Hu Kaihong (host):

Ladies and gentlemen, welcome to today’s policy briefing. The recent executive meeting of the State Council discussed clearing up non-administrative review and approval items of State Council departments as well as further improvement of financial services by the banking sector. Today we are very glad to have Mr Li Zhangze, who serves as the spokesman for the team working on reforms to help the streamlining and Mr Zhou Mubing, vice-chairman of the China Banking Regulatory Commission, to give us more information on those issues.

Mr Li, please.

Li Zhangze:

In August 2004, the State Council issued a notice to keep some non-administrative review and approval items. It used the words “non-administrative review and approval” and most of the items that remained were government internal reviews and approvals.

However, as time went on, some government departments set up a number of non-administrative review and approval items by using department regulations or official documents. Two characteristics of these new items were apparent: first, the basis for their establishment is determined by a relatively low-level government body; second, the process is not strictly standardized. More often than not, a department kept the process closed when issuing an official document for a non-administrative review or approval.

Under such circumstances, non-administrative reviews and approvals gradually became a “gray zone”, and a great number of items came from these “gray zones’. These items did not comply with the Administrative License Law but have the nature of an administrative license.

Now, everybody could understand that non-administrative reviews and approvals do not have clear basis nor a strict process. Their existence will lead to improper administrative behavior or even become a hotbed of corruption. Thus, in order to bring all government work in line with the rule of law, the State Council released the Circular on Clearing up Non-Administrative Review and Approval Items on April 2014 and decided to clear them up, cancel and adjust whenever necessary, and remove the whole category of “non-administrative license review and approval”.

Hu Kaihong (host):

Thank you, Mr Li. Now let’s give the floor to Chairman Zhou.

Zhou Mubing:

Good morning, ladies and gentlemen. It’s a pleasure to share with you the performance of the banking industry and the plan to improve its performance in the next phase.

Since the start of this year, the banking industry has been performing steadily with rapid credit growth. The industry has contributed to the steady development of the economy in the first quarter of the year.

The industry has increased support to the real economy. By the end of the first quarter, China’s outstanding loans reached 85.9 trillion yuan, an increase of 14 percent from the same period last year. The country’s new loans in the first quarter reached 3.68 trillion yuan, 601.8 billion yuan more than a year ago.

In the meantime, the banking industry has accelerated loan recovery through various ways, such as expediting the disposal of bad assets, transferring credit assets and securitizing assets.

Also, the industry has lent strong support to key areas and weak links of the country’s economy. Following strategic plans laid out by the government, it has increased loans to key projects, strengthened support to energy-saving, technological innovation and other strategic and emerging industries, and has been developing an inclusive financial system.

Zhou Mubing:

The China Banking Regulatory Commission issued specific guidelines for this year to improve financial services for small and micro enterprises. It asked banks to increase the amount of loans to SMEs this year, and that the growth of loans to small and micro enterprises doesn’t fall below the average growth of total loans, the number of SMEs getting loans don’t fall below the number a year ago, and the proportion of SMEs obtaining a loan against all eligible SMEs which applied for a loan doesn’t drop below that of last year.

By the end of the first quarter, the amount of outstanding loans to SMEs reached 21.4 trillion yuan, an increase of 16.8 percent from the same period last year. Also, 11.2907 million SMEs obtained loans, the growth of loans to SMEs was 3.48 percentage points more than the growth of other loans, and 90.18 percent of eligible SMEs which applied for a loan obtained one, which was 4.08 percentage points more than the same period last year. The banks’ performance in the first quarter met the targets set by the CBRC.

The banking industry has also been asked to deepen financial reform and extend greater support to rural areas.

By the end of the first quarter, the industry had lent 24.6 trillion yuan to clients in rural areas, up by 12.9 percent from the same period last year. Lending to affordable-housing projects was 1.4 trillion, which was 63.2 percent more than the same period last year.

Zhou Mubing:

The banking authorities are also streamlining and delegating their powers and improving their abilities to supervise business behavior, thus encouraging the market to realize its potential. They have published revision drafts of five regulatory documents for public opinion. According to the revision, more administrative approval items will be canceled and more administrative powers will be delegated. How the banking authorities deal with their administrative approval powers will be further regulated.

Risks in the banking industry have remained under control. By the end of the first quarter, the bad debt rate of commercial banks was 1.39 percent, the capital adequacy ratio of commercial banks was 13.1 percent, which was 1 percentage point more than the same period last year. There was 2.1 trillion yuan in the commercial banks’ loan loss reserves.

The plan for the industry is:

First, the industry will work to both maintain the country’s economic growth and help it restructure its economy.

Second, it will lend greater support to key areas and weak links of the economy, such as major transport and clean-energy projects.

Third, it will make the most of both new loans and credit assets.

Fourth, it will work to make it easier and less expensive for companies to obtain loans.

Now I would like to answer your questions.

China Daily:

My question is for Mr Zhou from the CBRC. I understand that there are some instances of illegal fee collection in the banking industry. Some banks collect fees without providing services, some force customers to pay more than the lending rate under false pretenses or link fees to sales of wealth management products. My question is what will the CBRC do next to clean up illegal fee collection and if these measures can ease the borrowing difficulties of companies? Thanks.

Zhou Mubing:

Thank you for the question. It is a good question, to the point, and it targets the concern of the leadership, the public and our commission. May I take a bit more time to elaborate on the issue.

First, commercial banks, as other companies in the service industry, provide services and charge fees for them. It is normal behavior in the market economy. It is normal because banks are quite similar to rice sellers, shopping malls or other vendors selling clothes and grains, who, also in the service sector, survive by providing paid services. Commercial banks should also observe the rules of a market economy — that charges must be standard and not illegal. How do we conclude if the charges are arbitrary or not? Here are four principles for your reference.

Principle One, to follow the guidelines. The CBRC and the NDRC (National Development and Reform Commission) issued the Measures for the Management of the Service Prices of Commercial Banks, a regulation that widely applies to basic banking services that are often used by customers and have a strong connection with national economic development and people’s lives. Except for services whose prices are fixed by the government, the prices of other banking services are up to the market. Government-fixed prices of banking services are decided according to the Price Law by the CBRC and the NDRC, while market-oriented prices are decided by different banks, although they are obliged to publicize those prices at their branches. One can launch a complaint against a bank’s branch office if it does not show the price list of its services.

Principle Two, transparency. For government-fixed prices, the NDRC and the CBRC have issued price categories. The NDRC, as the price-setting government agency in China, is responsible for setting the standards of charges and it has lowered the pricing standard for part of banking services. For market-oriented prices, banks must clearly mark the prices of their services based on their cost. These prices have to be transparent and not subject to arbitrary change. The right to know and the customers’ right of choice must be ensured.

Principle Three, the price must accord with the service. The quality of the service must in accordance with their fees. This principle means that banks must not charge fees without providing services or charge more than they should.

Principle Four, the fee amount should be in accordance with the financial capability of the customer. Charges for banking services must accord with the reality of the customer. The same service may bring different benefits to VIP customers and small and micro enterprises. The price for small and micro enterprises can be lowered a bit.

These four principles are for your reference.

Zhou Mubing:

The public pays close attention to banking charges, since all of us, including myself, are bank customers. The concern of the public is the concern of the State Council’s leaders. Here are the measures already taken by the CBRC.

The CBRC has set strict rules to regulate banking service charges to help banks bear their share of social responsibility and protect the rights of customers.

First, we have issued legal documents for overall supervision. The CBRC and the NDRC issued the Measures for the Management of the Service Prices of Commercial Banks in February 2014, which clarifies the procedure to set prices and the responsibility to release information, strengthen internal management controls and external supervision as well as social supervision to ensure the interests of customers and their right to know and the right to choose.

Second, we have urged the banks to lower charges. We require commercial banks to cut or exempt charges for basic services to ensure the public’s right to enjoy such services. We also require them not to charge extra fees except on the lending rate for small and micro enterprises. We require them to lower the handling fee for credit card payments to reduce the financial burden on business owners and facilitate credit card spending. I would like to particularly note that by the end of 2014, the pricing list of the 21 major banks in China was condensed from 305 in 2011 to 117.

Third, we have conducted targeted inspections. Since 2012, the CBRC has continued to carry out rectification efforts on illegal charges and requires banks to publicize their price lists and set up mechanisms to handle complaints.

The CBRC dispatched 18 inspection groups during 2012 and 2013 to a total of 224 banking headquarters and 319 branches to carry out both open and secret inspections. We found at least 104 problems in these places and ordered them to solve the problems within a stipulated period. We have also punished people related to 62 law-breaking issues found in these places. Since October last year, the CBRC started targeted inspections in 10 provincial areas and at the end of last year the CBRC initiated an inspection inside its own organization. With all these efforts, banks are improving their paid services and complaint handling mechanisms, although there are still some banking organizations providing services that do not meet the standard. Problems mentioned by the reporter, such as collecting fees tied with sales of wealth management products, or collecting fees without providing services, also exist.

Zhou Mubing:

Recently, Agricultural Bank of China, China Construction Bank and Postal Savings Bank of China issued a price adjustment notice for IC (integrated circuit) cards. Agricultural Bank of China has made a commitment to stop collecting fees for some business-related services from May 1. The public will see these banks gradually lower charges and the CBRC will step up the efforts to promote banking services.

First, we will monitor banks to ensure they charge reasonable fees that cover their cost, and fit the standard of their services. In that regard, the headquarters of each bank has issued relevant regulations but sometimes grassroots bank branches collect charges to achieve their performance goals. So what we are doing now is to solve the problem by changing their evaluation system.

Second, we will continue to regulate these banks according to standing rules. We will clean up unnecessary intermediary agencies to reduce the borrowing costs of companies.

Third, we will make good use of the complaint handling system to penalize banks for illegal or arbitrary charges. For those who charge without providing services, we will impose harsh penalties. For those who overcharge, we will ask for an immediate stop such activity. For those charges which cover the cost of banking, we will ask them to control the price. For those charges collected under false pretenses, we will scrap them without hesitation.

We are ready to accept public supervision, especially from the media, on illegal and arbitrary charges of banks. The government watchdog will follow the clues and trace them to the end. Thank you.

Reuters:

Mr Zhou, you’ve mentioned that loans to medium-sized enterprises (MSEs) increased 17 percent year-on-year and agro-related loans saw a year-on-year increase of 13 percent. What do you think of MSEs and agro-related clients compared with traditional bank clients such as large enterprises in terms of loan quality and credit? Does the China Banking Regulatory Commission have any statistics about the non-performing loan ratio concerning MSE loans and agro-related ones? Also, are you worried that the banks’ asset quality will be affected by such loans?

Zhou Mubing:

Your question is very professional. I’m very glad to answer it. First of all, I’d like to say that it is true that the non-performing loan ratio of MSE loans is higher than the average for other kinds of loans. The situation is the same internationally. Statistics in March showed that the non-performing loan ratio of MSE loans is 0.5% higher than that of other loans. We believe the risk is controllable now since we have prepared adequate capital for non-performing loans and are fully capable to address possible risks. Meanwhile, we have required commercial banks to draw up accountability regulations concerning MSE loans. As long as the bank has performed according to strict regulations, it can be exempted of liability if risk occurs.

China News Service:

Mr Li, you’ve just mentioned some cleanup work about non-administrative approvals. My question is, what’s the impact of such work on the government’s efforts to regulate powers and improve administrative efficiency? Thank you.

Li Zhangze:

You’ve raised a good question that we all care about. You know that the central government has put forward a series of major measures to streamline administration and delegate power. These measures have greatly stimulated the market’s vitality and boosted economic and social development. Over the two years, we have constantly deepened reforms on administrative approval systems. The State Council has cancelled or delegated over one third of approval items.

As I have said, most of the existing approval items are non-administrative ones, which are not based on laws or regulations. To overhaul non-administrative approval items has become a key task of reforms.

The Party Central Committee and the State Council have attached great importance to cleaning up non-administrative approvals. Last year, the State Council issued a circular requiring an overhaul of non-administrative approvals among all departments in one year.

At an executive meeting of the State Council on May 6, Premier Li Keqiang urged efforts to abolish unnecessary non-administrative approvals.

The government should behave in a fair manner, and there should be no vagueness concerning the boundaries of government duties, the Premier said.

The meeting reached consensus concerning how to deal with the remaining 244 non-administrative approval items. From now on, non-administrative approval has become a thing of the past.

If you ask what’s the meaning for economic and social development or what’s the influence on administration according to law I will say that: first, the cleanup of non-administrative approvals is a major measure of deepening reforms of administrative approval. It will help to alleviate burdens on enterprises and the public. It is also conducive to releasing the potential of private investment and stimulating society’s vitality, thus removing barriers for mass entrepreneurship and innovation.

Second, it is significant for promoting administration according to law and the transformation of government’s functions. An important reason that administrative approval reform fluctuated is that some ministries have set up some non-administrative approvals by themselves. We’ve been determined to stop this. By doing so, the government is putting power in a cage of regulation as President Xi Jinping has called for.

Third, this work will bring benefits to enterprises and the public. The cleanup of non-administrative approvals might not directly influence every individual. However, we should follow people’s wishes in exercising governance, and powers should not be held without good reason.

China Central Television:

Mr Li, in the category of non-administrative approvals, there are items such as the construction of university science and technology zones, water conservancy tourism, opening ports to the public and preferential tax policy on the development of the western regions. When handling these non-administrative approvals, how do you categorize them? Thank you.

Li Zhangze:

You raised a professional question. I have already mentioned several principles when dealing with non-administrative approvals. In the list of State Council administrative approval items published on the official website of State Commission Office of Public Sectors Reform, there are over 300 non-administrative approval items. When we were clearing up these items, we constantly communicated with related ministries and listened to advice from experts and scholars. We examined every item together with the State Council’s Legislative Affairs Office.

It was announced at the State Council executive meeting this week, that there are four ways to deal with the remaining 244 items. The first is to cancel them. Market vitality will be boosted once they are canceled. The 49 items involved will not be approved by ministries and cannot be transformed into other patterns for approval.

Second is to change some into administrative permits. Providing those items meet specific requirements and are in accordance with the regulations of administrative approval, they can go through the new administrative approval process by law and regulations. This category has 20 items.

Third is to turn some into governmental administrative items. These concern local governments, their departments and central government institutions and need stronger regulated management if they are truly necessary to keep. There are over 80 items in the category.

Fourth is to transform some into those that need reform and regulation. For example, some of the items are supported by policies and funds, they do not belong to governmental management, neither do they belong to the administrative permit category. The will be further researched, cleared up and regulated along with the promotion of administration streamline and administration by law.

The specific ways to handle this issue was discussed at the State Council executive meeting. Thank you.

Reuters:

Chairman Zhou, local-government bond financing has become a hot topic in local media. Will local commercial banks purchase bonds issued by local governments? If purchased, would the quality of bank assets be affected?

Zhou Mubing:

Are you talking about the 1-trillion yuan local-government bonds approved by the Ministry of Finance? In fact, it is great to substitute bank loans with government-issued bonds. There are several advantages to bond issues: reducing overall financial risks; enhancing control of overall government debt; strengthening public supervision; increasing transparency of local debt; boosting liquidity of government assets; and strengthening banks’ risk management.

NHK:

It is possible that the control over deposit interest rates will be fully lifted within the year. In that case, what new services will financial institutions consider providing?

Zhou Mubin:

You raised a very professional and targeted question. The deposit insurance program was launched on May 1. We will further promote the interest rate marketization. Currently our loan interest rate is open but we still keep a ceiling on deposit interest rates which will be gradually lifted. I think interest rate marketization is a trend and a necessary measure to deepen market reform.

It is both good and bad news for banks. It is good news because after the liberalization of deposit and loan rates, the competition in the market will be better. Therefore the banks have more autonomy in allocating their assets and liabilities and make operational decisions according to market demands. And those banks which better control risks and operate well tend to have greater potential for profits. And they will surely provide better services for the public.

I think the trend should be like this. Liberalization of interest rates is good for competition. Who will get benefits from competition? Surely it is the consumers, including you guys and me.

But what worries me is some of the small banks, especially small rural banks. They might face great pressure due to their slow adaptation to market demands.

Full competition among banks is an inevitable tendency in market economic development and will help boost market vitality. Relevant authorities should take positive measures to promote market vitality and increase competition and meanwhile effectively prevent risks.

Hu Kaihong (host):

That is all for today’s policy briefing. Thank you.