People’s Bank of China Deputy Governor Wu Xiaoling on the Challenges Facing China Banks

Wu Xiaoling: “2007 is the first year for China's banking sector as it opens up to foreign investment. Four Chinese banks have gone public ? Industrial and Commercial Bank of China, People’s Bank of China, China Construction Bank and Bank of China ? which not only raised the profile of Chinese banks both domestically and globally, but also gained much useful reform experience. Let me recap some of the landmarks of the Chinese banking reform to date:   

First, the financial conditions of Chinese banks have greatly improved in terms of stable growth of revenue and profit, increased profitability, improved return on assets and asset quality. In addition, banks have seen remarkable improvements in the provisioning coverage ratio, core capital adequacy ratio, and capital adequacy ratio.

Second, major achievements have been made in the governance structure of banks. China’s three primary banks have established a framework for corporate governance based on modern financial enterprise systems. An effective new mechanism has also been formed for monitoring and restricting shareholders, board of directors, and senior management ? a significant break from the former decision-making process. In addition, shareholders and boards now play an important role in corporate governance.

Pressures and challenges

Along with the achievements, China’s banking industry is now facing increasing pressure from competition and innovation. Domestic banks are feeling the heat of increased competition from the intermediary financing sector and the individual credit market as well as stock price pressure and profitability pressure.

Looking into the profitability of the three primary banks ? ICBC, PBC, CCB ? we find a big improvement over the past, but there is still a large gap between them and the world’s Top 10 banks. The ROE and ROA of most Chinese banks are below global averages, which means we must make much more effort. 

As reform continues, commercial banks will face more challenges. In order to improve the governance structure of the banking industry, China must transform its official foreign investment company ? Central Huijin ? so that it operates along true market-based principles. This will require coordinated efforts among the bank management, board of directors, and board of supervisors. Banks must also leverage the role of party organizations. The final goal will be to develop corporate governance with Chinese characteristics.

In recent years, Central Huijin has played an important role in the banking industry reform, including introducing strategic investors, improving corporate governance and facilitating IPOs. However, the company has only passively held shares in ICBC, PBC, CCB and BC, and does not yet function on a true capital operation basis.

In the future, Central Huijin will be folded into the State Foreign Investment Co. and will become a truly market-oriented investment company. Within the scope of the state investments, Central Huijin should have the right to independently manage the shares in its invested companies, to arrange dividends, and to manage the investments under its control. Furthermore, Central Huijin should form a professional management team and build a market-based personnel promotion system for its management and directors.”

SPEAKER’S BIO

Wu Xiaoling
Deputy Governor of the People's Bank of China

Wu Xiaoling holds a long list of impressive positions in addition to her role as deputy governor of the People’s Bank of China (PBOC). She also serves as: executive vice chairman, China Society for Finance and Banking; chairman, Banking Accounting Society of China; contract research fellow, China Society of Economic Reform; and professor at Tsinghua University School of Economics & Management, Renmin University of China, Central University of Finance and Economics, and Xiamen University.

Prior to her current position at PBOC, Wu served in several other capacities including: deputy director for applied theory research, vice editor-in-chief for Financial News; deputy director-general for the Financial Reform Department, director, Policy Research Office, and president, Shanghai Branch. Outside of PBOC, Wu has served as director-general of the State Administration of Foreign Exchange. Her research interests focus on financial reform and currency policy. She has published a number of writings on economics and was awarded China’s Sun Yefang Economics Prize in 1994.