Facing the WTO Accession: Strengthen China's Banking Industry ----From the Evidence of Chinese Banking Problems

Essay by zjzjUniversity, Bachelor'sB+, March 2004

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China's ambitious efforts to reform and restructure the banking system began in earnest in 1998 and are accelerating rapidly as the accession to the World Trade Organization (WTO) become true. This pace reflects the industry transformation that WTO membership promises as restrictions are removed and China's banks are subjected to greater competition from foreign institutions with developed skills and capabilities, advanced information technology, efficient processing and superior management expertise with market economies. According to an industry source, the lending business in China is expected to grow by 40% annually in the decade after entry into the WTO. This tremendous potential and ensuing competition represents the opportunity and challenges the domestic banks face. Facing challenge, China's banking industry must be recognize that managing inherited nonperforming loans (NPLs) and overcoming antiquated business models, policies, procedures, systems and infrastructure are critical to meeting the demands of an increasingly competitive market. This submission accounts on the most popular weakness that exists in the bank industry and offer a systematic recommendations to improve it .

1.0 The weakness of Chinese banks

1.1 Non-performing loans, weak capital base and low profitability

NPLs are recognized as one of the most serious balance-sheet problems facing Chinese banks in recent years, yet the exact figure of total NPLs in China's banking sector is still unknown. In 1999,the authorities proposed a solution of debt-to-equity swap to deal with this issue, i.e., to establish asset management companies (AMCs)to take over the existing NPLs of four wholly-state-owned banks, and to let AMC's to recover NPLs as far as possible ,with AMCs acting primarily as owners of equity assets. In 2000, the upper limit for the four AMCs to take over NPLs from the four banks was set at 1.3 trillion Yuan, which was equivalent to about 15 percent of china's GDP.