Privatization In China

The term privatization was believed to be coined in 1936, first appearing in a chronicle published in “The Economist”. It did not become popular until 1980s when most European countries began their privatization efforts. With the fall of USSR and other socialist countries in the early 1990s, the tide of privatization has reached a lot of developing countries. As an example, for four Eastern European countries (namely Poland, Hungary, Czech and Slovak) in Eastern Europe, “the average share of national GDP attributable to the private sector increased from 20% to more than 50% over the three year period 1990-1993.” [1]

As a country trying to reforming its economic system into a capitalistic one and also being the largest one of the only four surviving communist countries (China, Cuba, North Korea and Vietnam), China also noticed this global trend of privatization and has started to plan its own privatization procedures. Target sectors include utility, telecommunication, railway, post system, banking and various others, which were previously controlled by special committees of the government under a planning economy. After more than 20 years of reforms, most of these sectors have seen a shift from governmental committees to state-owned companies. Therefore, the Chinese government is naturally seeking for the next step: pushing those companies further into the “free market” and relieving itself from the operational and management duties, only keeping the governance responsibilities. This was what they did later in the telecommunication companies by listing them in Hong Kong.

In recent years, the banking sector has become the focus. It is interesting to note that the next area to which the government may shift is its post system. With the recent emergence of UPS and FedEx in China’s domestic parcel service market, discussions of a possible reform of China’s post system have frequently appeared in various media or forums. As China has been quickly expanding its economy for almost 20 years, it is crucial that a healthy and powerful financial market be established in China to sustain its growth. Besides trying to establish a security market from scratch, the Chinese government also felt it was necessary to reform its long-existing commercial banks, which had long been part of this country’s government since it was established in 1949.


One of the recent news that hit many financial analysts in Wall Street was the Initial Public Offering (“IPO”) of the Industrial and Commercial Bank of China (“ICBC”), setting the record for the amount of money it raised among all IPOs ever made over the world. The IPO of ICBC was actually one of the steps the Chinese government had taken to privatize (or at least partially privatize) its four major commercial banks: ICBC, China Construction Bank (“CCB”), Bank of China (“BoC”) and Agriculture Bank of China (“ABoC”). CCB and BoC have already performed IPOs during the last 18 months and the IPO of ABoC is scheduled at 2007. Table 1.1 shows the scale of these four largest Chinese commercial banks and Table 1.2 shows the comparison of ICBC with Bank of America (“BoA”), one of US’s major commercial banks. From these figures, we can see that these banks are “noteworthy for scale alone,” like ICBC, which was “established in 1984 as China began its capitalist turn, boasts $724 billion in deposits, 355,000 employees and 18,038 branches, more than three times as many as Bank of America, the United States’ largest bank.”[2]

Table 1.1 Assets and deposits of China’s big four (in billions dollars, as of 2005[3])





























Table 1.2 Comparisons of ICBC with BoA (in billions dollars, as of 2005[4])






















Chinese banking system had been operating under China’s planning economy for a long time. This historic system was no longer working after China turned itself to market economy at the end of 1970’s. However, the old system had left with the Chinese government a huge amount of non-performing loans (NPL or “bad ” loans) and a seriously corrupted management (especially for high bank officials). They had become two most urgent problems facing the Chinese banking system. Back in the old days, Chinese banks offered loans solely based on political decisions of the government and there were no mechanisms for risk management or credit policy. Without any evaluation or restriction on the creditworthiness of borrowers, it was not surprising that Chinese commercial banks were having tremendous bad loans, which became apparently very serious in the early 1990s. This finally led the Chinese government to consider taking reforms in its banking industry. Based on an article in the year of 2003, “Ratings agency Standard and Poor's said yesterday it has cut its estimate on the non-performing loan (NPL) ratio for Chinese banks to 44 to 45 percent from 50 percent. It also raised its estimate on NPL recovery rate to 20 percent from 15 percent based on recent observations of Chinese banks and asset management companies.”[5]. These figures have been decreasing since China started banking reforms. In 2004, “China's major banking institutions slashed the ratio of non-performing loans (NPLs) by 5.32 percentage points to 17.8 percent last year, according to a press conference Thursday.” [6]. It was reported that “Chinese banks have seen their average Non-Performing Loan (NPL) ratio drop to single figures for the first time, reports the banking watchdog. In their latest report, the China Banking Regulatory Commission (CBRC) revealed the banks' NPL ratio has shrunk 4.2 percentage points in 2005 to 8.6 percent.”[7]


Although these numbers looked promising, the prospect of Chinese banking industry was still dim at that time. As pointed by Professor Victor Shih from Northwestern University [8], in those years “Chinese banks actually had a net increase in NPL amount, although the ratio fell in 2004. The only reason official figures report a drop in both NPL ratio and absolute NPL amount is that 50 billion USD was transferred from the foreign exchange reserve to the BOC and CCB to help them write-off NPLs. Without the write-off, China's NPL would stand at 2.18 trillion RMB, which is "just" 16% of GDP. China has had high growth this year and now has a GDP of some 13.65 trillion RMB”. This was not the full story of the figure yet. Moreover, people still questioned the accuracy of the number. As pointed out by Professor Victor Shih again, “this NPL figure only includes the 16 largest banks in China and does not include NPLs in the smaller city commercial banks and all of the rural credit cooperative” and “the other issue is false reporting by branch banks. Because of intense pressure to reduce NPL ratio, many branch banks have falsified NPL ratios or have hid them by rolling over loans. No one really knows the magnitude of this problem, but the problem might well add another 10% to China's NPL ratio.” [9] It was very clear that simply more injecting money to write off bad assets would not help very much.


The second major reason for Chinese banking industry reforms is the commitments made by the Chinese government to open its domestic banking market to foreign banks at the end of 2006 under the agreement China made when joining the WTO. Before that agreed date, foreign banks might pose very little threat to Chinese banks as it was reported in[10] that “At the end of year 2003, foreign equity stakes in Chinese banking institutions were just $500 million or 0.3 percent of total banking capital. Foreign banks held only about 1 percent of total banking assets. By contrast, China’s five largest SBCs (State Controlled Bank) … control over 60 percent of the country’s loans and deposits.” However, the Chinese government feared that without further reforms, it would be impossible for Chinese commercial banks to compete with foreign banks. As Liu Mingkang, chairman and president of the Bank of China, said in 2001 “In five to 10 years, Chinese banks may be faced with problems, such as the loss of clients and brain drain, as a result of foreign banks' flooding into China.”[11] Thus, turning those major commercial banks that had been heavily burdened by NPL to more efficient and profitable banks that can operate under market economy becomes a necessity.


[1] David Donaldson & Dileep Wagle, Lessons of Experience No. 1: Privatization: Principles and Practice (1995), 


[2] David J. Lynch, Chinese bank IPO expected to raise $19 billion, USA Today Oct. 5, 2006.

[3] Id.

[4] Id.

[5] S&P cuts estimate of Chinese NPL ratio by 5 percent,

[6] NPL Ratio of Chinese Banks Down to 17.8%, Xinhua News Agency March 11, 2004, available at

[7]Chinese banks' NPL ratio falls to single figures, Xinhua News Agency Jan. 28, 2006, available at

[8] Victor Shih, Elite Chinese Politics and Political Economy, available at (last modified Feb., 2005)

[9] Id.

[10] John Chan, Foreign Capital Pours into China’s Banks, Oct. 8, 2005, available at

[11] Chinese Banks Urged to Prepare for Post-WTO Competition, People's Daily, May 10, 2005, available at