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China's Policy Banks

09-09 17:06 Caijing

In 1994 The State Council of the Peoples Republic of China established three policy banks to take over the government's policy lending. The Export-Import Bank (Exim), the Agricultural Development Bank and the China Development Bank (CDB) each has its own distinct function and responsibility within the Chinese developmental model.

The policy banks were charged with promoting and financing the construction of infrastructure, promoting exportation and food productions. But in the last decade the government had steered the policy banks in a new direction and put in motion a dramatic commercialization movement. Arguably the term 'policy bank' no longer describes the business operations these banks engage in. Only the Agricultural Development Bank, due to its unfavorable market niche, retains its traditional planning era luster.   

Exim, with only a tenth of the size of CDB, was a dwarf compared to its two larger sister banks. Yet, soon after its establishment, Exim's business horizons and industry scope expanded in rapid strokes. In 1995 Exim began providing foreign clients with developmental aid and preferential loan services. The following year Exim took over the distribution of government backed loans extended to foreign nations. In 1999 Exim had entered the more lucrative market of financing international engineering projects and the export of high-tech products. By 2000 China's “Go-Out” (zou chu qu) strategy – encouraging domestic companies to do businesses overseas – was in full force and Exim was at the forefront of the internationalization process. At present Exim not only holds a huge stake in China's export market but has regional branches in over 108 countries and financial hubs around the world.

In 2007 Exim underwent a deep restructuring process and a formal market oriented division was established in addition to the bank's traditional policy directed functions. In 2008, Exim's proprietary business profits completely covered losses from its policy-lending operations, and for the first time the bank reported profits, which totaled over 1.9 billion yuan. Earlier this year, Exim president Li Ruogu told Caijing that reforms within Exim have decreased the banks non-performing assets from over 9 billion yuan down to less then 7 billion yuan.

Central bank and Finance Ministry officials have shown great interest in Exim's success and have heralded the blending of developmental policy and private business interests as a possible model for the bank. Clearly there is great appeal for this method as it provides the state greater leverage in channeling the commercialization process. Yet, how can two contradictory economic ideologies coexist? Let alone within the same institution? In addition to the apparent friction between commercial and public principals there remains a strong concern and apprehension about what roles such hybrid banking institutions will play in a competitive market.

At present, Exim's primary policy objective is still the promotion of foreign trade and diplomacy by capitalizing domestic exporters and exporting credit to potentially profitable foreign projects. Yet, in conjunction with China's commitment to commercialization and internationalization, Exim's customer base has gradually been dominated by private business interest. While Exim's operational directives are not profit oriented and fiscal obligations can at best be defined as accomplishing a balanced portfolio, the bank does have an interest in volume and is often embroiled in fierce competition with the state-owned commercial banks for customers.

In most cases, even in those involving foreign borrows, the policy banks like Exim are able to provide preferential loans with very flexible payment schedules at less than half the interest offered by any of the commercial banks. In some ways the policy banks still represent the government's private stockpile of capital which is spent primarily for political and private purposes without much oversight or accountability.

According to a source in the CBRC, China's Banking Regulatory Commission, the main problem facing China's banking industry is the lack of strong legislation behind banking regulation and enforcement. Sanctions for illicit banking practices are few and far in between, while regulation is more of a formality than a constraint. Within in the policy banking sector conflicts of interests between state and private business are obvious. As China's foreign reserves continue to grow – soft-budget constraints will likely exacerbate such issues. In response to these concerns the Ministry of Finance (MOF) has advocated for further separation between policy and commercial banks. The MOF has also argued that these two banking functions should be treated as separate institutions with their own regulatory bodies. In addition, the MOF has repeatedly encouraged banking executives to set reasonable fiscal targets and moderate their risky behavior.

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