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This chapter will discuss major problems of banking sector by literatures review firstly, then analysis the impact of the Chinese banking industry after WTO.

3.2 Major problems of Chinese banking sector

After China joined the WTO five years, the domestic banks and foreign banks have the same treatment. Meeting this situation, domestic banking sector faced to formidable challenge. The domestic banks need resolve the problems in the following.

3.2.1 Accumulation of Non-Performing Loans (NPLs)

Alicia, Sergio and Daniel (2006) point out the Chinese banks is the main financier of non-profitable state-owned enterprises (SOEs), so SOEs reform has a direct impact on bank reform. Because the Chinese banks’s governance has the larger extent to massive government intervention. Especially, the four state-owned commercial banks (SOCBs), they are not free to choose their asset structure, the credit is directly or indirectly controlled by the central or local government. (DeYoung and Rice, 2004) 

SOEs is the major part of the nation’s industrial, until the 1980s, their share in the industrial production and employment were 60 to 70 percent, when the China’s economy reform, the SOEs is gradually become no profit enterprises. LU (2006) states some factors make the NPLs crisis’ emergence in the late 1990s. The early period, in 1984, the government began to require the SOCBs support SOEs, provide the sufficient capital make SOEs’ smooth and gradual restructuring. And the taxes-for-profits and loans- for-grants reforms, the government transferred the burden to SOEs from the state budget to SOCBs. But many of SOEs also operating inefficiency, the non-performing loans (NPLs) were formed. Until 1994, the government campaign in the mid-1990s to clear up widespread inter-firm arrears by injecting bank funds, all contributed to the accumulation of NPLs.

According to research of GUO (2005) during 2001, total bank loans expanded to RMB 1.3 trillion, in this number, SOEs sectors leverage was very high. In these secor, a high proportion of loans taken by state-owned enterprises were non-performing. Government estimates the NPLs of the SOCBs at about 27% percent of their loans outstanding.

Table 4 NPLs in Chinese financial system

Time USD(billion) NPL ratio (% of total loans) % of GDP

State-owned commercial banks Dec 03 232 20 17

Joint-stock Commercial banks Mar 04 23 7 2

Policy banks Jun 03 19 18 1

Credit cooperative Mar 04 60 30 4

Banking system total Dec 03 373 19 28

Asset management companies Dec 03 107 -- 8

Financial system total Mar 04 480 -- 36

Source: official figures reported by Bofit (2004)

From the Table 4, in 2003, the ratio of NPLs to total loans was 20 percent, compare with the ratio of NPLs in 1997, it’s decreased to 10% however, this ratio also above the other emerging economics standards, for example, the 9.1% in Eastern Europe. By the end of 2003, Ernst Yong (2004) pointed CBC had bad loans about RMB 193 billion (U.S. 23.4 billion dollar ) , nearly 9 percent of its total loans, the BOC was RMB 344 billion (U.S. 41.5 billion dollar ) bad loans, and other two banks ( SOCB and ABC ) were burdened with over 700 billion (U.S. 85 billion dollar) each.

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