Personal Financial Services in China - Essay Example

Personal Financial Services in China Contents Contents 1 Introduction of Bank of China 2 Chinese financial background 3 Analysis of Chinese financial industry 4 Analysis of Chinese Personal Financial services 6 The position and Situation of Bank of China in Chinese bank industry and personal financial services industry 7 References 10 Introduction of Bank of China One of the four main publicly owned commercial banks in China is the Bank of China. The bank commenced its financial services in 1912. It is fully owned by the government of China and is the oldest one. Before 1928, it was considered as the central bank of China that controlled the monetary policy of the economy and had the right to print notes and create money. However in 1928, Central Bank of China, another independent body, came into existence that formulated the monetary policy and, thus, the bank solely became a commercial bank (Ji, 2003, p.137). In terms of its operations in the People’s Republic of China, this bank is the second largest commercial bank and in terms of market capitalisation, it is the fifth largest in the world. The bank went public in the year 2006. The bank has its operations all over the world which includes the Americas, Asia Pacific, Europe, Africa as well as the Sub-Saharan countries. The bank has assets of worth RB 6,951.68 billion and is a very large lender to individual and businesses. The bank regularly reports increase in their profit levels as high as 20%. It is the only non central bank of the country that has the license to print notes. The bank has ventured into the business of corporate banking that includes financing for corporate, trade related services, corporate savings services, personal banking including management of personal wealth, providing personal loans as well as credit and debit card facilities. Chinese financial background Throughout the world, China is considered as a pioneer in all kinds of new technologies and modern scientific approaches to business. Thus, it has recorded a very high average growth rate of 10% for the last three decades (Zhu, 2012, p. 115). The economic structure is such that the country follows a socialist model in which unionisation is supported and the people are provided with social benefits (Chao, 1986, p.245). Fair competition takes place where private and public enterprises work in harmony with one another and try to deliver efficient allocation of the resources in the economy. The economy of China has the highest rate of urbanisation and it is also the largest economy of the world. The country started the endeavour to industrialise the economy at the beginning of the 1950s. Before 1978, the growth rate of the economy was 3 % per annum which increased to 8% post 1978 period. There was a reversal in the pattern of accumulation of capital and the productivity growth of the factors of production like labour and technology. The rate of labour participation grew very slowly during this period because the growth rate of population was very low (Schultz, 1953, p.136). The basic model that every business in the people’s republic of China followed was focused on investment. This strategy was taken only to achieve economies of scale and high rate of growth by the government of China (Naughton, 1995, p.45). However, it was not much of a success and led to many unfavourable consequences for the society. The agricultural production in the country also faced a setback because of this reason. In the post 1990 period, the economy of China again started growing at a very high average rate of 10% and it was accompanied by a very high rate of inflation. The Asian financial crisis had a very little impact on the Chinese economy only through the fall in the FDI and reduction in the exports of the country. This is because China had very large reserves and the cash inflows that took place in the country were mainly long term in nature and could not be withdrawn by the investors. But it was not completely unaffected. The rate of unemployment was increasing and the growth rate was slowing down. An important step undertaking during this phase was the attempt to modernise the banking services to make the system more fast and flawless. From the start off the new millennium, the government of China made several changes in the constitution and thereby brought about reforms in the economy. Private property rights were made more relaxed and there were amendments made to curb the high rate of unemployment and to bring about equilibrium in the distribution of income among the citizens. The gross national output of the economy of China started increasing at a rate of more than 13% and the GDP was recorded much greater than a lot of developed economies of the world like Germany. In the present day, China is acknowledged by the whole world as having a much self sufficient economy. The country depends less on the outside countries for the products and produces more in the domestic market. The country also exports to the rest of the world and has been able to achieve a better standard of living. Analysis of Chinese financial industry The Chinese financial services industry mainly comprises of the banking and insurance services. The financial services act as a major accelerator for the economic growth of a country. There is a positive correlation between the growth of the Chinese economy and the growth rate of the financial services sector (Schumpeter, 1934, p.75). The financial services in the present day have become less costly by the incorporation of automation in the operations and thereby reducing the time for the transactions. The banking industry in the People’s Republic of China has shown an overwhelming performance over the years. Despite the recent slowdown in the economy, the banking industry has shown a steady growth. The worth of the assets of all the banks in the economy has been close to 115 trillion Yuan, which has increased by 19% from the previous year. The commercial banks’ yearly net profits have been 1041 billion Yuan taking all together. The net interest income was also as high as 2.15 trillion Yuan as in 2011. Despite these towering performances in the banking sector, the stocks of the banks did not perform satisfactorily in the securities markets. The main reason behind this is the instability in the world economy. The banking sector has witnessed several changes over the past 20 years and the western model of operation is mostly followed in this country of Asia. There are four main players in the public sector banking scenario. They are the Bank of China, the Agricultural Bank of China, the Industrial and Commercial Bank of China and the China Construction Bank. Apart from this, there is the Apex Bank that is the People's Bank of China which is the central Bank of the country and is the main regulatory body (Cheng, 2003, p. 98). This bank implements the monetary policies of the country, namely, the adjustment of the rates of interest, the setting of the liquidity requirements and framing of the policy guidelines for the other public sector undertakings. Apart from the publicly owned banks, the country also has banks set up for specialised financing and support in areas of agriculture, development of small scale industries and trade related activities. There are also smaller banks that are owned by the state. The securities market also faced hard times till it recovered from the state of stagnation and gained momentum. The capital ratios of the firms that are listed in the stock exchanges have shown very stable capital ratios. Analysis of Chinese Personal Financial services The banking services in China have changed on the ground of the changes in the behaviour patterns of the consumers as well as the changes in the ways in which the multinational and domestic organisations run their businesses. There are various features of these changes. The consumers are inclined more towards the local institutions for meeting their needs. Almost 80% of the population would go to the local institutions because the people are apprehensive about the performance of the foreign banks amidst the ongoing financial crisis. This is a more common behaviour of the richer sections of the society in China. The 2008-09 financial crises have destroyed the faith that the people across the world had developed for the foreign banks. The local banks had also lost their loyal customers and the banking relationships of the country became worse. The customers expected the banks to serve their personal needs and the bank employees would be ready to make any extra effort to help their clients. However, the retail banking sector entails within it a lot of prospects for growth. The industry aims at bringing more number of people under the scope of banking services and widening their operations rather than augmenting their profitability (Chen and Shi, 2004, p. 39). However, the customer satisfaction is still their chief aim. The banks have also extended their credit card and debit card services which have become very popular in today’s fast changing world. The insurance services sector of the country witnessed a slowdown in 2012 but has again picked up the pace. The sales channels for this sector have been developed and the Bancassurance model has been adopted to provide faster spread of the insurance services. The people nowadays have become more conscious of their needs for an insurance cover and, hence, they are much informed as compared to their previous generations. The position and Situation of Bank of China in Chinese bank industry and personal financial services industry The Bank of China has made attempts over time to retain its strategic position and to bring a lot of diversity in the financial services. It provides to the customer a variety of services including the basic funding and financing services, the sales of insurance through the Bancassurance model, portfolio and wealth management services, advisory and consultancy services, debit and credit card facilities, foreign exchange facilities and custody services for personal assets. Since there are a number of players in the banking sector, both large public sector and smaller banks, the main objective of the Bank of China is to provide high quality services to the customers so that the customer satisfaction is maintained and the market share is retained. The economic and political scenarios pose a lot of risks to the bank and thus the institution has taken various steps to safeguard against the possible negative influences on the bottom line of the balance sheet of the bank. The economic events taking place around the world have effects on the businesses of the country which has resulted in a fluctuation in the amount of loan sanctions of the bank (Yang and Kuhn, 2012, p. 55). The level of non performance assets of the Bank has also increased due to reduction in the repayment capacity of the individuals of the economy. Over the period of its existence the bank has faced several scenarios of operational risk and market risk which has hampered the credit position of the bank. There have been regulatory monitoring as well from the international BASEL Committee and the bank has to disclose the mandatory norms relating to the risk management process (Zhou, 2007, p.197). Asset Liability Range for the bank widened due to the increase in the deposits and advances. The structure in which the banking business runs also moved to a more optimised position. The asset quality also reduced over time due to the reduction of the non performing assets and the restructuring of the existing loans. In the last few years, Bank of China carried on with the process of strengthening and honing the competitive advantage over the other banks playing in the same market. The bank remained loyal to the procedure of orientation of the specialisation in operations and the centralisation of the management of the bank. The bank achieved integration of the business in the international and the domestic markets and also hastened the advancement of the cross border operations. The capabilities for providing global services have been widened and there has been a spurt in the foreign businesses for the Bank of China. The operating income generated due to diversifying of its business platform resulted in unwavering growth which, in turn, contributed to an increase in a strong presence in the market (Meng, 2009, p.110). The adoption of the centralised clearing system has caused expediency in the way the system works. The bank made some restructuring in the internal management which was done to bring about better efficiency and management of the services and strengthening the basic capabilities of the bank. Proper training and development of the employees contributed to get accustomed with the new e- banking facilities and helped them to communicate it to the customers in a better way. The bank improved the plans for the construction of infrastructure. It would make an endeavour to put into practice Smart-bank Construction Plan which plans to deliver better-quality customer experience. The channel buildings would be strengthened and the intelligence levels would be accentuated (Chiu and Lewis, 2006, p. 26). The core banking system has witnessed a lot of improvement over time merged with the integration of the banking network. Finally, it may be said that the new generation of leadership would bring in modernisation for the sector along with introduction of various reforms in the way the system is executed. Analysts are of the opinion that the banking sector may face a lot of liquidity crisis due to the present economic scenario around the world. The decline in the aggregate demand and the demand for housed would reduce the interest income for the banks as the number of advances would be reduced. The government of China is also in the constant effort to stabilise the economic condition and thereby trying to cut out the economic unrest in the country. The banks are encouraged to serve the rural and unbanked areas so that all the common people have access to credit facilities for financing their housing, automobiles and other smaller necessities. References Chao, K., 1986. Man and Land in Chinese History: An Economic Analysis. Stanford: Stanford University Press. Chen, J. and Shi, H., 2004. Banking and Insurance in the New China: Competition and the Challenge of Accession to the WTO. Massachusetts: Edward Elgar Publishing. Cheng, L., 2003. Banking in Modern China: Entrepreneurs, Professional Managers, and the Development of Chinese Banks, 1897-1937. Cambridge : Cambridge University Press. Chiu, B. and Lewis, M., 2006. Reforming China's State-owned Enterprises and Banks. Massachusetts: Edward Elgar Publishing. Ji, Z., 2003. 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