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1、Chinas Economic Growth and Financial Reform,Prof. Zhao XijunSchool of Finance Renmin University of ChinaBeijing The 9th September 2008,Overview of Recent Growth,GDP: 10.7 trillion Yuan RMB in the first half of 2007, A growth of 11.5% and 0.5% faster than 2006CPI: 3.2%, 1.9% higher than 2006Foreign t
2、rade balance: 112.5 billion US$, 51.1 bn US$ more than 2006Regular government revenue: 2.6 trillion Yuan RMB, A growth of 30.6% and 8.6% faster than previous year; government expense: 1.8 trillion Yuan RMB, a growth of 22.7% and 5.2 higher than 2006; result: 819.8 bn Yuan RMB budget surplus and 279.
3、3 Yuan RMB more than the previous year,Some Details of Growth,Residents available revenue: 7052 yuan RMB in the first half of 2007 for city, a 14.2% growth and 4% higher than 2006; 2111 yuan RMB for rural, a 13.3% growth and 1.4% higher than 2006Employer salary was 10990 yuan RMB, a growth rate of 1
4、8.5% compared to previous yearTotal social consumption was 4.2 trillion yuan RMB, a growth of 15.4% and 2.1 higher than 2006, hit a historical higher since 1997,Some Details of Growth,Capital investment: 5.4 trillion Yuan RMB in first half of 2007, a growth of 25.9% and 3.9% lower than previous year
5、 but 2.2% higher than first quarter Foreign trade volume: 980.9 billion US$ in the first half, a growth of 23.3%; export grow 27.6%, 2.4% higher than 2006, import grow 18.2%, 3.1% lower than 2006; a trade balance of 112.5 billion US$, 83.1% higher than 2006 and grow 27.9% faster,Some Details of Grow
6、th,The use of FDI was 31.9 billion US$ in the first half, a growth of 12.2%By the end of 2006, the foreign financial asset owned by Chinese government and private sector was 1626.6 billion US$, a growth of 33% than 2005; the foreign financial liability was 964.5 billion US$, a growth of 21%; which m
7、ade 662.1 of net foreign financial position, a growth of 57%, 25% of chinas GDPBy the end of June 2007, china maintain 1332.6 billion US$ as FX reserve, a growth of 41.6%, 266.3 bn US$ more than year end of 2006 and 144 billion higher than the previous year,Economic Growth,China,World average,Econom
8、ic Growth in China and US,Economy Size of Some Countries as % of China,Added-value Breakdown,Growth of GDP: Decomposition,Import, Export and GDP,Price Change,Price Change,Economic Growth and Price Change,Price change and Interest Rate,Money Supply,Driven Factors of Chinas Economic Growth,Rich labor
9、supply High national savings rateLabor productivity increaseFinancial reform,Labor,Labor quality and Cost,Benefited from increase both in population and investment in high education, China got more high quality but cheap laborThe new enrolments of university student was 5.30 billion in 2006, 14 time
10、s than in 1978But the real salary grow only 5 times than 1978,High Education and Population,Growth of Salary,Capital formation,National Savings,Use of Foreign Capital,Growth of Export, Investment and Consumption,Deposit Savings and Stock Market,Growth of Stock Index,Growth of Stock market Value,Grow
11、th of Investors,Productivity,Investment in R and D,Growth of Private Enterprise,Private Enterprise and Economic Growth,Growth of Industrial Profit,Financial Reform: Overview,China,The reform and opening policy in financial sector started from the end of 1978From 1978 to 1984, to set up a two tier ba
12、nking system:In 1978, PBOC was separated from MOF and become the central bankFrom 1978 to 1984, four state owned banks (with their own business field) were established by the governmentIn 1979, the first Trust and Investment company was set up and banks began to develop trust and investment business
13、In 1980, urban and rural credit union were introducedIn 1983, the first insurance company was separated from PBOC,China (cont),From 1985 to 1988, competition was introduced into financial sector:In 1985, business barriers between four big banks were brokenFrom 1986, new banks with investment other t
14、han the government were set upIn 1986, an interbank borrowing and lending market was introduced, also from that year, some big cities started to setup trade centers for the trade of treasury bills and other securitiesIn 1986, the duel FX rate system was abolished, a new FX retention system was intro
15、duced, a FX swap center was setupFrom 1988 to 1991, development of the stock market:In December 1990, the first nation wide stock exchange was setup in ShanghaiIn January 1991, Shenzhen setup the second stock exchange,China (cont),From 1992 to present, the rapid development in financial sector:From
16、1992, more and more new banks were setup and foreign banks began to enter into Chinese market, different types of non bank financial institutions were introduced into market also in that yearIn 1992, CSRC was separated from PBOCIn 1994, three policy banks were established, the FX control system and
17、the FX rate system was reformed also in that yearIn 1995, both central bank law and commercial bank law were promulgated by governmentIn 1998, CIRC was setupIn 1999, Completion of WTO accession negotiation, gradually opening of financial service industryIn 2003, CBRC was setupFrom 2004, the four sta
18、te owned banks started their restructuringFrom 2006, the financial service industry full open to foreign investors,System Achievements,After 28 years reform and opening, Chinas financial sector has achieved 4 systematic improvements：Institution：Formed a diversified system including banking and non-b
19、anking, domestic and foreign financial institutionsMarket：FX/Money/Capital marketLaw and Regulation：PBOC/CBRS/CSRC/CIRC/SAFEPolicy：More and more Market Oriented (interest rate, FX rate, open market operation, reserve rate, etc.),Financial Institutions (as of 2005),Banking：4 SOBs3 policy banks12 shar
20、eholding banks112 city CBs8 rural cooperative banks7 rural CBs681 urban credit unions32854 rural CUs211 foreign banks220 RP offices of foreign banks,Non-banking：4 AMCs59 trust companies74 finance companies12 leasing companies3 auto finance companies131 securities companies43 fund management companie
21、s69 insurance companies,Market Oriented Policy,From 1998, banks credit plan was abolished and more market oriented policy instruments (such as interest rate and open market operation) was introduced Liberalization of interest rateInter-bank bid/offer rate/Repo rate/Discount rateInterest rate on fore
22、ign currencyMore flexibilities for loans to agriculture, small/medium sized firms and home mortgage loanShanghai Inter-bank Offered Rate (SHIBOR) was set up, including 8 market rates: overnight/one week/2 weeks/one month/3 months/6 months/9 months/one year,Reform of Exchange Rate of RMB,Period: 1981
23、.1.1 1984.12.31,RMB exchange rate was used as an instrument in stimulating export and has no more relations with priceRMB exchange rate was quoted publicly from the January 1st 1981 and was used in the settlement of no trade transactionsAnother internal RMB exchange rate was used in the settlement o
24、f trade transactions,Period: 1985.1.1 1993.12.31,RMB internal settlement price and public quotation was convergedRMB exchange rate was adjusted gradually from US$1= RMB￥2.80, 3.20, 3.70, 4.72, 5.22, 5.80FX swap centers ware set up for foreign funded companiesAn official setting quotation existed for
25、 domestic companiesAnother market setting price existed in swap centers,Period: 1994.1.1 2005.7.21,Official setting price and market setting price ware convergedAn inter-bank FX market was set upThe managed floating FX rate system was introducedFX retention and purchasing system was introducedRMB wa
26、s convertible under current accountThe exchange rate between RMB and US$ was set as the base rate, and the new exchange rate was set as US$1= RMB￥8.70PBC was responsible in setting the daily base rates for financial institutionsFinancial institutions ware delegated to set up its own rates for transa
27、ctions of its client based on the official settling rate and within some margins, say 0.25%The maximum bid-offer differential was set to 0.5%,Period: 2005.7.21,2005/07/21, PBOC launched a new reform in RMB exchange rate systemTo abolish the “hard peg” to US$To adopt a new mechanism of “market based,
28、 with reference to a basket of currencies” Maximum daily change for US$: previous days closing rate 0.3%From 7pm 2005/07/21, the exchange rate of RMB moved from 8.27RMB/ 1US$ to 8.11 RMB/1US$, i.e. an appreciation of 2%2007/09/12, the exchange rate was 7.55RMB/1US$,Mechanism,Market based: based on m
29、arket supply and demand of FXWith reference to a basket of currenciesManaged floating or dirty floating Maximum daily change for US$: previous days closing rate 0.3%Basket currencies and their weight: undeclared,RMB Exchange Rate,Reform of Banking Sector,Two Major Problems,No Enough CapitalHuge Non
30、Performing Loan (NPL),Inadequate Capital (1),Even according measures of old Basel Accord, the average weighted capital adequate ratio for major Chinese banks was only about 5.75% by year end of 2003, less than 8% required by minimum regulatory capital adequate ratio of old Basel AccordThe capital ad
31、equate ratio for 3 policy banks, 4 sate-controlled banks and 11 shareholding banks were respectively 6.0%, 5.3% and 7.4% Much less than 12% requirement for internationally active banks and much much less than 20 requirement for top banks,Inadequate Capital (2),In 1998, 270 billion yuan RMB special b
32、onds were issued by MOF and the proceeds of money were injected into 4 big banks as their capital, make their capital adequate ratio of 4.6%, but by year 2003, the ratio was again decreased to 4.28% If we use prudent measures of the new Basel Accord, the capital adequate ratio for 4 big banks was on
33、ly -2.29% after deducting all loan loss,Inadequate Capital (3),According to measures of old Basel Accord, there is a 340 billion yuan RMB gap to the 8% of minimum adequate ratio; and a 630 billion yuan RMB gap to the 10% of prudent adequate ratio; If we use measures of new Basel Accord, there is a 2
34、.4 trillion yuan RMB gap to the 8% of minimum adequate ratio; and a2.7 trillion yuan RMB gap to the 10% of prudent adequate ratio;,Non Performing Loan,In 1999, 4 state AMCs were setup, a total number of 1394 billion yuan RMB NPL were written down by 4 big banks and were transferred to AMCs account,
35、making their NPL ratio fall 9.2 percentage points by year 2000But the number of NPL of 4 big banks still remain as high as 2 trillion yuan RMB by year end of 2003, their average NPL ratio was high as 20%After one year financial restructuring, 2 big banks, BOC and CCB made some improvement, their NPL
36、 ratio fall to 5.12 and 3.70 respectively, their capital adequate ratio were increased to 8.62% and 9.39%respectively,Capital Adequate Ratio & NPL（2004）,NPL in Different Economies（2004）,Reform of Banks,Bank Reform Overview (1),By the year end of 2003, the government decided to start the bank reform.
37、 2 big banks, CCB and BOC started the process of restructuring and each got 22.5 billion US$ capital injectionBy middle of year 2005, ICBC, the largest commercial bank in china, was approved to restructure. ICBC got 30 billion US$ capital injection: 15 bn from FX reserve and 15 bn from MOF (128 bn y
38、uan RMB retained earnings were transferred into banks capital),Bank Reform Overview (2),In June 2005, Bank of Communications launched its IPO and was listed in Hongkong Stock ExchangeOn 27th October 2005, CCB completed its IPO and was listed in Hongkong In 2006, BOC completed its international and d
39、omestic IPO on the 1st of June and the 5th of July, raised 86.7bn HK$ and 20bn Yuan RMB respectively, and listed dually in Hongkong and ShanghaiOn 27th October 2006, ICBC completed its “A+H” syncro-IPO and dual listing, the amount proceeds from IPO was 19.1bn US$ (124.9bn HK$ + 46.4bn Yuan RMB), mak
40、ing the largest IPO in the world this year,Bank Reform Overview (3),Other banks planned to IPO:China Merchants Bank (to be listed in Hongkong)China Minsheng Bank (to be listed in Shanghai)China CITIC Bank (to be listed in Shanghai) China Industrial Bank (to be listed in Shanghai)Nanjing Commercial B
41、ank (to be listed in Shanghai)China banking sector reform initiatives: timeline from 1995 through,Reform of CCB,End of 2003, got 22.5 bn US$ as capital injectionJan. 2004, signed cooperative agreement with CitiGroup, CitiGroup agreed to become strategic investorJune 2004, completion of financial res
42、tructuringSeptember 2004, CCB shareholding company was setup16th Mar. 2005, scandal of banks former president Zhang and CitiGroup withdraw from the cooperation17th Mar. 2005, Mr. Guo was appointed as banks new president, make contact with Bank of AmericanJun 2005, BOA agreed to become CCBs strategic
43、 and promise to purchase 3bn US$ shares from CCB at a price of 1.15 HK$ per share5th October 2005, start road show, IPO price from 1.8 HK$-2.15HK$ per share10th October, IPO price increased to 1.9HK$-2.4HK$ per share19th October, final IPO price 2.35 HK$ per share, IPO proceeds 62.2bn HK$27th Octobe
44、r, listing in Hongkong Stock Exchange, closing price 2.35 HK$/share,Reform of ICBC (1),1998, started the process of commercialization: write off NPL, improvement of internal control, introducing new IT technology, etc. By middle of year 2005, ICBC was approved to restructure, got 30 billion US$ capi
45、tal injection and started restructuring200000 people leaved ICBC, the number of employee decreased from 560000 to 360000The number of branch decreased from 37000 to 18000,Reform of ICBC (2),Jan. 2006, signed agreement with Goldman Sachs, Alliance and American Express, the three companies promised to
46、 become ICBCs strategic investor and purchase 3.78 bn US$ shares from ICBCJuly 2006, ICBC launched its IPO in Hongkong, but late on, the plan was modified. The old IPO plan was replaced by a new “A+H” IPO plan.October 2006, ICBC started its road show27th October, ICBC completed its “A+H” IPO and dua
47、l listing both in Shanghai and Hongkong, closing at 3.52 HK$/share in Hongkong and 3.28Yuan RMB/share in Shanghai,Remained Work,Improvement in corporate governance, internal control, full-range risk management and business competitivenessFurther reform in internal organizational structure and busine
48、ss processing order to enhance the banks management efficiencyFull execution of cooperative agreement with strategic investor, especially in product innovation and risk managementMore progress in increasing capital ratio, asset quality, profitability, and the banks financial positionThe restructuring of the 4th state owned bank: china agriculture bank,Thank you,