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Chapter Five Current domestic banks profile

5.1 Introduction 

After China opened the financial market for the foreign investors, the domestic and foreign banks are played important role in China’s current banking industry. According to the review on Chinese banking system, domestic banks always have some problems, however, the world economic integration process gradual expedite, the financial markets opening after WTO accession, all make the acceleration of the Chinese banking system reform. Focus on foreign banks, they have played important role in introducing the advanced management experiences and attracting foreign capital, intensifying competition, and promoting the improvement the corporate governance of the Chinese banks.

This chapter will analysis the current situation of China’s banking industry. Firstly, it will introduce the measures of the Chinese banking system reform; secondly, discuss the current structure and situation of domestic banks. Finally, give the summary.

5.2 The measures of Chinese banking system reform 

5.2.1 Increase capital adequacy 

The Chinese bank’s capital inadequacy, the government tries to find the way to resolve this problem. There is two ways which are implementing in commercial banks: capital injection and issuance of subordinated term bonds.

In 1998, the State Council submitted to issue the special government bonds to provide for the in injection of capital into the SOCBs. The total amount of this capital was RMB 270 billion (US 32.5 billion dollar) government expected this capital can resolve the capital inadequacy of the SOCBs, however, they can’t resolve this problem. In 1998, the capital ratios reached 8%, but, after 1998, the capital ratios of the SOCBs have dropped. 

After 2003, the government implemented a unique scheme to inject capital into system. The Central Huijin Inverstment Company (Huijin) based on the investment of the foreign exchange reserves by State Administration of Foreign Exchange (SAFE) was established. (Cheng 2006). Huijin injected RMB 499.6 billion ( US 60.4 billion dollar) to the SOCBs. The original largest shareholder is the Ministry of Finance (MOF) increased its investment by RMB 5 billion to avoid reducing the value of shareholders ‘holdings, after Huijin injected capital, and the Social Security Fund (SSF) also invested RMB 10 billion.

The result of the capital injected is effective. Before, MOF is the largest shareholder, when the conflict occurred between the interests of the SOCBs and the SOEs, it only reform the SOEs, the government was no strong ability to protect SOCBs’ commercial interests. Now Huijin become an influential shareholder of the SOCBs. It urges them to carry out their reform plans, improve their corporate governance, then gain the efficient returns from their business.

For other aspect, the way of capital injection indirectly increase the foreign exchange reserves. Because the capital injection was use the official foreign exchange reserves, but government didn’t want to the desire deterioration for the government’s balance sheets, so Chinese leaders were use the efficient way to increasing foreign exchange reserves. From 2001 to 2003, the foreign exchange reserves of China more than doubled and have continued to expand. (Kumiko 2007)

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