The Changing Role of the Big Four State-Owned Banks

The four SOCBs had historically specialized lending practices that continue to be reflected in their loan portfolios to this day. For example, BOC has much more foreign exposure owing to its responsibility for a large share of China’s foreign exchange business whereas ABC’s loans still primarily support rural agricultural and industrial development.

Until 1998, the central government incorporated the four SOCBs into its credit plan to finance its state-owned enterprises (SOEs). This move left the SOCBs with no real scope for taking into account the creditworthiness of policy borrowers or questioning the loans they were directed to make for politically motivated projects. The practice of assigning loan quotas to every region under each year’s credit plan further prevented the allocation of credit from being determined by market forces. For example, regions with low growth potential tended to receive relatively large amounts of loans because of their dependence on SOEs.

Under the credit plan, policy lending quotas had been set without any reference to the banks’ ability to meet the quotas. In high-growth areas where deposits were high, bank lending options were constrained and they did not have sufficient interest income to pay depositors. To make payments they kept large (interest-bearing) excess reserves with the People’s Bank. Low growth areas, meanwhile, tended to have high quotas that the banks could not meet through their deposits alone. Therefore, they had to turn to the People’s Bank for funds, leaving the central bank redistributing funds from high-deposit areas to low-deposit areas. The old central bank role as the provider of SOE working capital needs (Chapter 3) was therefore simply being carried on indirectly by using the banking system as a conduit for these same central bank funds.

In a testament to the forced nature of SOCB lending during the days of the credit plan, ABC, for example, did not even establish a preferred creditor list until 1999 - at which time the then-president of ABC stated that, for the first time, “ABC will pay more attention to the quality of the loans than the quantity” (China Daily, January 21, 1999). This change, however, did not mean that the SOCBs were entirely freed from government pressure for high levels of loans to spur growth. Indeed, the “new” ABC credit list still reflected the long-standing government emphasis on putting livestock farmers in a position to consume excess grain, thereby supporting higher agricultural product prices.

Although almost all domestic banks in China are still at least partially state-owned, only the four largest were ever part of the credit plan. The smaller banks historically were able to achieve greater profitability and efficiency levels because their loan portfolios contained more private or collective enterprises. The SOCBs continued to feature relatively low-profit efficiency over the 1994-2003 period (Berger, Hasan, and Zhou, 2008) while weaker SOCB prudential standards were reflected in lower excess reserves, lower deposit/loan ratios, and higher loan/asset ratios than for the smaller joint-stock banks, for example (Jia, 2008).^[109] In the past, the government had deliberately restricted the smaller banks’ growth so that they would not pull deposit resources away from the specialized banks as they commercialized. Berger, Hasan, and Zhou (2008) identify benefits from the more recent government move to permit minority foreign ownership in the banks, however - leaving at least the hope that similar benefits will accrue from the prospective fuller opening up of the SOCBs to foreign ownership.

The earlier, pre-WTO exclusion of foreign banks from the domestic deposit and loan markets reflected the government’s fears that more effi­cient foreign institutions would threaten the SOCBs. WTO entry essentially forced the authorities to commercialize the banks, however, so that they could be in a position to survive the new competition.^[110] Although bur­densome restrictions delayed the benefits of including more competitive, better-managed foreign banks in China’s financial markets, the opening-up process accelerated considerably after the partial IPO of BOC in Hong Kong in 2002. By 2006 foreign investors had taken strategic positions in seventeen major Chinese banks in addition to their stakes in BOC, CCB, and ICBC (Ernst & Young, 2006, p. 11). The more promising banking landscape of the 2000s, however, would scarcely have been attainable without the reforms, and NPL reductions, initiated in the 1990s.