The China Banking Regulatory Commission (CBRC) announced yesterday the greenlight had been given to launch a postal savings bank.

The nation's banking industry regulator said in a statement that it "would actively study concrete plans to launch a postal savings bank and report the plans to the State Council to get its endorsement as soon as possible."

The postal savings service in China has more than 36,000 outlets nationwide and oversees 1.22 trillion yuan (US$150.4 billion) of deposited funds, while maintaining a firm market presence as the provider of basic banking services.

But due to its outdated operating mechanism and delicate relations with the nation's postal system, the service is facing a critical need to reform.

"The reform of the postal savings system has taken a historical step and the setting up of a postal savings bank will begin soon," said the CBRC on its website yesterday.

The announcement came after the State Council finally approved the much-debated reform of China's postal system last Wednesday.

According to the reform plan, the State Postal Bureau, also known as China Post, will have its administrative role split from its postal business functions. The postal savings service, an important part of China Post, will also be reformed accordingly.

The plan to reform the postal savings service has ignited heated discussion in recent years and the government is now considering what avenue the reform should take.

The postal savings service occupies 9.25 percent of China's banking market, the fifth largest institution in terms of savings, but only conducts deposit business.

Deposit interest rates in postal savings are level with those of commercial banks, but money deposited in the service can be re-deposited in the central bank, which used to pay a preferential interest rate - more than 4 percent.

The broader interest rate spread guarantees a stable income for postal savings, meaning depositors do not have to fear bad loans.

As such, the postal savings sector worked hard to lure deposits, while at the same time shouldering the central bank with a larger burden.

During the six years from 1996 to 2002, the central bank slashed interest rates eight times, but re-deposit rates stayed higher than initial deposit rates.

In 2002, the central bank forked out 18 billion yuan (US$2.21 billion) to compensate for deposits taking advantage of this rate gap.

Without any incentives to reform, the postal savings sector was reluctant, but the word came down that changes needed to be made.

In August 2003, the central bank announced a cut in interest rates to 1.89 percent on new funds re-deposited by postal savings, lower than the one-year, 1.98-percent rate offered by the postal savings system.

That move was aimed at forcing the postal savings sector to seek higher returns in the marketplace, while keeping risks to deposited money at a minimum.

Challenges & obstacles

However, due to a lack of experience in managing funds and hedging risks in capital markets, the postal savings service faced a number of challenges.

"With the rapid development of postal savings business, the current operating system which mingles together postal savings with other postal business has created many problems," read the CBRC statement.

As they are part of the postal system, postal savings lack sound corporate governance and an internal control system. Also, since the sector is not a real financial entity, it's difficult to open up investment channels.

Another important obstacle in the path of reform is that staff in postal savings can move to other departments without too much trouble and vice versa. Therefore, some staff in the business lack the necessary skills.

Some experts have suggested turning the postal savings sector into a commercial bank with a limited business scope in low-risk wholesale banking services and negotiable loans.

The bureau should also make full use of its vast branch network to promote remittance and intermediary services, the experts said.

According to the regulator's statement, it has taken a series of steps to transform the postal savings sector into a genuine commercial bank, while striving to improve its risk-control and compliance capabilities.

(China Daily July 29, 2005)