Wu Xiaoling: Strengthening China's financial industry in the process of
opening up
Speech by Ms Wu Xiaoling, Deputy Governor of the People's Bank of China, at the Sino-US Economy
and Trade Forum, Beijing, 14 February 2006.
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Ladies and Gentlemen,
It is a great pleasure to join such a distinguished audience to discuss about issues related to trade and
economic cooperation between China and the United States. As two large countries in the world,
China and the United States maintains a friendly cooperative relationship between each other not only
fits in with their respective fundamental interests, but also helps to create a favorable environment for
world development. It is an independent choice of the Chinese people to embark on the way transiting
to the market economy and it is an internally generated force that pushes China to open to the outside
world and actively integrate into the world economy. Opening up has not only brought China vitality,
but also deepened the reform process which helped to create a better platform for the Chinese
economy to integrate into the world economy. China is developing in the process of opening up while
the rest of the world is benefiting from China's development.
China's financial industry has also benefited from the opening up process. In October 1979, Mr. Deng
Xiaoping, the late architect and mastermind of China's reform and opening up, asked Mr. Rong Yiren
to establish the China International Trust and Investment Corporation (CITIC), a holding company with
its business spreading from the financial sector to various other industries. The incorporation of CITIC
has opened for China a window to the outside world in terms of external financing. After that, China
began to introduce foreign financial institutions in the country by allowing them to set up representative
offices, operational entities and even joint-equity institutions in China, turning a new chapter in the
reform and opening up of the Chinese financial industry.
It is the financial reform and opening up that has brought China out of the rigid doctrine that confined
the country to a self-pride fallacy of " a nation of no domestic and external debt", and helped China to
learn to use financial instruments and foreign capital to develop the Chinese economy. In conventional
Chinese wisdom, borrowing debt becomes a feasible choice only when other options are exhausted.
In the past, a Chinese usually needs to save several months or even years before he or she could
offer to buy some relatively expensive goods, and borrowing money is considered to be something
shameful and reflecting one's incapability. Under the centralized command economy, we were once
proud of being a country with neither domestic nor foreign debt. With the deepening of China's
economic interactions with the outside world since the start of reform and economic opening up,
mentality of the Chinese people has witnessed tremendous changes. In 1979, China resumed external
borrowing which was suspended for 20 years, and financed a total of US$3.5 billion externally in the
year. In 1981, the Chinese government decided to issue treasury bonds totaling 4.9 billion yuan. With
steady progress of the financial industry, consumer credit has gradually become popular among the
Chinese people who find their livelihood is increasingly dependent on various services and facilities
provided through the financial system. In 1985, the Shenzhen Branch of the China Construction Bank
issued the first ever home mortgage loans to a customer in China. As of the end of 2005, China's
outstanding balance of government bonds reached 2.7 trillion yuan, and that of foreign debt and house
mortgage loans amounted to over US$260 billion and 1.84 trillion yuan respectively. China's financial
assets totaled 37.5 trillion yuan, 2.06 times of the GDP.
It is the financial reform and opening up that has enabled the Chinese financial institutions to improve
its business performance and management level amid market competition, especially in competition
with the foreign institutions. At the same time, the foreign financial institutions has also benefited from
the opening up of the Chinese financial industry. The foreign financial institutions have brought
competition incentives for their Chinese counterparts to improve and transform business strategies
and management by setting good examples in the conduct of intermediary business, patent
application of certain banking products, charging fees on account services, disintegrating the customer
market and introducing the concept of check and balance in building up the internal control system
etc. As the most open and developed city in Mainland China in terms of the financial industry,
Shanghai harbors the best branch offices of the Chinese financial institutions with respect to
profitability, asset quality and product innovation, with its financial openness not posting a competitive
barrier for growth of the domestic institutions. With the development of the Chinese economy, the
deepening of financial reform, steady improvement of management skills in the Chinese financial
institutions and the strengthening of profitability, the Chinese banks realized profits totaling 253.2
billion yuan in 2005, compared with 23.2 billion yuan in 2001. At the same time, asset quality also
evidently improved, with the NPL ratio dropped from 25.4 percent in 2001 to 9.8 percent in 2005.
Foreign financial institutions harvested profits amounting to US$446 million, increasing by 227.6
percent over that of 2001 which was registered at US$196 million.
China is a country that honors its commitments. The Chinese government has been fulfilling its WTO
commitments strictly on time or even ahead of schedule in terms of opening up the financial sector. In
December 2005, five more cities, namely Harbin, Changchun, Lanzhou, Yinchuan and Nanning, were
opened ahead of schedule to foreign financial institutions for local currency business, bringing the total
number of cities allowed for RMB business from 18 up to 25. In the areas of securities and insurance
business, the Chinese government has almost fulfilled all commitments concerning market access and
business scope except that the Sino-foreign joint equity brokers are not allowed to provide
underwriting services for issuance of A shares.
For the time being, foreign banks equity taking in a Chinese bank is subject to a ceiling of 25 percent,
or a limit of 20 percent in the case the equity is bought by a single foreign financial institution, if these
foreign banks intend to be treated same as their local Chinese partners in terms of business conduct.
By the end of 2006 when the domestic market is fully open to foreign banks for local currency
business, such a proportional limit will only hold significance for taxation purpose, and bears no
restrictions on the conduct of business.
China's practice since its accession to the WTO has shown that although the business growth rate of
foreign banks in recent years was higher than that of domestic banks, the market share of foreign
banks in China's banking sector does not see dramatic changes. In 2001, foreign banks accounted for
1.8 percent of the total banking assets, 0.35 percent of the RMB loans, and 14.7 percent of foreign
exchange loans. While in 2005, these figures rose respectively to 1.89 percent, 0.55 percent and
20.97 percent. With restrictions on RMB business to be removed in 2006, the market share of foreign
banks in RMB business is likely to further expand.
By 2005, 25 foreign banks have taken stakes in altogether 20 domestic banks, with some banks
investing in different domestic banks. In our view, in the share-holding reform of the state-owned
commercial banks, the main purpose of inviting strategic investors is to introduce advanced business
concepts and management skills so as to further improve the corporate governance of domestic
banks. With regard to introducing strategic investors, the Chinese regulatory authorities have laid
guiding principles called "long stake holding, governance improving, business cooperation and
avoiding peer competition". Under the precondition that the State holds the majority of stakes, more
involvement by the foreign and public investors will do no harm but to improve corporate governance
and business management in the state-owned commercial banks.
In the process of banking reform, introducing strategic investors is unlikely to threaten China's financial
security. I agree with Mr. Cheng Siwei, Vice Chairman of the Standing Committee of the National
People's Congress, that financial security here is a macro concept. At the micro level, safeguarding
financial security is to preserve soundness of individual financial institutions and avoid systemic risks
resulting from the failure of a single institution. At the macro level, pursuing financial security is to
maintain a balanced development of the national economy and keep the currency value and exchange
rate basically stable, which is closely related to the macroeconomic management capability of a
country. With the State still holding the majority of stakes, participation of strategic investors will help
to produce stronger state-owned commercial banks rather than undermine China's financial security.
What is important is to manage the structural balance of the economy and create a more flexible
mechanism for the economy so as to make it more adaptable to the changing situation, otherwise the
performance of the individual financial institutions could be impaired. Promoting economic reform and
opening up and rationalizing the economic system are essential to the sound development of the
financial sector. While introducing foreign strategic investors, we expect that domestic investors could
also be involved in the reform process. In this case, we need to quicken the steps in reform of
domestic capital market so that the Chinese investors could benefit from the economic reform.
The opening up of China's financial market has provided good opportunities for foreign investment,
enabling investors from various countries to capitalize on China's rapid development. The reform of
China's financial sector and its development also need a relatively easy external environment that
understands China's reform efforts. Currently, the lopsided development of the world economy, large
fluctuations of oil prices, escalating "twin deficits" of the United States and other unstabilizing factors
has not only brought uncertainties to the world economy but also produced stern challenges to the
Chinese financial reform and development. China's financial reform and opening up is a long journey
that requires arduous efforts to conquer, therefore we need to continue to steadily advance the reform
according to the guiding principles and policies, further liberalize the financial market, and strive to
build a mutually beneficial relationship between China and its foreign partners.
Thank you.