HONG KONG -- To understand where reform might take Chinese banking, it is necessary to know where the industry has been.
For most of the past half century, the People's Bank of China was literally all you needed to know about banking in China. It did everything from accepting and distributing deposits to printing money.
The socialist view of banking as a vehicle to collect liquidity and redistribute it to government projects was well served by the bank. But as Supreme Leader Deng Xiao Ping's vision of a new, more economically vital China evolved, plans were made to expand and refine the system.
Functions Divided
The first real signs of change came in 1984, when the government broke the monolithic system into two tiers.
The People's Bank took its first baby steps toward becoming a true central bank. The other functions were split among four state-owned "specialized banks."
Today, four gigantic banks dominate the industry, with combined total assets of nearly $800 billion. Much of their business comes from government-mandated "policy loans." But several of the banks are active in areas such as derivatives and mortgage lending.
One, the foreign-exchange-oriented Bank of China, had assets of $278 billion in 1992. Another, the Agricultural Bank of China, boasts 56,000 branches. The $247 billion-asset Industrial and Commercial Bank of China, or ICBC, has 520,000 employees.
In 1992, ICBC had an astounding return on equity of 29.7%, with a return on assets of 1.13%; Bank of China's figures, respectively, were 22.4% and 0.77%.
Technically Insolvent
"These guys are powerhouses. They are enormous," says Ronald Enestrom, regional head for First Chicago Corp. "And you can't quarrel with those numbers. Would that we could do so well."
But numbers can be deceiving. According to several leading economists, all four banks are technically insolvent - their bottom lines hit hard by huge policy loan portfolios and a loan-to-deposit ratio of over 100%.
The government orders its banks to make policy loans to state-run businesses, such as an old coal mine, that have little hope of turning a profit. Banks then must carry the bad debt on their books.
"Technically, they are bankrupt," says Tsang Shu-ki, a senior lecturer and banking expert at Hong Kong Baptist College. "But they are 100% state owned, so politically the state won't let them go under."
Printing Money
Instead, the government has been printing money and running deficits, helping to fuel an inflation rate that has soared above 30% this year in major cities.
The changes implemented over the past decade have focused on introducing both competition and specialization into the sector.
Instead, most of the banks have carved out geographic or industry niches, and appear to have gentlemen's agreements not to grab each other's turf.
"They all do the same exact thing within their own spheres," Mr, Tsang says. "ICBC wouldn't dream of going to the countryside to lend to farmers. It's bureaucratic respect. You don't want to step on the toes of your colleagues."
To help spur greater competition, nine other banks have been created over the past decade.
Owned by Governments
Two, CITIC Industrial Bank and the Bank of Communications, are considered "universal banks," and can do business pretty much when and where they please. The other seven are small regional banks, limited mostly to the fast-growing southern coastal areas.
None of those banks is "private," but most are owned by shareholders -- largely state and local entities. All are minuscule compared with their state-owned counterparts.
While changes have come slowly, American bankers point to the rapid evolution of stock and bond markets, and the recent emergence of such consumer banking staples as home mortgages, as evidence that inertia in the banking industry can be overcome.
But the fact that today there are still only 13 banks in a country of 1.1 billion people is one measure of the distance the reforms must travel.
