By Violaine Cousin (auth.)
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Additional info for Banking in China
Banks are required to analyse their borrowers The State as Regulator 29 before extending loans (art. 11 Requirements for establishing a commercial bank include having a professional senior management team, as well as having adequate registered capital, shareholders and a complete organisation. Changes in name, business scope, important shareholders and capital have to be approved by CBRC. As art. 34 states: ‘A commercial bank shall conduct its loan business in accordance with the need for the development of the national economy and social progress and under the guidance of the state industrial policy’ – it therefore, however, remains unclear how freely a bank can operate.
Market-driven instruments and mechanisms used to influence financial flows emerged in the mid-1980s. A first step was made with the introduction of minimum deposits and reserves requirements as well as discounting activities. These mechanisms became necessary with the end of the strict allocation of loans until 1995 and the increased opening and diversification of the banking sector. 34 Banking in China PBOC can intervene in financial markets through a number of instruments (to which certain interest rates are attached): • interest rates for loans and deposits (until recently also through interest rates controls), and window guidance (a softer version of the credit quotas), • minimum reserve requirements, • rediscounting, • central bank re-lending,13 and • open market interventions.
A third reason for the slow pace of reform relates to the challenge posed by the large unprofitable state-owned enterprises (SOEs), which are also seen as of paramount importance to the state. Reform of the banking system could not go ahead without a concurrent reform of SOEs. Finally, as in many cases where reforms are required, there was reluctance by politicians to recognise that reform was necessary and a general reluctance to abandon established practices. Banking System Features and History 11 Systemic risk The banking system is the source of financing for enterprises but also the source of systemic risk to the economy as a whole (Longueville and Ngo, 2004).