- Chinese financial system
China's financial system is highly regulated and has recently begun to expand rapidly as monetary policy becomes integral to its overall economic policy. As a result, banks are becoming more important to China's economy by providing increasingly more finance to enterprises for investment, seeking deposits from the public to mop up excess liquidity, and lending money to the government.
As part of US$586 billion economic stimulus package of November 2008, the government plans to remove loan quotas and ceilings for all lenders, and increase bank credit for priority projects, including rural areas, small businesses, technology companies, iron and cement companies.
For the past few decades, the People's Bank of China has exercised the functions and powers of a central bank, as well as handling industrial and commercial credits and savings business; it was neither the central bank in the true sense, nor a commercial entity conforming to the law of the market economy. But since reform and opening-up began in 1978, China has carried out a series of significant reforms in its banking system, and strengthened its opening to the outside world. Consequently, the finance industry has made steady development. At the end of 2004, the balance of domestic and foreign currency savings deposits stood at 25,318.8 billion yuan and the balance of home and foreign currency loans came to 18,856.6 billion yuan. Now China has basically formed a financial system under the regulation, control and supervision of the central bank, with its state banks as the mainstay, featuring the separation of policy-related finance and commercial finance, the cooperation of various financial institutions with mutually complementary functions.
In 1984, the People's Bank of China stopped handling credit and savings business, and began formally to exercise central bank functions and powers by conducting macro-control and supervision over the nation's banking system. In 1994, the Industrial and Commercial Bank of China, the Bank of China, the Agricultural Bank of China and the China Construction Bank were transformed into state-owned commercial banks; and three policy-related banks were founded, namely, the Agricultural Development Bank of China, the National Development Bank and the China Import and Export Bank. In 1995, the Commercial Bank Law was promulgated, creating the conditions for forming the commercial bank system and organizational structure, and providing a legal basis for changing the specialized state banks to state-owned commercial banks.
Since 1996, the financial organizational system has gradually been improved; the wholly state-owned commercial banks have been transformed into modern financial enterprises handling currencies; over 120 shareholding medium and small-sized commercial banks have been set up or reorganized; and securities and insurance financial institutions have been further standardized and developed. April 2003 saw the formal establishment of the China Banking Regulatory Commission (CBRC). Since then, a financial regulatory system has been formed in which CBRC, China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC) work in coordination, each body having its own clearly defined responsibilities.
In January 2004, the State Council decided that the Bank of China and the China Construction Bank would start the experiment of transforming the shareholding system. The main tasks are to establish a standardized corporate governance and an internal system of rights and responsibilities in accordance with the requirements for modern commercial banks; to restructure the financial system, speed up the disposal of non-performing assets and to reinforce minimum capital requirement to build up first-class modern financial enterprises. Now, six shareholding commercial banks and urban commercial banks in China have begun to accept overseas investors as shareholders.
Opening up of the financial industry
Over the past 20-odd years, China's financial institutions in the Special Economic Zone, coastal open cities and inland central cities have approved a range of wholly foreign-owned and Chinese-foreign joint venture financial institutions. Every year since 2002, China has increased the number of cities where foreign banks are allowed to handle RMB business, and within five years such banks will be allowed to handle RMB business in any city. At the end of 2004, the total assets of foreign financial institutions in China reached over US$47 billion; foreign banks were allowed to handle RMB business in 16 areas, and 62 foreign banks from 19 countries and regions set up 191 business institutions in China, of which 116 were approved to handle RMB business. There were 211 foreign bank branches in China.
The CSRC has approved the establishment of 13 Sino-foreign equity joint venture fund management companies, and started to formally handle the application of establishment of joint venture fund management companies with a maximum 49 percent foreign share; the CIRC declared that: from December 11, 2004 on, foreign insurance companies could handle health insurance, group insurance, life insurance and annuity insurance businesses; regional restrictions on establishing wholly foreign-funded insurance institutions were canceled and the proportion of the foreign share in joint venture insurance agencies was allowed to reach 51 percent.
Foreign banks have expanded their China-related business scope. In November 2003, the CBRC started to implement new policies, e.g., permitting foreign banks to provide RMB services to all kinds of Chinese enterprises in areas with open RMB business (previously, these banks' RMB services were restricted to foreign-funded enterprises, foreigners and people from Hong Kong, Macao and Taiwan in cities with open RMB business). The new policy also encourages qualified international strategic investors to join the restructuring and reforming of China's banking and financial institutions on a voluntary and commercial basis.
Meanwhile, all China's commercial banks have set up branches overseas, and started an international credit business. The Bank of China ranks first in the number and scale of overseas outlets. In 1980, China resumed membership of the World Bank, and returned to the International Monetary Fund. In 1984, China started business contacts with the Bank for International Settlements. In 1985, China formally joined the African Development Bank and in 1986 formally became a member of the Asian Development Bank.
The ongoing development of China's financial system will play a critical role in the country’s effort to narrow social disparities and pursue balanced growth. Reforming the financial system would increase the rate of GDP growth and help spread China’s new wealth more evenly. If the reforms directed additional funds to private companies — China's new growth engine — the economy would generate significantly higher returns for the same level of investment and GDP would rise. Such a shift will stimulate mass job creation in the strongest areas of China's economy and increase tax revenues to finance social programs.
After more than a quarter century of reform and opening to the outside world, by 2005 China’s economy had become the second largest in the world after the United States when measured on a purchasing power parity (PPP) basis. The government has a goal of quadrupling the gross domestic product (GDP) by 2020 and more than doubling the per capita GDP. Central planning has been curtailed, and widespread market mechanisms and a reduced government role have prevailed since 1978. The government fosters a dual economic structure that has evolved from a socialist, centrally planned economy to a socialist market economic system, or a "socialist market economy with Chinese characteristics". Industry is marked by increasing technological advancements and productivity. People’s communes were eliminated by 1984 — after more than 25 years — and the system of township-collective-household production was introduced to the agricultural sector. Private ownership of production assets is legal, although some nonagricultural and industrial facilities are still state-owned and centrally planned. Restraints on international trade were relaxed when China acceded to the World Trade Organization in 2001. Joint ventures are encouraged, especially in the coastal Special Economic Zones and open coastal cities. A sign of the affluence that the reformed economy has brought to China might be seen in the number of its millionaires (measured in U.S. dollars): a reported 236,000 millionaires in 2004, an increase of 12 percent over two years earlier.
Chinese officials cite two major trends that have an effect on China’s market economy and future development: world multipolarization and regional integration. In relation to these trends, they foresee the roles of China and the United States in world affairs and with one another as very important. Despite successes, China’s leaders face a variety of challenges to the nation’s future economic development. They have to maintain a high growth rate, deal effectively with the rural workforce, improve the financial system, continue to reform the state-owned enterprises, foster the productive private sector, establish a social security system, improve scientific and educational development, promote better international cooperation, and some believe, change the role of the government in the economic system. Despite constraints the international market has placed on China, it nevertheless became the world’s third largest trading nation in 2004 after only the United States and Germany.
The Fifth Plenum of the Sixteenth CPC Central Committee took place in October 2005. The Fifth Plenum approved the new Eleventh Five-Year Plan (2006–10), which emphasizes a shift from extensive to intensive growth in order to meet demands for improved economic returns; the conservation of resources to include a 20% reduction in energy consumption by 2010; and an effort to raise profitability. Better coordination of urban and rural development and of development between nearby provincial regions also is emphasized in the new plan.
Government finances and budget
China has a budget deficit of around 1.5% of GDP. China projected a budget deficit of 295 billion yuan in 2006, down 1.7% from 2005. The overall budget deficit in 2004 was approximately US$26 billion, an amount equivalent to about 1.5% of GDP. In 2007, economic planners expect China's already small budget deficit to shrink again. According to economists, this has afforded China to spend more on public services such as education and healthcare.
The government budget for 2004 was US$330.6 billion in revenue and US$356.8 billion in expenditures. 95.5% of revenue was from taxes and tariffs, 54.9% of which was collected by the central government and 45% by local government. The expenditures were for culture, education, science, and health care (18%); capital construction (12%); administration (14%); national defense (7.7%); agriculture, forestry, and water conservancy (5.9%); subsidies to compensate for price increases (2.7%); pensions and social welfare provisions (1.9%); promotion of innovation, science, and technology (4.3%); operating expenses of industry, transport, and commerce (1.2%); geological prospecting (0.4%), and other (31.9%).
Before the reform and opening, China exercised a single taxation system. Because taxation had no connection with the economic activities of enterprises, this system lacked vitality. In 1981, the Chinese government began to collect income tax from Sino-foreign joint ventures and solely foreign-funded enterprises, taking the first step in taxation system reform. From 1983 to 1984, the reform consisting of the replacement of profits by taxes was carried out in domestic enterprises, and a foreign-related taxation system was set up. As a result, instead of a single tax category, a compound taxation system in which turnover and income taxes were the mainstay and other tax categories were in coordination with it was initially in place and promoted the control of finances and the economy. In 1994, the reform of the taxation system was deepened, and a complete structural adjustment of the taxation system was made by taking the market economy as the norm. In 1996, China lowered the rate of customs duties and export drawback, and exercised import supervision.
China’s annual rate of inflation averaged 6% per year during the 1990–2002 period. Although consumer prices declined by 0.8% in 2002, they increased by 1.2% in 2003. China’s estimated inflation rate in 2006 was 1.8%.
China's banking system is highly regulated with six major banks, each having specific tasks and duties. The People's Bank of China is the largest bank in China and acts as the Treasury. It also issues currency, monitors money supply, regulates monetary organizations and formulates monetary policy for the State Council. The Bank of China manages foreign exchange transactions and manages foreign exchange reserves. The China Development Bank distributes foreign capital from a variety of sources, and the China International Trust and Investment Corporation (CITIC) was previously a financial organization that smoothed the inflow of foreign funds, but is now a full bank, allowing to compete for foreign investment funds with the Bank of China. The China Construction Bank lends funds for capital construction projects from the state budget, and finally the Agricultural Bank of China functions as a lending and deposit taking institution for the agricultural sector.
Financial reform in China's banking sector include the introduction of leasing and insurance, and operational boundaries are being slowly eroded to promote competition for customers who are now permitted to choose banks as well as hold accounts in more than one bank.
Banking reform was initiated in China in 1994, and the Commercial Banking Law took effect in July 1995. The aims of these actions were to strengthen the role of the central bank—the People’s Bank of China—and to allow private banks to be established. The People’s Bank of China was established in 1948. It issues China’s currency and implements the nation’s monetary policies. China’s oldest bank, founded in 1908, is the Bank of Communications Limited, a commercial enterprise located in Shanghai. China’s second oldest bank was established in 1912 as the Bank of China. Since 2004 it has become a shareholding company known as the Bank of China Limited and handles foreign exchange and international financial settlements. The Agricultural Bank of China, founded in 1951, is mainly involved in rural financing and the provision of services to agricultural, industrial, commercial, and transportation enterprises in rural areas. Other major banks include the China Construction Bank; established in 1954 as the People’s Construction Bank of China, it has been a state-owned commercial bank since 1994 and maintains some 15,400 business outlets inside and outside China, including six overseas branches and two overseas representative offices. The China Construction Bank was restructured in 2003 into a shareholding bank called the China Construction Bank Corporation, with the state holding the controlling shares. CITIC was founded in 1979 to assist economic and technological cooperation, finance, banking, investment, and trade. The Industrial and Commercial Bank of China was founded in 1984 to handle industrial and commercial credits and international business. The Agricultural Development Bank of China, Export and Import Bank of China, and State Development Bank all were founded in 1994. China’s first private commercial national bank, the China Minsheng Banking Corporation, was opened in 1996. Commercial banks are supervised by the China Banking Regulatory Commission, which was established in 2003. In 2005 the commission announced the launching of a new postal savings bank to replace the old system and its more than 36,000 outdated outlets nationwide.
Since the inception of the "open door policy", a number of foreign banks have been permitted to open their doors in major cities in China. However, these are largely representative branches, with only a few being permitted to carry out branch functions in Shanghai and Shenzhen. Their participation in China's financial system has been limited, but as China starts to borrow more from abroad, their role may become greater in the future.
When first permitted in the mid-1980s, foreign banks were restricted to designated cities and could deal only with transactions by foreign companies in China. After those restrictions were loosened following China’s accession to the World Trade Organization in 2001, some foreign banks have been allowed to provide services to local residents and businesses. In 2004 there were some 70 foreign banks with more than 150 branches in China. In 2007 a limited number of foreign banks were allowed to issue debit cards in China (and Bank of East Asia was allowed to issue a credit card). This made banking with a foreign bank more convenient, as money in accounts could be accessed at ATMs like customers of local banks could. In 2009 this number grew to six, but only two of these are not tied to Hong Kong.
There are stock exchanges in Beijing, Shanghai (the third largest in the world), and Shenzhen and futures exchanges in Shanghai, Dalian, and Zhengzhou. They are regulated by the China Securities Regulatory Commission.
In 1990 and 1991, China set up stock exchanges in Shanghai and Shenzhen. In the past decade, the Chinese stock market has completed a journey that took many countries over a century to cover; China's stock market today has capital approaching 3,705.6 billion yuan, 1,377 listed companies and 72.16 million investors.
The Chinese stock market has promoted the reform of government-owned corporations and the change of their systems, and enabled a stable transition between the two systems. On the strength of the stock market in the past decade, many large state-owned enterprises have realized system change.
The change also has stimulated medium and small-sized state-owned enterprises to adopt the shareholding system, thus solving the most important issue - the system problem - during the transition from planned to a market economy. As for ordinary citizens, bank deposit is not the only way to put their money, the stock market has become one of the most important channels for investment.
Methods of stock trading are constantly being improved. Today, a network system for securities exchange and account settlement has been formed, with the Shanghai and Shenzhen exchanges as the powerhouse, radiating to all parts of the country. In 2004, China issued 123 kinds of A share, and 23 rights issues, collecting a total of 83.6 billion yuan; and 28 kinds of B and H shares, collecting a total of 67.5 billion yuan.
As China's economy becomes more integrated with the rest of the world its financial system will become more in line with international practices.
China has also learnt from Hong Kong's financial system, with the help of the Hong Kong Monetary Authority.
China had a favorable balance of trade of US$32 billion in 2004 and US$38.7 billion in 2003. These amounts reflect the general course of a favorable trade balance during the previous eight years. In 1996 China’s trade balance was US$12.2 billion, peaking at US$43.4 billion in 1998 but declining to US$24.1 billion by 2000 before starting its new increase.
Balance of payments
China’s current account balance in 2004 was nearly US$68.7 billion. Added to this total was US$54.9 billion in foreign direct investment (exceeding that invested in the United States). When other investments, assets, and liabilities are brought into the calculation, the overall balance of payments was US$206.1 billion in 2004, compared with US$75.2 billion in 2002 and US$116.5 billion in 2003.
According to United Nations statistics for 2001, China’s external and public, or publicly guaranteed, long-term debt had reached US$91.7 billion. China’s debt had grown steadily during the 1990s, peaked at US$112.8 billion in 1997, and then declined annually thereafter. By 2004 China had US$618.5 billion in its international reserve account, 98.6 percent of which was from foreign exchange, not including the Bank of China’s foreign exchange holdings.
Foreign aid and foreign investment
China is the recipient of bilateral and multilateral official development assistance and official aid to individual recipients. In 2003 it received US$1.3 billion in such disbursements, or about US$1 per capita. This total was down from the 1999 figures of US$2.4 billion and US$1.90 per capita. Some of this aid comes to China in the form of socioeconomic development assistance through the United Nations (UN) system. China received US$112 million in such UN assistance annually in 2001 and 2002, the largest portion coming from the UN Development Programme (UNDP).
China also obtains foreign capital through foreign loans, foreign direct investment (FDI), and other investment by foreign businesses. Since 1980 foreign businesses from more than 170 countries and regions have invested in Chinese joint-venture enterprises. Most joint-venture activities are located in coastal cities and increasing numbers in inland cities as well. Some 300 of the 500 top transnational companies in the world have invested in China, and foreign investments have become an important capital source for China’s economic development. In 1999 FDI totaled US$40.3 billion. Between 1979 and 1999, cumulative FDI totaled US$305.9 billion, US$40.3 billion of which was invested in 1999 alone. In that year, China had approved the establishment of 342,000 foreign-funded enterprises, more than 100,000 of which have gone into operation. Contracted FDI reached nearly US$82.8 billion in 2002, US$115 billion in 2003, US$153.48 in 2004, and US$130.33 billion in the first nine months of 2005.
In 2007, China enacted a new law for corporate income tax which would unify the rates paid by foreign and domestic firms at 25 percent. Domestic firms used to pay 33 percent and foreign-funded firms 15 percent. Analysts say the overall impact on foreign direct investment would be limited due to China's relatively cheap labor and the promise of a huge market.
Currency and foreign exchange control
China’s currency is the renminbi (RMB, "people’s currency") or yuan. The interbank exchange rate on August 1, 2006, was US$1 = RMB7.98. The RMB is made up of 100 fen or 10 jiao. Coins are issued in denominations of one, two, and five fen; one and five jiao, and one RMB. Banknotes are issued in denominations of one, two, and five jiao; and one, two, five, 10, 50, and 100 RMB.
The Renminbi is issued and controlled solely by the People's Bank of China. RMB exchange rates are decided by the People's Bank of China and issued by the State Administration of Foreign Exchange, the latter exercising the functions and powers of exchange control.
In 1994, China reformed the foreign exchange system, combined the RMB exchange rates, adopted the bank exchange settlement system and set up a unified inter-bank foreign exchange market. On this basis, China included the foreign exchange business of the foreign-invested enterprises in the bank's exchange settlement system in 1996. On December 1, 1996, China formally accepted Article 8 of the Agreement on International Currencies and Funds, and realized RMB convertibility under the current account ahead of schedule. Meanwhile, China has been active in promoting bilateral currency exchange between ASEAN and China, Japan and the Republic of Korea (10+3). At the end of 2004, China's foreign exchange reserves reached US$609.9 billion and its share in the International Monetary Fund has risen from 11th to 8th place. The variety of financial businesses has been increasing steadily, and China has opened an array of new businesses to become integrated into the various aspects of modern international financial business, such as consumer credit, securities investment funds and insurance-linked investments.
China's insurance industry started to recover in 1980, after a 20 year standstill. In 1981, the People's Insurance Company of China was transformed from a government department into a specialized company, with branches or sub-branches in every part of China. 1988 witnessed the founding of the Ping An Insurance (Group) Company of China and the Pacific Insurance Company, both mainly active in the coastal areas. In 1996, the People's Insurance Company of China made a big step forward in transforming its administration and operational mode, in setting up a modern enterprise system, and integrating with the international market. The Insurance Law of 1985 and the founding of the China Insurance Regulatory Commission in 1988 provided the legal basis and specific rules for the operation of the insurance market. In 1980, China only had one insurance company; by 2004 there were 62, with a total revenue of premiums of 431.8 billion yuan, of which 100.4 billion were paid as compensation and payment.
- Central Financial Work Commission
- Ministry of Finance of the People's Republic of China
- Financial services in the People's Republic of China
- Foreign exchange reserve of the People's Republic of China
- State Administration of Foreign Exchange
- China Investment Corporation, CITIC
- Panda bond
- Qualified Domestic Institutional Investor
- Hedge fund industry in China
- List of asset management companies of the People's Republic of China
- China Securities Journal
- History of banking in China
- Fengbo Zhang Analysis of Chinese Macroeconomy
- Gregory C. Chow (2007). China's Economic Transformation. Blackwell. ISBN 1405156244
- Cecil R. Dipchand, Zhang Yichun, Ma Mingjia (1994). The Chinese Financial System. Greenwood Press. ISBN 0313292825
- Franklin Allen, Jun Qian, Meijun Qian (2007) China’s Financial System: Past, Present, and Future, in China's Great Economic Transformation, edited by Thomas G. Rawski and Loren Brandt. Cambridge University Press. ISBN 0521885574
- Twitchett, D., Financial Administration under the Tang Dynasty (Cambridge Univ Press, 1970)
- Pitfalls of a State-Dominated Financial System: The Case of China - Genevieve Boyreau-Debray, Shang-Jin Wei
- China Society for Finance and Banking
- Institute of Finance of the People's Bank of China
- China Finance Association
- China Center for Financial Research of Tsinghua University
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