China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [68]
The reforms have failed to reduce the state’s control and intervention in the sector. This can be seen by looking at the ownership structure of the banks. In addition to the four dominant SCBs, which are wholly state-owned banks, virtually all the other major joint-stock banks are owned by state-affiliated entities and local governments. The newly formed city commercial banks are owned and controlled by local governments and SOEs.68 Even rural credit co-ops, nominally owned by farmers, are run by local governments. The effective state monopoly of the banking sector has remained intact.69 The only truly private financial institution is Minsheng Bank. But with assets of $30 billion in 2003, this bank is a relatively small player.70 In 2003, there were signs that the government might be ready for the entry of additional private banks. One possibility under discussion is the establishment of private rural commercial banks in which local government would have no control.71
Compared with indigenous private sector players, foreign banks have fared only marginally better. Although they were allowed to open branches and representative offices in 1990, the restrictions imposed by the Chinese government have largely kept foreign banks out of the market beyond financing trade and servicing foreign-invested firms. In 1997, of the 173 foreign banks with foreign currency operations in China, only 9 were allowed to conduct local currency operations. Foreign banks had $38 billion in assets (about 3 percent of the assets in the four SCBs) and $27 billion in loans .72 The situation in 2002 remained basically unchanged. Foreign banks accounted for only 1 percent of total bank assets in China.73 Getting into China’s banking sector via joint ventures was restricted as well. Only a small number of foreign financial institutions were allowed to make equity investments in several select small joint-stock banks (including Minsheng Bank). 74 By the end of 2003, China had only seven Sino-foreign joint-venture banks.75 While foreign banks will gain unimpeded access to the domestic market in 2007 as a result of China’s WTO commitments, the prospects for domestic private entrants remain cloudy.
The most immediate and important impact of the state’s dominance in the banking sector is the government’s tight control of the most critical price in allocating credit—interest rates. During most of the reform era, the government imposed strict control on loan and deposit rates. The pace of liberalization was extremely slow. Starting in 2000, limited flexibility was allowed only in certain types of transactions that would not likely have a substantial impact on the credit market. For example, the government allowed the free floating of borrowing rates on the interbank market. Rates on foreign exchange deposits became fully liberalized. RCCs were able to float their loan rates within a narrower band, as were city commercial banks, which could raise their loan rates, or lower them, within a very narrow band. However, deposit rates for all banks were set by the PBOC. Loan rates in the SCBs and eleven joint-stock commercial banks that controlled more than 80 percent of the loan market were also determined by the PBOC.76
China’s banking reform has failed the competition test because the measures taken since 1979 have not brought about a fundamental structural change in the credit market, leaving the dominant positions of the SCBs essentially untouched. In 1986, the four SCBs controlled 83 percent of the deposits and accounted for 90 percent of the outstanding loans.77 By 2003, they had lost considerable market share due to the emergence of other financial institutions. The four SCBs accounted for 65 percent of the total deposits and 66 percent of the outstanding loans. Nevertheless, the dominance of the four SCBs remained unchallenged.78 The SCBs were able to defend their market share mainly because their owner—the state—used regulatory