The comparison of financial The comparison of financial institutions, markets & institutions, markets &

instruments in China & US instruments in China & US and the possibility to set up a and the possibility to set up a deposit insurance system in deposit insurance system in

ChinaChina Fang JiFang Ji

June 15, 2004June 15, 2004

IntroductionIntroduction

Differences between China and US Differences between China and US in financial institutions, markets and in financial institutions, markets and instrumentsinstruments

Deposit insurance systemDeposit insurance system No deposit insurance company in ChinaNo deposit insurance company in China Is it necessary to set up a deposit Is it necessary to set up a deposit

insurance system in China? insurance system in China? If necessary, what structure will fit?If necessary, what structure will fit?

Part I: Financial institutions Part I: Financial institutions

Financial institutions are classified intoFinancial institutions are classified into in US: deposit taking and non-deposit taking in US: deposit taking and non-deposit taking

institutions institutions in China: according to their status and in China: according to their status and

function,function, central bankcentral bank policy-related banks and commercial policy-related banks and commercial

banksbanks non-bannon-bankk financial institutions financial institutions foreign-funded and Chinese-foreign jointly foreign-funded and Chinese-foreign jointly

run financial institutionsrun financial institutions

1. Central bank1. Central bank

Name: People’s Bank of China (PBC)Name: People’s Bank of China (PBC) Main functions:Main functions:

formulating and implementing monetary formulating and implementing monetary policiespolicies

issuing issuing renminbirenminbi, China’s currency, and , China’s currency, and managing its circulationmanaging its circulation

Regulating and supervising the Regulating and supervising the establishment of financial institutionsestablishment of financial institutions

regulating the financial marketsregulating the financial markets issuing rules and regulations concerning the issuing rules and regulations concerning the

operation of the financial industryoperation of the financial industry operating the state treasuryoperating the state treasury holding and managing national foreign holding and managing national foreign

exchanges and gold reservesexchanges and gold reserves

2. Policy-related banks2. Policy-related banks

Founded by the government for the purpose of Founded by the government for the purpose of carrying out important industrial and local carrying out important industrial and local development projectsdevelopment projects

Not for profitNot for profit Sources of funds:Sources of funds:

central bank loanscentral bank loans policy-related bondspolicy-related bonds

There are three such banks:There are three such banks: State Development BankState Development Bank Agricultural Development Bank of ChinaAgricultural Development Bank of China China Import and Export BankChina Import and Export Bank

3. Commercial banks3. Commercial banks

Deposit-taking institutionsDeposit-taking institutions Sources: borrowed funds, notice deposits and Sources: borrowed funds, notice deposits and

time depositstime deposits Three categories:Three categories:

State-owned commercial banksState-owned commercial banks

Joint-stock commercial banks — business focus Joint-stock commercial banks — business focus particularly on the coastal regionsparticularly on the coastal regions

City cooperation banks — serve for medium and small-City cooperation banks — serve for medium and small-sized enterprisessized enterprises

4. Non-bank financial 4. Non-bank financial institutionsinstitutions

Insurance company — 54 insurance Insurance company — 54 insurance companies, and over 70,000 insurance companies, and over 70,000 insurance agencies, supervised by the Insurance agencies, supervised by the Insurance Regulatory Commission Regulatory Commission

Rural credit cooperatives — scattered Rural credit cooperatives — scattered among small towns and rural villagesamong small towns and rural villages

Trust companyTrust company Finance companyFinance company

credit card vs. debit cardcredit card vs. debit card

Part IIPart IIFinancial markets and Financial markets and

instrumentsinstruments

Financial marketsFinancial markets

Same market classification:Same market classification: capital marketcapital market money marketmoney market

Capital market: primary and Capital market: primary and secondarysecondary

Instruments in money marketInstruments in money market commercial paper commercial paper treasury bills treasury bills negotiable large certificate of deposit negotiable large certificate of deposit Repurchase Agreement Repurchase Agreement

Instruments in capital marketInstruments in capital market Stock — stock exchanges and over-the counter Stock — stock exchanges and over-the counter

marketmarket Bonds — government Bonds — government bonds, corporate bonds bonds, corporate bonds

and bonds issued by financial institutions with and bonds issued by financial institutions with special functionsspecial functions

InstrumentsInstruments

WhyWhy differences differences Different economy systems -- planned economy vs. Different economy systems -- planned economy vs.

market-economy and developing country vs. developed market-economy and developing country vs. developed countrycountry

The economic reform began in China from 1980, some The economic reform began in China from 1980, some markets such as the stock market and the securities markets such as the stock market and the securities sector already run on market-economy lines. sector already run on market-economy lines. To some To some extent, China is still having a pextent, China is still having a planned economylanned economy

More government intervention, regulations and More government intervention, regulations and protection. Until now, there is no private bank in Chinaprotection. Until now, there is no private bank in China

Although the US is a developed country and its system Although the US is a developed country and its system is mature and has its obvious advantages, the current is mature and has its obvious advantages, the current institutions and instruments in China are what fit into institutions and instruments in China are what fit into its current situation considering the lack of a credit its current situation considering the lack of a credit system system

Overall China is still in the process of economic reform Overall China is still in the process of economic reform and development, it will finally rely on market tools to and development, it will finally rely on market tools to manage the whole system instead of using planned manage the whole system instead of using planned methodmethod

Part IIIPart IIIDeposit insurance system in Deposit insurance system in

ChinaChina No deposit insurance company No deposit insurance company in Chinain China Chinese Government is currently acting Chinese Government is currently acting

as the insurer for depositors’ savings in as the insurer for depositors’ savings in domestic banks. The insurance is based domestic banks. The insurance is based on the public’s confidence in national on the public’s confidence in national creditcredit

This is no regulation or legislation to This is no regulation or legislation to detail how depositors will be detail how depositors will be compensated if their banks go compensated if their banks go bankruptcybankruptcy

No need to set upNo need to set up a deposit insurance system a deposit insurance system

Most banks are state-owned ones, government Most banks are state-owned ones, government credit can guarantee the depositor’s account. credit can guarantee the depositor’s account. If one bank is at the risk of going bankruptcy, If one bank is at the risk of going bankruptcy, government will use all resources or hidden government will use all resources or hidden ways to save the bank from bankruptcyways to save the bank from bankruptcy

Under such protection, depositors can not feel Under such protection, depositors can not feel the risk of bank’s bankruptcy the risk of bank’s bankruptcy

If the bank really goes bankruptcy, the If the bank really goes bankruptcy, the government will take the risk, even by using government will take the risk, even by using government reserves to protect depositor’s government reserves to protect depositor’s moneymoney

Is that opinion sound???Is that opinion sound???

Setting up a deposit insurance Setting up a deposit insurance systemsystem

is a MUSTis a MUST No need to set up the system is a short-sighted viewNo need to set up the system is a short-sighted view currently 72 countries and regions have such a currently 72 countries and regions have such a

system system Bankruptcy happened every year since 1998 in China, Bankruptcy happened every year since 1998 in China,

big burden to government treasury and commercial big burden to government treasury and commercial banks banks

More competition will lead to more bankruptcies:More competition will lead to more bankruptcies: Competition from future liberalization of banks’ interest Competition from future liberalization of banks’ interest

ratesrates Competition from the foreign-funded banksCompetition from the foreign-funded banks Competition from the future introduction of private banksCompetition from the future introduction of private banks

Central government guarantying all deposits makes Central government guarantying all deposits makes commercial banks pay less attention to loan riskscommercial banks pay less attention to loan risks

The system stimulates fair competition and The system stimulates fair competition and urges banks to provide better services.urges banks to provide better services.

In china, household deposits are still the In china, household deposits are still the primary funds sources for commercial banks. primary funds sources for commercial banks. Well-designed deposit-insurance system would Well-designed deposit-insurance system would formally and efficiently protect the interests of formally and efficiently protect the interests of depositors, strengthen public’s confidence in depositors, strengthen public’s confidence in banks, and guarantee the funds sources.banks, and guarantee the funds sources.

China has begun implementing market-oriented China has begun implementing market-oriented reforms in its fast-growing financial sector, and reforms in its fast-growing financial sector, and as a result, a market mechanism will gradually as a result, a market mechanism will gradually replace government-sponsored deposit replace government-sponsored deposit protection.protection.

When?When?

The sooner China sets up the system, The sooner China sets up the system, the earlier it will be prepared for the the earlier it will be prepared for the challenge which is brought by the challenge which is brought by the market-economy reforms and the market-economy reforms and the severe bank competition.severe bank competition.

What system ?What system ? Institution: the insurance company shall Institution: the insurance company shall

be founded and managed by People’s be founded and managed by People’s bank of China instead of by the bank of China instead of by the governmentgovernment

Function: insure the deposit accounts, Function: insure the deposit accounts, supervise and prevent bank failuressupervise and prevent bank failures

Each financial institution shall be subject Each financial institution shall be subject to different premium rate regarding its to different premium rate regarding its business.business.

All deposit-taking institutions must join All deposit-taking institutions must join this system. this system.

ConclusionConclusion Each country has its own financial Each country has its own financial

institutions and instruments which adapt to institutions and instruments which adapt to its own situation.its own situation.

Developed countries have a relatively mature Developed countries have a relatively mature and well-developed financial system, and well-developed financial system, developing countries can definitely learn developing countries can definitely learn something from them, but they can not copy something from them, but they can not copy everythingeverything

China has been performing market-economy China has been performing market-economy reforms, from the development point of view, reforms, from the development point of view, it is a must to develop a deposit insurance it is a must to develop a deposit insurance system. But it may take a while.system. But it may take a while.

Thank you!Thank you!

谢谢谢谢 !!