Reform and Strengthening of the Banking Sector
Traditionally, the Chinese financial system is bank dominated. The state owned banks were used primarily to funnel capital into the large state owned companies in the form of policy loans, not taking into consideration basic principles of sustainable banking. In the course of time, huge amounts of non-performing loans (NPL) were accumulated through this practice. Furthermore, a lack of alternative capital sources besides credit still characterizes the Chinese financial system.
After the economic revolution of 1978, the financial sector was gradually opened. Banks increasingly had to adhere to commercial principles. In this scenario, the NPL posed a growing threat to their commercial viability. Until now, the government is working successfully on reducing the NPL ratio in the banking system through specialized Asset Management Companies.
Nevertheless, after great progress in opening the financial sector, following the accession into the WTO, NPL are still a problem for the Chinese banking system. Furthermore, the historical developments lead to a lack of corporate governance and adequate risk management in banking institutions, causing great inefficiencies in capital allocation. Selective reforms, mostly concentrating on the state-owned commercial banks, lead to large discrepancies in financial development and availability of financial services. Therefore, small and medium-sized private enterprises and rural households have only very limited access to formal credit, a fact that impedes rural development in China. The alleviation of these discrepancies and the cooperation with foreign entities constitute the future way of development. However, successful alliances and strategic partnerships with German credit institutions in China require experience and intercultural sensitivity.
To address these issues, we have started cooperation with the Postal Savings Bank of China (PSBC) and support the development of specialized Micro-Credit Companies (MCC). By now, PSBC has disbursed more than 200.000 loans to the rural population, and several hundred MCCs have come into being, serving the under-banked population. Furthermore, we have approached the problem of lack of alternative capital resources through our project in asset and equity market reform. For further information on our activities in this field, please visit our detailed project descriptions:
Microfinance and Rural Financial Sector Reform
Asset and Equity Market Reform