THINK TANK | China and Basel III

THINK TANK | China and Basel III

Dr. Peter Knaack

THINK TANK | China and Basel III

China was largely isolated from the global economy until the late 1970s. After three decades of Maoist planned economy and a decade of Cultural Revolution, the flow of capital was almost completely under the direct control of the central government, and banks merely served as accounting institutions. In October 1979, one year after embarking on the path of economic reform, Deng Xiaoping declared that “we must turn the banks into real banks” (Qiao, Su, and Zhang 2010: 73). When the first Basel Accord was released in 1988, China’s financial system barely had “real banks,” and the central bank had existed for a mere four years. A commercial banking law was not in place until 1995. It is thus not surprising that domestic authorities did not engage with Basel standards until 2003. One of the first acts of the China Banking Regulatory Commission (CBRC), created in 2003, was to implement Basel I standards domestically (Rana 2012). As for Basel II, a CBRC statement from 2007 reads: 

Obviously, it is a gradual and long-term course to meet all the standards; therefore, banks must, based on their own situation, make an overall plan and gradually meet the Basel II standards in a phased, well-sequenced manner. (CBRC 2007)

Since China joined the Basel Committee in 2009 it has changed its position significantly. The country is evolving from laggard to primus inter pares in financial regulation. China’s new banking standards are not only stricter than Basel III, they have implemented ahead of the internationally agreed schedule.

In October 2009, the CBRC published a notification entitled “On improving the commercial bank capital replenishment mechanism,” preparing banks for recapitalization in line with expected higher capital requirements. In June 2011, half a year after the Basel III standards were published, the CBRC released the “Commercial Bank Leverage Ratio Management Method.” After circulating consultation papers in April 2012, the CBRC followed up with the “Capital Rules for Commercial Banks,” approved by the State Council in June 2012. All relevant rules for the domestic implementation of Basel III have thus published ahead of the Financial Stability Board (FSB)-mandated deadline of end of 2012 (State Council Development Research Center 2013e).

A striking feature of China’s implementation of Basel III is that the domestic rules are stricter than the international standards in several categories. The following three super-equivalent rules stand out: 

(1) Basel III raised the common equity capital ratio from 2 percent to 7 percent, but China’s minimum ratio is set at 7.5 percent. Domestic systemically important banks (D-SIB) face a capital requirement of 8.5 percent.

(2) Chinese authorities require a leverage ratio that is one percentage point higher than the international standard.

(3) China’s regulators do not impose a fixed provisions rate or coverage rate on banks. However, they promote a model of dynamic provisions regulation with the goal of loan-loss provisions equal to 2.5 percent of total loans and a 150 percent coverage rate of these loans. 

By contrast, Basel III refrains from setting any specific standard in this area. Instead, the Basel Committee merely states that it is “addressing incentives to stronger provisioning in the regulatory capital framework” (BCBS 2011: 6).

The Basel Committee’s new peer-review programme examined China’s implementation of Basel III in 2013. The committee gave Chinese regulators the best possible overall grade of “compliant” and duly noted a total of 17 points where China is gold-plating Basel III standards (BCBS 2013b). Even this long list is incomplete because it fails to incorporate the above-mentioned leverage ratio and provisioning rules. 

TABLE 1: Basel Standards and Domestic Implementation in China (Selection) 

TABLE 1: Basel Standards and Domestic Implementation in China (Selection)

In addition to stricter regulatory standards, China also committed to a tighter implementation schedule. Basel III is scheduled to be gradually phased in between the beginning of 2013 and the end of 2018. Beijing originally envisioned the phase-in to start a year ahead of every other country, in 2012, but later recognized that this was overly ambitious (Rabinovitch 2012). Nevertheless, the Chinese schedule stipulates full compliance by the end of 2016, two years before the global deadline. Beijing further beat the international standard setters by implementing the 4 percent leverage ratio in 2012 (BCBS 2013a; BIS and BCBS 2013; PBOC Research Institute 2012b).

However, China is not the only country that is gold-plating Basel standards. Currently, nine jurisdictions have issued rules that exceed Basel III, including Sweden, Hong Kong, Singapore, and the heartland of banking, which applies a so-called “Swiss Finish.” Almost all of them are high-income countries with fully developed financial markets that can rather easily afford to gold-plate. Besides China, India is the only exception to this pattern. 

In sum, China is establishing a system of prudential banking regulation that is stricter than the international standards, and it is implementing it faster than anybody else. Why is China, an emerging market economy with a per capita income much below the OECD average and a largely underdeveloped financial system, voluntarily subjecting itself to tougher financial standards than the rest of the world?

About the Author:

Dr. Peter Knaack is a postdoctoral research fellow in global economic governance at the Blavatnik School of Governance, University of Oxford. His research focuses on the politics of global financial regulatory reform in the G20 and the Financial Stability Board. E-mail: [email protected]

Cite this Article:

Knaack, Peter (2017), An Unlikely Champion of Global Finance: Why Is China Exceeding International Banking Standards?, in: Journal of Current Chinese Affairs, 46, 2, 49-52.

Publication Details:

This article is an excerpt taken from a research article published by GIGA German Institute of Global and Area Studies, Institute of Asian Studies (in co-operation with the Lau China Institute at King’s College London, and Hamburg University Press) in the Journal of Current Chinese Affairs which is an Open Access publication under the conditions of the Creative Commons Attribution-No Derivative Works 3.0 License.

References:

Qiao, Xiaohui, Qi Su, and Yandong Zhang (2010), 䀓ᇶഭᴹ䬦㹼᭩䶙 (Jiemi guoyou yinhang gaige, Revealing the Secret of State Owned Bank Reform, in: 䍒㓿 (Caijing), 25, 73–92

Rana, Shruti (2012), The Emergence of the New Chinese Banking System: Implications for Global Politics and the Future of Financial Reform, in: Maryland Journal of International Law, 27, 215– 234.

China Banking Regulatory Commission (2007), The Guidelines on the Implementation of the New Basel Accord by China’s Banking Sector, 14 November, online: (31 July 2017).

State Council Development Research Center (2013e), Ӿപᇊ䍴ӗ䟽 ՠⴻ㕃䀓䬦㹼䍴ᵜ㺕ݵ঻࣋Ⲵਟ㜭䙄ᖴ (Cong guding zichan chonggu kan huanjie yinhang ziben buchong yali de keneng tujing, The Possibility of Resolving Recapitalization Pressures for Banks Via Fixed Asset Revaluation, in: 䈳ḕ⹄ウᣕ੺ (Diaocha Yanjiu Baogao, Research Reports), 4280.

Basel Committee on Banking Supervision (2011), Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, Basel, CHE: Bank for International Settlements, online: (7 September 2017).

Basel Committee on Banking Supervision (2013b), Regulatory Consistency Assessment Programme (RCAP), Assessment of Basel III Regulations – China, September, Basel, CHE: Bank for International Settlements, online: (7 September 2017).

Rabinovitch, Simon (2012), China Delays Change to Bank Capital Rules, in: Financial Times, 6 June

Basel Committee on Banking Supervision (2013a), Report to G20 Leaders on Monitoring Implementation of Basel III Regulatory Reforms, Basel, CHE: Bank for International Settlements, online: (7 September 2017). 

Bank for International Settlements (2012), Annual Report. 82nd, Basel, CHE: Bank for International Settlements.

Bank for International Settlements, and Basel Committee on Banking Supervision (2013), Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, Basel, CHE: Bank for International Settlements, online: (7 September 2017).

 People’s Bank of China Research Institute of Finance and Banking (2012b), ᐤຎቄॿ䇞 ,,, ѫ㾱޵ᇩˈ⢩⛩৺൘ᡁഭⲴᇎᯭ䘋ኅ (Basaier xieyi III zhuyao neirong, tedian ji zai wo guo de shishi jinzhan, The Basel III Agreement: Main Content, Characteristics, and Domestic Implementation), in: 䠁㶽⹄ウᣕ੺ (Jinrong Yanjiu Baogao, Finance Research Report), 143
    Blogger Comment
    Facebook Comment