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3 options for reforming postal savings bureau
By Zhong Wei (China Business Weekly)
Updated: 2004-06-21 16:11

[The author Zhong Wei is a professor of finance at Beijing Normal University.]

China's financial authorities are weighing plans to split the country's postal savings bureau, despite resistance and internal struggles.

The decision-makers basically have three options, each with pros and cons, which require careful scrutiny.

First, the authorities can transform the bureau into a bank. The China Postal Savings and Remittance Bureau (SPSRB), the holding company of the nationwide postal savings services, has said it hopes to become a wholesale lender.

Second, authorities, as suggested by some government-affiliated think-tanks, can restructure the bureau into an investment fund. Such a system has been tested in Taiwan and Japan.

Third, the government can privatize the bureau's branches and offices into independent community banks that offer basic financial facilities for local residents.

The first plan has been widely debated, but it is unlikely authorities will select that option.

The idea is not new. It was first proposed in 1999 by the government body in charge of China's postal and telecommunications services. That same year, the People's Bank of China, the nation's central bank, approved the application.

So, why did the bureau drop the plan? The answer is simple: To become a bank, the bureau would have to be operated independently from the postal services, which were financially reliant on the bureau.

Forty-two per cent of SPSRB's annual income comes from the savings services, while in some provinces the figure is 60 or 70 per cent. In rural areas, the percentage approaches 100.

The postal savings bureau's personnel account for 32.8 per cent of all employees hired by SPSRB.

The postal savings services have become the main, and inseparable, part of SPSRB's business. Therefore, stripping the bureau from the SPSRB would result in the strangling of the holding company.

That was the last thing SPSRB's leaders wanted to do. So plans to transform the bureau into a bank were shelved. They are unlikely, under current circumstances, to be revived.

The plan to create an investment fund -- which will mimick the models in Taiwan and Japan -- is much different from the bureau-to-bank plan.

The bureau, once transformed into a fund, would be less regulated by financial authorities.

The fund would then absorb residential deposits and invest, for example, in government-sponsored infrastructure construction.

Under such a framework, SPSRB would have much more freedom to make investment decisions, while PBOC would only be able to offer "guidelines in principle" rather than impose strict regulations.

This plan, if adopted, would benefit SPSRB. But the problem is the plan will require the postal authorities to clearly identify accounting details of running the postal savings bureau, which would be based largely on the same platform as the traditional postal services.

SPSRB's practice of using profits from its postal savings services to subsidize its postal delivery services would not be able to continue.

The third option -- privatizing the bureau into community banks -- is comparatively new, and innovative.

Community banks are organized and operated independently, and their targetted customers are individuals and small businesses.

These private banks would provide financial services -- from deposits to pension fund management -- to small enterprises and local residents at comparatively little cost.

SPSRB would benefit from such a plan, in that during the privatization process it would raise funds and recapitalize itself. SPSRB will be able to introduce a franchise model, if the plan proceeds.

The history of China's postal savings bureau predates the establishment, in 1949, of the People's Republic of China. The bureau was abolished in 1953, but resumed operations in 1986 to complement the banking system in absorbing residents' deposits.

The postal savings services began as a pilot programme in 12 cities, including Beijing and Tianjin. A few months later, the services extended to other regions.

SPSRB was established in March 1986.

Despite its fast expansion during the first few years, the postal savings bureau created some devastating problems for the financial sector -- especially in rural areas.

The bureau accepted deposits from farmers, and redeposited the money in the PBOC for higher interest. Therefore, liquidity was reduced, and loans could not be extended to farmers.

China's rural financial system was "bleeding," due in part to the "drying-up effect" caused by the postal savings bureau. This was exacerbated in some regions, as the postal savings bureau has illegally delayed payments of remittances to inflate their deposits.

Financial authorities have also found it hard to control the postal savings services, even though some regional bureaux have been attracting deposits by advertising higher interest rates or by bundling services, for instance, installation of fixed phone lines.

Such problems have prompted financial authorities to reform the postal savings system. They hope the process will be complete within a few years.

However, the postal savings services, since 1992, have been rejuvenated, as policy-makers began encouraging the bureau's expansion to mop up excess liquidity.

At that time, decision-makers were most concerned about controlling domestic inflation.

PBOC's subsequent efforts to clean up rural credit co-operatives also helped the bureau establish its footing in rural China. The bureau spared no effort in expanding into the void created when the co-operatives closed.

The central bank in 2002 reduced the bureau's redeposit rate from 4.6 per cent to 4.36 per cent, after it had lowered, on several occasions, the benchmark interest rate.

Even so, the bureau profited from a 2-per-cent interest rate gap between the redeposit rate offered by the central bank and the rates offered to depositors.

PBOC terminated the bureau's free lunch last year when it substantially lowered the bureau's redeposit rate. Now, the rate is equal to the reserve rate for commercial lenders.

Deposits with the bureau reached 931.5 billion yuan (US$112.57) at the end of last year, while its deposits with PBOC approached 848.9 billion yuan (US$102.59).

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