Policy Banks Reform Motivation And Development Direction In China

ABSTRACT:With the development of the socialist market economy, operating environment of policy Banks has changed a lot in China. China's marketization degree improves from37.73%in1994to78.11%in2004. According to international experience, when one country's marketization degree is higher than the75%, it is considered into the phase of highly marketable. Under the background of highly market-oriented, capital requirements of China's economic and social development can be easily obtained through marketing channels, and the demand for policy fund is less and less. However, at the same time, policy banks'assets in china are increasing quickly from204.8billion in1994to9404.8billion in2011, increasing by46times. Decreasing demand and increasing supply makes some policy fund flow to commercial financial filed, results in the decrease of state-owned capital allocation efficiency, and disorderly competition in financial markets. Therefore, marketization degree improvement is the ultimate reason of reform of policy Banks in China, and reducing policy bank system size is the sound financial reform thought for China.There are three paths to reduce policy banks size:the first is exiting part of policy banks out of market, the second is mixing policy business and commercial business in one bank, the third is transform part of policy banks into commercial banks. Because Chinese policy Banks have long-term credit advantage, and it is lack of financial institution exit legal system in China, the first path is not reasonable; Based on commercial financial and policy financial theory, one bank can't mixed operate policy business and commercial business simultaneously. Because it's different to distinguish commercial business from policy business, if one bank operates two businesses simultaneously, it will not only failed to be responsible for the national policy, but also failed to assume sole responsibility for its profits or losses. Therefore, the second path is also reasonable. We suggest that the third path is an option, because the third path can separate policy business from commercial business through market. Some businesses that commercial banks are not willing to bear, but involve national strategic development, those are policy business, need policy banks to support.As the third path is an option to shrink Chinese policy banks size, we need a standard to judge which bank can be commercially reformed. According to policy credit of chinese economic and social development need and policy credit amount of single bank undertakes, this paper designs an index---SDI(subsidy dependent index)----for measuring whether a policy bank can commercially reform. Different to foreign situation, most of chinese policy banks'subsidy is indirect. Direct subsidy data can be directly obtained from financial report; however, indirect subsidy has to calculate by a reasonable method. Chinese policy banks' indirect subsidy contains two parts, the first is bond issued by the national credit guarantee, and the second is national capital not for profit. This paper uses "value compensation method" to measure the subsidy from national credit guarantee, and uses "size reference method" to measure the subsidy from national unprofitable capital. Calculating total subsidy get by CDB, EBC and ADB, it suggests that, CDB and EBC can run not depend on national subsidy, and meet the standard to commercially reform. But ABD undertakes most policy business, run depend on national subsidy heavily, and can not to commercially reform.This paper redefines the connotation of development finance, and considers commercial development finance is the specific direction of chinese policy banks commercially reform to. Although most of related literature regarded development finance as the specific direction of chinese policy banks' reform, these previous research defines development finance contained in the policy financial framework, confusing the relationship between development finance and policy finance. According to the international practice of development finance, we consider development finance is a financial activities that main obtain fund by issuing bond and invest fund by medium-and long-tern credit. Development finance contains commercial development finance and policy development finance. The operation mode of policy development finance is obtaining fund by lower price and credit fund by lower interest; however, the mode of commercial development finance is obtaining fund by more expensive price and credit fund by higher interest lever. China development demand for a large number of medium-and long-term commercial credits, this amount demand can not be met by traditional commercial banks, while CDB and EBC have advantages of supplying medium-and long-term credit. Therefore, commercial development finance is the business pattern of CDB and EBC after their reform. This business pattern is different from traditional commercial banks. The policy business that undertaken by CDB and EBC now can operate by tender, or can be carried on by ADB.This paper analyzes the performance and reason of CDB's biased reform direction, proposes some recommendations about rectifying. It has been clear that the reform direction of CBD is commercial bank in2007, and CBD has become joint-stock company in2008, but apart from setting up a modern financial corporate management structure, CDB's reform did not get any substantive progress in the last five years. The performances of CDB's biased reform direction are:the first is national credit guarantee should stop but not, the second is its developing model is mixed operation. The reasons of CDB's biased reform direction are:(1) Distorting development finance conception, and obscuring its property, made it neither a policy bank nor a commercial bank.(2) Lack of a complete reform framework, there are no specific direction and perfect supervision system. To rectify CDB back to the commercial development bank, the government must design a perfect reform framework, and CDB must strip its policy business, and improve the ability of market pricing.In terms of commercialization reform, the EBC has obvious superiority at the medium-term credit, import and export trade, and risk control. However, it also has weakness, for example, the network is less, the assert size is smaller, the fund cost is higher, and the capital is insufficient and so on. Facing the opportunity of foreign trade growth rapidly, but it is under threat of financing cost increasing after commercial transformation. Based on SWOT strategic analysis reveals that, EBC should insist foreign trade medium-credit to play its profession advantage after commercial transformation. At the same time, in order to overcome its smaller asserts size, higher financing cost and inadequate capital, EBC should expand financing channels, improve pricing ability and increase capital obtained ways. Compared with other banks, EBC faces higher country risk and exchange rate risk. Therefore, after commercial transformation, EBC must strengthen country risk and exchange rate risk control because it has to take these risks. Through a rough estimate, EBC's tier2capital adequacy ratio is about3%, can't meet the minimum regulatory requirement in the short time, so actively strive for national capital injection is the most effective method to improve capital adequacy.The "three rural" development in China still needs a lot of policy funds support, while ADB can't assume this responsibility because of imperfect internal control system and external regulation, so ADB need be reformed from governance structure term in the policy framework. Due to the highly dependent on national subsidies, ADB's enthusiasm is not high, the overall operation efficiency is very low; because of imperfect internal control system and external regulation, many violations have happened in it. The defects in ADB's governance structure make it is inefficient. In order to improve its efficiency, ADB's reform should strengthen its governance performance. ADB must improve internal control system; the ministry of finance should design an appraisal mechanism as investor to evaluate ADB's performance including economic performance and social performance; regulators have to strengthen supervision laws, and monitor ADB's systematic and unsystematic risk.