I. The current situation of the Chinese policy financial institutions

The state decided to set up China Import & Export Bank, China Agricultural Development Bank and National Development Bank in 1994 as a major move to reform the financial system. These banks are charged with the responsibilities of providing policy-oriented loans for the import and export of complete sets of electromechanical equipment, for grain and oil storage, the purchase of major farm produce and byproducts, and agricultural development, and loans and discount business for financing the key state projects. At the same time, the policy-oriented functions of the former four state-owned banks were separated to sever their association between basic currency with policies and to create conditions to speed up their commercialization and establish the independent status of the central bank. In the past four years, the three policy banks witnessed rapid development in their business and played an important role in implementing state industrial policies, backing regional economic development and stabilizing the agricultural sector. They also helped the development of China’s financial sector and the reform of financial system.

Table 1 Credit receipts and Payments of Policy Banks (in RMB 100 million yuan)

	National Development Bank	Import & Export Bank	Agricultur　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　al Development Bank	Total	Percentage in All Financial Institutions
Sources of Fund	3637.19	301.65	7480.88	11419.72	11.5%
Among which: Deposits	7.18	0.17	155.10	162.45	0.18%
Financial: Bonds	3261.96	262.26	360.99	3855.21	98.5%
Re-loan of the People’s Bank			6759.66	6759.66	49.2%
Owners’Equity	472.39	26.95	128.17	627.51	14.6%
All loans	3580.17	245.50	7165.12	10990.78	14.2%
Among which: Short-term Loans		5.14	7074.77	7079.91	12.7%
Medium and Long-term loans	3566.70	232.29	90.35	3889.34	24.1%

Source: “Monthly Report of Monetary Credit Receipt and Payment of Chinese Financial Institutions”, May 1998

According to the above table, less than four years after their founding, the policy financial institutions had occupied an important position in the financial system. On the credi market in particular, they accounted for 12.7 percent of the short-term loan market shares and 24.1 percent of the medium and long-term loan market shares.

The three banks also played an important role in their respective domains if viewed form the results of their business operations. Since its founding, The National Development Bank had provided funds for over 3,000 projects, with key projects accounting for 70 percent of all the important projects. The banks effectively supported the implementation of the state industrial policies and the regional development strategy and played and active role in the realignment of economic structuring. China Import & Export Bank is the state policy financial institution to bolster the export of such capital good as electromechanical products and complete sets of equipment. It made full use of such export financing methods such as export credit, export credit insurance and external guarantee to support the export of large quantities of high-tech and high value-added electron mechanical and products and equipment with good economic result and ,which have broad export prospect on the international market and can bring in a large amount of foreign exchange at low production cost. Up to the end of 1997, it approved export seller’s credit totaling over RMB 40 billion yuan, buyer’s credit of 93.77 million U.S. dollars and undertook export credit insurance of 1.116 billion U.S. dollars. China Agricultural Development Bank is mainly charged with the task to ensure the fund for purchasing farm produce and byproducts. It effectively pursued the state policy in the purchase and sell of grains and oil products, providing the guarantee for stabilizing agricultural production and raising peasants’ income through the elimination of IOY in the purchasing. The table shows the business performance of the three banks.

II. Problems confronting China’s policy financial institutions After their founding, these policd banks did play a prominent role in implementing state industrial policies and promoting economic development and they themselves developed rapidly. However, with the present situation in view, they are confronting increasingly outstanding problems which show in the following aspects.

Table 2 Assets, Liabilities, Losses and Gains of the Policy Banks in 1997

(in 100 million RMB yuan)

Items	National Development Bank	Import & Export Bank	Agricultural Development Bank
Total assets	3811.48	313.17	9233.00
Total liabilities	3354.43	278.28	9111.2
Owner equity	457.04	34.89	121.80
Of Which: Paid-in Capital	442.33	33.19	139.96
Operating income	3720.59	25.83	654.87
Operating expenses	294.30	24.75	717.76
Net profit	8.16	0.71	-25.3

Source: 1997 Annual Reports of National Development Bank, China Import & Export Bank and Agricultural Development Bank

1.Uncertain legal status and unclear functions

Viewed from their nature policy-oriented banks are set up for a special purpose by the government to implement state industrial policies and the regional development strategies. This is the base point in the relations between the banks and the government. But in practice, such a nature has not been recognized by law and their functions and status and relations with the government are far from clear. Up to now, there exists neither law on the establishment of the three banks, nor any special regulations on the administration of them. Such a situation not only does not conform to the prevailing international practice, and will affect the business guideline, objectives and internal management mechanism of the banks and their relations with the ministries of the central government.

2. Inborn deficiency in system design

The deficiency manifests in the followings:

First, the functions of these banks are in distortion. Policy banks assume both financial and monetary characters, but the two characters do not stand side by side and on an equal basis, their prominent and foremost character should be their financial character. Otherwise, the necessary precondition for setting up the banks would not exist. Their monetary character shall serve their financial purpose. The reason why the policy banks must operate as a bank is because their major purpose is to ensure the recovery and turnover of their fund to increase the efficiency in using fund. Now, at the decision making level or the management level, or even inside the policy banks, the relation between the primary and secondary characters are not clear. The two characters are often put on the same par with each other and over emphasis is even laid on the monetary character. As the result, the tendency to weaken the policy nature and reinforce the commercial nature of the policy banks appeared in practical operation, and their interest rates on loans are basically at par with that of the commercial banks. The business scope of the policy banks comes into competition with the commercial banks, thus hampering the full play of the superiority and functions of the policy banks. The management system the policy banks is also fallen into a wrong path, for they just follow the management system as that of the commercial banks.

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