Congressional Research Service, "China's Banking System: Issues for Congress," February 20, 2012

Summary
China’s banking system has been gradually transformed from a centralized, government-owned and government-controlled provider of loans into an increasingly competitive market in which different types of banks, including several U.S. banks, strive to provide a variety of financial services. Only three banks in China remain fully government-owned; most banks have been transformed into mixed ownership entities in which the central or local government may or may not be a major equity holder in the bank.  

The main goal of China’s financial reforms has been to make its banks more commercially driven in their operations. However, China’s central government continues to wield significant influence over the operations of many Chinese banks, primarily through the activities of the People’s Bank of China (PBOC), the China Banking Regulatory Commission (CBRC), and the Ministry of Finance (MOF). In addition, local government officials often attempt to influence the operations of Chinese banks.

Despite the financial reforms, allegations of various forms of unfair or inappropriate competition have been leveled against China’s current banking system. Some observers maintain that China’s banks remain under government-control, and that the government is using the banks to provide inappropriate subsidies and assistance to selected Chinese companies. Others claim that Chinese banks are being afforded preferential treatment by the Chinese government, given them an unfair competitive advantage over foreign banks trying to enter China’s financial markets.  

While some question what they characterize as unfair competition in China’s banking sector, others are concerned that many of China’s banks may be insolvent and that China may experience a financial crisis. According to these commentators, efforts to resolve a serious accumulation of non-performing loans (NPLs) only disguised the problem. In addition, China’s NPL situation may have been worsened by its November 2008 stimulus program and the emergence of “local government funding platforms” that generated an estimated $1.7 trillion in local government debt. A financial crisis in the city of Wenzhou revealed the previously underappreciated risk associated with China’s “underground” banking activities. Some analysts fear that a sharp decline in China’s property values could precipitate a financial crisis that could effect the U.S. economy.

China’s banking system raises two key issues that may be of interest to Congress. First, Congress may choose to examine allegations of inappropriate bank subsidies to major Chinese companies, particularly state-owned enterprises (SOEs). Second, under its WTO accession agreement, China was to open its domestic financial markets to foreign banks. Congress may consider reviewing China’s compliance with the WTO agreement and press the Obama Administration to raise the issue with the Chinese government.  

This report will be updated as circumstances warrant.

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