The development and supervision of the banking sector

In 1997, some new progress was made in the development and reform of the banking sector particulary in the transformation of the operating mechanism of the state-owned commercial banks, intensifying shareholding restructuring of other commercial banks, and accelerating the establishment of the city commercial banks. At the same time, the economic restructuring increased market-orientation of the banking sector and internationalization of banking activities, the risk exposure of banks in general increased. The supervision of the banking sector experienced significant changes. The central bank strengthened the regulation and supervision of banks in terms of licensing, operation and exit of banks to ensure stability of the banking sector. In the next three years, China will establish a financial system, a financial market system and a financial regulatory and supervisory system in line with the requirements of a social market economy. The banking sector is expected to change their institutional structure, improve regulatory framework and strengthen supervision.

The progress in the development and reform of the banking sector

In 1997, the banking sector continued to develop. The wholly state-owned commercial banks remained dominant in the banking sector. Other commercial banks continued to increase their market share and demonstrated robust vitality. The regional commercial banks experienced rapid development and became an important force in the chinese banking sector.

The intensified institutional restructuring of the state-owned commercial banks.
In an effort to achieve the shift from the growth-oriented business strategy to the efficiency-oriented strategy and under the guidance of the principle that required the strict control over the size of the institutions and rational organizational structure and layout, the wholly state-owned commercial banks intensified their efforts in structural reform. And in so doing, the number of local branches was reduced by 5300.

The intensified reform to promote shareholding system for other commercial banks.
In 1997, the Everbright Bank of China and Investment Bank of China undertook the restructuring program in order to becomeshareholding commercial banks. The EverbrightBank of China was the first commercial bank to allow foreign participation. The Pudong Development Bank, Fujian Industrial Bank and Guandong Development Bank all increased their capital by way of increasing the number of shares.

The increased efforts to establish city commercial banks.
As of end 1997, 154 cities received the approval from the State Council to go ahead with their plan to establish city united commercial bank. 74 city united commercial banks had already been granted licenses. It were cleared for starting organization process.

The strengthened banking supervision.
The increased efforts to conduct prudential supervision by the central bank achieved significant results. First, the segregation of commercial banking, trust and securities business generally completed. Second, the licensing of banking institutions and the fit and proper test for senior management further improved. Third, the central bank strengthened its ability to conduct analysis of supervisory information on commercial banks through off-site supervision as well as its capacity for early detection of risks. The commercial banks were informed on a quarterly basis of the results of off-site supervision. Fourth, the supervision of banks was also strengthened by strong enforcement actions. Fifth, some emerging finantial risks were reduced.

The prospects for the development and supervision of the banking sector in 1998-1999

Establishing a modern banking system
This system will be characterized by effective central bank supervision, clear separation between policy banks and commercial banks, which coexist and cooperate with regional commercial banks and urban credit cooperatives. To enhance efficiency through streamlining and rationalizing organizational structure, the state-owned commercial banks will consolidate local branches, merge provincial branches with municipal branches of the provincial capitals, and close subordinate grassroots establishments with overlapped business or chronic losses. These banks will shift their customer base to large and medium-sized (state-owned and stated-controlled) enterprises and large and medium-sized cities. Regulations for policy banks will be formulated. The resources for policy lending will be used for such operations strictly in compliance with the business scope approved by the State Council. Efforts will be made to promote the shareholding structural reform for regional commercial banks and allow them to expand their presence in large cities in light of the quality of their internal control system and business performance. Efforts will be made to speed up the establishment of city commercial banks in large cities and, on a trial basis, in some counties and cities with strong business activities. These commercial banks are expected to offer financial services to facilitate the development of the local economy and small and medium-sized enterprises.

In two years, the state-owned commercial banks will meet the 8 percent capital adequacy standard. The future efforts will focus on the improvement of their corporate governance and the institutional arrangements for the general meeting of shareholders, board of directors and to ensure compliance with the rules and regulations and prudent management. In 1998, all the state-owned commercial banks will be expected to set up the board of supervisors. The banks should strngthen the internal control system. Their internal audit and supervisory system should be independent and report to the headquarters. They will be required to improve the liability/asset ratio management, the separation of credit review, the pledge of collateral and management responsibility system for ensuring asset quality. They should also report true value of their performing assets based on the market discipline and prudent accounting principles in 1998, with reference to international practices and in consideration of the domestic circumstances, the asset classification system will be improved. In addition, the loan loss provisioning system will be revised as well in accordance with the prudent accounting principles. The system for capital replenishment will be reformed and improved in the same manner. A rigorous, consistent accounting and reporting system should be in place. The personnel management and remuneration system duly reflecting the features of the banking system should be introduced and improved.

Improving the banking supervision system
The primary objective of supervision is to enhance the sound management and overall resilience of the banking system with the help of the oversight of the central bank, the internal control of commercial banks, the discipline by banking association and the public. From 1998 onward the supervision of local currency business, foreign exchange business, domestic and cross-border business will be conducted on a consolidated basis. The efforts to increase supervisory efficiency include the processing of the data for off-site supervision electronically sa as to increase the efficiency in data collection, processing and analysis and to enable early warning. Drawing on international practices, efforts will be made to set up a credit rating system for commercial banks and urban credit cooperatives so as to improve management and to identify the priority for examination by the central bank. The commercial banks will be required to strengthen their internal control system and the oversight of the central bank should be based on the effective internal control system of the commercial banks. The establishment of the banking association is envisaged for the purpose of self-discipline. Commercial bank information disclosure system will be developed with a view to enhancing the transparency of the banking system and exercising market discipline on business activities of commercial banks.

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