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Sample Research Proposal on The Hhistory of the Chinese Banking System


The research study will focus on the problems and challenges for banking in China upon entering the World Trade Organization. There has to be an empirical research to support valid evidences and findings allocated for the gathering of research information and evidences. The study will look at the possible issues and challenges within China – their banking system process, its useful aspects and implications as a whole. The literature review for this banking proposal will provide an in-depth detail of certain important points that will serve the purpose and goal for the research. Thus, specific questions are needed for research guidance and organization such as: How will the banking industry in China provide competence and value upon entering the WTO? What are the ways in which the banking system of the country surpass any problems and challenges and relate to the present situation faced by the banks of China? For the methodology, there is the use of survey questionnaire that could be unstructured type as well as case studies that will give ample support to the focus of research. Moreover, descriptive methodology is applicable as there are certain useful materials to be included to determine certain problems and challenges for the banking system. Aside, assessment and evaluation of data in its research findings is needed to realize the value of research and its related studies.


China's Banking System

It was mentioned that the history of the Chinese banking system has been plaid as nationalization and consolidation of the country's banks received the highest priority in the earliest years of the People's Republic and banking was the first sector to be socialized. Recovery after Chinese civil war, the People's Bank of China moved very effectively to halt raging inflation and bring the nation's finances under central control as the banking organization was modified in order to suit changing conditions and new policies (Ketizu, 2000; Li Xuan, 2000; Li et al, 2000). The banking system was centralized early on under the Ministry of Finance, which exercised firm control over financial services and the money supply. During the 1980s the banking system was expanded and diversified to meet the needs of the reform program, and the scale of banking activity rose sharply. New budgetary procedures required state enterprises to remit to the state only a tax on income and to seek investment funds in the form of bank loans. (Feng, et al, 2000; Ketizu, 2000)



Moreover, money was disbursed in stages as a project progressed. The reform policy shifted the main source of investment funding from the government budget to bank loans and increased the responsibility and activities of the People's Construction Bank. Urban credit cooperatives were new addition to the banking system when they first began widespread operations. (Wang, 2000; Zheng, 2000) As commercial opportunities grew in the reform period, the thousands of individual and collective enterprises that sprang up in urban areas created a need for small-scale financial services that the formal banks were not prepared to meet. Bank officials therefore encouraged the expansion of urban credit cooperatives as a valuable addition to the banking system. Aside, the banking system has exerted close control over financial transactions and the money supply. (Zheng, 2000) The government departments, publicly and collectively owned economic units and social, political and educational organizations were required to hold their financial balances as bank deposits. They were also instructed to keep on hand only enough cash to meet daily expenses as the major financial transactions were to be conducted through banks. Payment for goods and services exchanged by economic units was accomplished by debiting the account of the purchasing unit and crediting that of the selling unit by the appropriate amount. This practice effectively helped to minimize the need for currency. (Li Xuan, 2000; Li et al, 2000)

Since 1996, interest rates for deposits and loans have been cut several times in China in order to stimulate the economy. Given that adjustment in deposits is slower than that in loans for instance, borrowers are able to quickly change to new rate credit, banks may consequently suffer from a fall in their net interest income (Wang et al., 1999, p.106). As China's banking and securities industry has been heavily controlled by the government and its various departments, the industry has a strong discrimination against non-state enterprises and institutions. Over 80 percent of Chinese bank lending, amounting to over 9.3 trillion yuan at the end of 1999 went to state-owned enterprises in various forms. Accordingly, less than 20 percent of loans made by Chinese banks went to non-state enterprises (Gong and Dai, 2000, p.103). This bias has been more conspicuous in state-owned banks. For instance, out of all loans made by China's financial institutions, 14 percent went to non-state enterprises, whereas out of all loans made by China's state-owned banks, less than 9 percent went to the same group of non-state enterprises (Fan, 2000, p.31).





WTO Agreement Regarding China's Banking Industry

In the bilateral negotiations between China and the U.S. leading to China's WTO membership, the Chinese government has reportedly agreed to open up the financial sector to foreign financial institutions. (Gong and Dai, 2000) For the banking sector, China agrees to commit to full market access in five years for U.S. banks. Foreign banks will be able to conduct local currency business with Chinese enterprises starting 2 years after accession. Foreign banks will be able to conduct local currency business with Chinese individuals from 5 years after accession. (Xie, 1996) Foreign banks will have the same rights as Chinese banks within designated geographic areas. Both geographic and customer restrictions will be removed in five years. As the scope of business expands for Chinese firms, foreign joint venture securities companies will enjoy the same expansion in scope of business. Minority joint ventures will be allowed to underwrite domestic securities issues and underwrite and trade in foreign currency denominated securities. (Xie, 1996)




Impact of the WTO Accession to China's Banking Industry

According to the commitment undertaken by the Chinese government, the banking and securities industry will be gradually open to foreign financial institutions when China joins the WTO. (Feng, et al, 2000; Ketizu, 2000)

First, China's domestic banks and securities firms will increasingly face competition from their foreign counterparts in some locations such as large cities and coastal areas, and for some customer groups. Financial-service customers in China will have more choices when deciding to allocate their financial resources and consume a financial service product. (Feng, et al, 2000; Ketizu, 2000)

Second, the government's control over the banking and securities industry will possibly be weakened. Governments in China at present are still very much influenced by the traditional centrally-planned system, and they strongly desire to dictate, through directing the flow of funds in the economy. The WTO rules and commitments they undertake will necessarily add constraints on the way they control and regulate the economy as well as the finance industry. (Feng, et al, 2000; Ketizu, 2000)


Third, WTO accession will facilitate the movement of Chinese currency towards full convertibility in the future. There is at the moment in China's currency convertibility with regard to current-account transaction. Upon the WTO accession, when more inflow of foreign funds is allowed in China's banking and securities industry, the rights to withdrawal of investment will also be permitted, even if this has to be conducted under certain conditions. (Yi, 2000; Jiao, 1999) Moreover, foreign financial institutions will increasingly demand entry into China's foreign exchange markets and this will necessarily result in increased currency convertibility.  (Yi, 2000; Jiao, 1999) In answer to the first question, it is likely that China's domestic financial institutions will see some talent drain in the short term as foreign financial institutions may possibly increase their demand for local talent. However, in the long term, the supply of local talent would also increase if and when China's domestic financial institutions maintain their demand for talent. (Yi, 2000; Jiao, 1999) It is indeed possible for China to become more vulnerable to financial shocks, accompanied by capital flight, when the economy and the finance sector become more open along with the WTO accession.



However, depending on the soundness of China's macroeconomic management and financial system during the pursuit of internal and external liberalization – the huge amount of remaining the tight control of interest rates in the banking sector, together with irregularities in the securities sector, indicate that China still has a long way to go towards a sound and mature financial system. There is potential danger in China's external liberalization if reforms are not accelerated to counter these problems (Artus, 2000; Caporale, et al, 2000). 

The preconditions of China entering the WTO

China is a unique country concerning its political and economical system, it actually represents the combination of Marxism ideology and principles of free market economy; it is ruled by the bureaucratic administrative system, which is though slowly developing and changing to better due to constant liberalization of public life and economy. (Yi, 2000; Jiao, 1999) The leaders of China have used various protectionist measures to reduce import to their country and to stimulate export which was still rather difficult because of the lack of interaction and corresponding agreements with potential trade partners. The liberalization has somewhat improved the situation but the progress of Chinese economy still remains slow compared to China's extreme trade and industrial potential.

During the last decade the economy of China has been very stagnant despite different simulative measures taken by the leaders of the country. The leaders of the country didn't want to reduce entrance barriers for foreign firms; other problems were the refusal to reform and to some extent denationalize the banking system and numerous violations of the intellectual property rights in China. The economical situation within the country has been gradually changing; China has signed numerous trade treaties with world countries, and the leaders of the country decided to make another attempt to enter the WTO. (Yi, 2000; Jiao, 1999)

Possible advantages and disadvantages for China entering the WTO

The main advantages for all countries entering the WTO are the new trade opportunities and reduction of trade barriers and import tariffs; for China this means a significant increase of Chinese goods export and the efficient stimulation of Chinese economy. Entering the WTO will contribute to liberation and further progress of Chinese economical system; it is most likely that interaction with the members of the organization will stimulate the banking system of China; it will also support the positive development of Chinese economy. (Gong and Dai, 2000)


There is an opinion that Chinese law system will be radically changed because of entering the WTO: due to the necessity to work with foreign lawyers new laws have to be accepted by Chinese leaders and in my opinion, a significantly different law system will be worked out as a result of such economical collaboration. Generally speaking, all branches of economy and related industries will have the opportunity to develop intensively and rapidly, and this is, in my opinion, the main advantage of entering the WTO for China. (Gong and Dai, 2000) The disadvantages, Chinese enterprises will experience serious concurrence from more developed, equipped, well-organized and effectively managed foreign firms. Due to the long dominance of administrative system of ruling over the development of free market in China most enterprises and firms there are not accustomed to free concurrence conditions; moreover, there exists an opinion that China lacks the proper personnel to work in the conditions of free concurrence and open economy. The policy of protectionism led to weak and slow development of Chinese economical agents, and many economists fear that these firms will not bear the concurrence with more experienced foreign exporters. (Feng, et al, 2000; Ketizu, 2000)



Another disadvantage is that Chinese system has not yet been properly adjusted to working within the international trade system; entering the WTO means starting active trade processes, concluding treaties and organizing export operations. China doesn't have the necessary management system to fully experience the advantages of entering WTO, there will be required a lot of effort to accept the changes brought by the international trade partners. The Chinese acceptance of international laws means that there will appear social, economic and political challenges to the society and it is obvious that though such challenges will be faced at once, the economy of China is not ready to use the new trade advantages most effectively. (Gong and Dai, 2000) There will be significant changes in different branches of Chinese economy in the sphere of telecommunications: China has signed a number of agreements concerning mobile services, internet service providers and telecommunications regulation.








Banking Ways

The experiences of other nations indicate that increasing the level of participation of foreign banks in the domestic banking industry can have positive effects. However the near term effects of China's WTO entry will be that foreign banks will compete on price and high efficiency services, attracting some of the best customers away from China's domestic banks and worsening the asset quality of the domestic banks. (Bank of China, 2002) The Chinese government should solve the problem of non-performing assets, implement more prudent risk management, and urge domestic banks to better adapt to international competition. (Bank of China, 2002) Also, after WTO entry some domestic banks will form strategic partnerships with foreign banks and these relationships will make it easier for the foreign banks to enter the domestic capital market, while allowing the domestic bank to obtain more foreign capital, newer technology and knowledge, which will lead to profits. (Bank of China, 2002)







According to the framework of the WTO agreement, the opening requirement for the banking sector is much broader and the reform is more profound. These not only provide overseas banks with tremendous opportunities, but also give a big push to the progress of China's banking sector by urging it to operate in line with the international standards, and therefore ensure the long, stable and healthy development of China's banking sector and financial markets. (Bank of China, 2002) Under the opportunities and challenges, it is beneficial to review the development experience of China's banking sector in the past twenty years so as to make clear the direction for future development. The banking sector also provided and paid profits and taxes to the government, enhancing the government's ability to support the rapid economic growth. It can be said that China's banking sector has been for the long time contributing to our country's economic construction by financing numerous key projects, infrastructure facilities and the state-owned enterprises and playing a unique role in promoting economic growth and transforming financial capital into investment. (Bank of China, 2002)




The methodology to be used for the study will consider the effectiveness of descriptive measures that will provide the value of certain banking system cases that will integrate the facts of certain challenges and problems faced upon joining the WTO in the aspect of China's banking system. The survey questionnaire is used and its respondents could cater to various bank personnel in China such as their Central Bank and Agricultural Bank. The sample population is important as it only takes a reasonable percentage of respondents representing the whole population. A possible of 100 respondents is needed for this study ranging from 25-55 years old and that they are going to answer certain survey questions in a type of agree and disagree technique that can be interpreted through the use of likert scaling. For the case study, there needs to consider case analysis of such Chinese banks and assess problems and challenges as possibly reflected upon entering WTO. The data gathered are to be measured and evaluated through appropriate research tools for methodology as it can be in books, journals and articles. The research variables could relate to such competitiveness issues, policy reaction, liquidity problems, balance sheets and useful tables for illustration purposes. There needs to have ample research evidences, findings and results to support reliability and validity of research study. 

The survey questions are being simplified from 1-20 based on the respondents response, as in the latter part, this will be split into two tables emphasizing positive and negative views with its desired analysis of the study implementation.

1 to 5 Likert Scale

1 strongly disagree, 2 disagree, 3 no comment,

4 agree, 5 strongly agree


1)      __________ There is particular knowledge can be found in banking ways and it is transparent upon adaptation of the WTO.

2)      __________ It is crucial to equip necessary knowledge regarding the workflow and procedures of China's banking system.

3)      __________ The bank process are easy to learn, acquire, capture knowledge and gain experience from counterparts and working partners.

4)      __________ China is taking an active role for banking system knowledge because of such knowledge-intensive environment as new knowledge can be continually created and retained.

5)      __________ There are no problems and barriers in terms of banking relations and integration within the members of WTO for exchanging knowledge and experience.

6)      __________ The bank industry has to keep a harmonious and collaborative relationship with counterparts and working partners.

7)      __________ The bank staff and management are empowered with sufficient authority to judge and make decision by themselves for most of the jobs.

8)      __________ Certain situations and issuers are stimulated and encourage to identify challenges, brainstorm ways to generate creative ideas

9)      ___________ The banks are welcomed to raise any suggestion or recommendation to Management that can improve internal efficiency and increase competitive edge.

10)  ___________ The banking system provides an open and appropriate communication channel to unveil challenges and concerns on works so that mutual trust can be developed.

11)  _________ The current system fulfills the coaching, inspiring and serving leadership in an optimal mix.

12)  _________ The process of system continually encourages personnel to develop and learn from the process.

13)  _________ The management knows which employees are the carriers of valuable and scarce knowledge. Sources of internal expertise have been codified and mapped out.

14)  ________ There provides a competence development policy on internal and external matters for both sides.

15)  ________ There provides up-to-date banking system and information.

16)  _________ There is really a need to adapt to the sanctions deemed for the banks adhering to the policies of WTO.

17)  _________ There needs to have accessibility for principles and governance within the banking industry in partnership to World Trade.

18)  ________ There has appropriate communication and information systems to broadly spread knowledge in control of bank risks and issues.

19)  ________ China banks provide comprehensive measures for ideals and control of situations reflecting certain assumptions from within the WTO.

20)  ________ The WTO gives better assistance to the banking system and cultivates business environment through collaboration of strategies and plans for a positive thinking, mutual trust and open communication.


For the questionnaire procedure, each respondent is given an allotted time to answer the questions being asked and from there it is a must to consider the competency of the answers given to provide justifiable outcomes. There needs to compute its variations in terms of mean and its standard deviation to apply allowable amount of statistics and its analysis.  The likert scale method produces means and standard deviations for variables. It also prints the minimum and maximum value. Likert scale questions are appropriate to print means for since the number that is coded can give us a feel for which direction the average answer is. The standard deviation is important as it give us an indication of the average distance from the mean. A low standard deviation would mean that most observations cluster around the mean. A high standard deviation would mean that there was a lot of variation in the answers. A standard deviation of 0 is obtained when responses to a question are the same. Henceforth, prior to computing a scale that is the mean of a series of questions, first assign points to each question so that the reverse wording questions will be assigned the opposite number of points than the positively worded questions.




In support to research findings and discussions, the likert scale has its values and corresponding interpretations such as 1 strongly disagree, 2 disagree, 3 no comment, 4 agree, 5 strongly agree. Thus, such outcome may possibly entail the weighted mea value as it could imply that the majority of respondents answered no comment regarding the statement and the standard deviation implies a certain discrepancy from such data from its mean as the deviation value as resulted data from respondents have the average and difference from the mean itself.



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