Reform in China’s Banking Sector: More to come?

Written by Jinna Wang || April 28 2012

In recent years, Chinese banking sector profits have skyrocketed to new levels, in part due to the Beijing imposed ceiling on the rates banks pay depositors, providing banks with a source of cheap funds, which banks then in turn lend out at much higher rates. Net profits for commercial banks grew 36 percent last year, reaching 1 trillion Renminbi. Chinese banks are enjoying year-on-year rises of more than 30 percent in their first-half net profits. In one example, the Industrial and Commercial Bank of China’s fees and commission income for the year 2011 was close to 100 billion RMB, compared to 72 billion in 2010 and 55 billion in 2009.

For years, Chinese banks have enjoyed the extremely low cost-of-capital in a country with one of the highest household savings rates in the world and a tightly controlled monetary system. The problem stems from the combination of low interest rates for deposit accounts as well as relatively high inflation rates as China continues its roaring economic development. For years, much of the banking sector’s profits have been coming at the expense of individual households, who have been given negative real returns on their money since 2004. Exorbitant service charges are also a central cause in the call for reform.

In the latest round of calls for reform, China's bank regulator has warned lenders they will be "severely punished" for charging excessive fees. The Chinese Banking Regulatory Commission began an investigation into banking fees on April first, promising punishment for banks found to be charging high fees for routine services, but has yet to define what constitutes as “high fees” or what the punishment will be. Aside from high service charges, unwillingness to lend to small businesses is another major concern and area of possible reform. Lending at China’s big four banks are heavily skewed toward large State-Owned-Enterprises (SOEs) and Town-Village-Enterprises (TVEs), passing over small business demands for capital in the process.

Compare to the slow pace of reform in previous years, we forecast 2012 to be a year of hard-hitting and swift reform, due to Beijing’s blunt appeals for change and the perhaps the not-so-surprising cooperation from the major banks. Wen Jiabao, the premier of China, has already stated that China’s state-controlled banks are a “monopoly” that needs to be broken up, a frank and very public warning. Banks, on the other hand, have mostly agreed to the need for reform and stated that they will comply with new measures, perhaps due to Beijing’s threat of “severe” punishment. The area that most likely will be first improved is the high service fees, since Chinese banks are charging for matters as small as changing an internet password, an issue to cause public ire, indeed.

2012 has been a perfect storm to push industry reforms, and more changes are on the horizon. People’s Bank of China, the state planning agency, and the CBRC have worked together to draft a new set of rules for the banking sector, which states that banks must give three months notice for any increases in service fees, and that subsidiary branches of the same bank will not be able to set different version of services charges.