreign currencies delinked by financial institutions, recover debts in local and foreign currencies, and lease or assign and reorganize the acquired assets formed by NPLs in local and foreign currencies. Additionally, the four asset companies also swap debts to equity in local and foreign currencies, conduct phased corporate shareholding, recommend the stock listing for companies within the range of asset management, underwrite bonds and stocks, secure NPLs with the approval by relevant departments, issue financial bonds, and borrow from financial institutions.
By the end of 2005, the total NPLs acquired by the Shanghai offices of Huarong, Great Wall, Oriental, and Xinda asset management companies amounted to RMB 31.4 billion (based on total creditor value) with accumulated disposal of assets amounting to RMB 14.6 billion and recovery of cash amounting to RMB 10.5 billion. Since late 2004, the four offices have made great efforts to develop the three new businesses of custody, reinvestment, and commercialized procurement. These have laid a solid foundation for the development and transaction in Shanghai’s market of bad financial assets.
4.6 Postal Savings and Remittance in Shanghai
The Shanghai Postal Savings and Remittance Office was established by the Shanghai Post Office (SPO) in July 1986 as a specialized agency to carry out savings and remittance businesses. There are altogether 430 counters for savings and remittance in SPO’s branch offices located in the city’s 14 districts and counties.
At present, the grassroot outlets of postal savings and remittance in Shanghai are mainly engaged in the RMB savings, remittance and agency business. The Shanghai Postal Savings and Remittance Office is in charge of fund transfer, accounting and statistics in postal savings business and comprehensive management of business operations. Over the past few years, the business of postal savings agencies in Shanghai has developed steadily. As a result, the balance of savings deposits rose to RMB 51.08 billion at the end of 2005.