CONFIDENTIAL #3
10.
As can be seen from the chart, the relationship between PBOC and the specialised banks resembles that between the central bank and the commercial banks in the
western countries. Organisationally, PBOC should be the overall supervisory body responsible for regulating the activities of the specialised banks, but it is not clear to what extent this function is being effectively carried
out in practice. Within the framework of targetted output
and price developments, the PBOC establishes an overall
credit plan, which includes credit provided to the
specialised banks. The implementation of the credit plan relies on regulations which stipulate the deposit base and deposit requirements of the specialized banks, and the rediscount rates. All government accounts are held with
the PBOC, while other accounts may be held with the specialised banks. Specialized banks are required to deposit an amount equivalent to 10% of their total deposits with the PBOC. Coupled with the government account deposits, this requirement ensures that the PBOC has direct control over about 30% of the total deposit base. Specialised banks can supplement their loanable funds by borrowing from the PBOC. The interest rates on
such borrowings are 4.7% for lending up to the limit set in the state credit plan, and 5.04% for temporary
borrowings in excess of that limit. These interest rates are higher than the 4.3% annual return specialised banks are able to receive from their deposits with the PBOC.
This interest rate differential is intended to discourage
specialised banks from borrowing excessively from the PBOC.
11.
Besides re-structuring, the main thrust of the
reform of China's banking sector since 1979 has been to
substitute bank lending for direct financing out of the
state budget, and to give the banks greater autonomy in
deciding to whom loans may be granted, in what amount and
for what period. The credit-worthiness of projects now
CONFIDENTIAL #2
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