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10/19/14 China - The Banking System

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The Banking System
China Table of Contents
The history of the Chinese banking system has been somewhat checkered. 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 completely socialized. In the period of
recovery after the Chinese civil war (1949-52), the People's Bank of China moved very
effectively to halt raging inflation and bring the nation's finances under central control. Over the
course of time, the banking organization was modified repeatedly to suit changing conditions and
new policies.
The banking system was centralized early on under the Ministry of Finance, which exercised firm
control over all financial services, credit, 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. Between
1979 and 1985, the volume of deposits nearly tripled and the value of bank loans rose by 260
percent. By 1987 the banking system included the People's Bank of China, Agricultural Bank,
Bank of China (which handled foreign exchange matters), China Investment Bank, China
Industrial and Commercial Bank, People's Construction Bank, Communications Bank, People's
Insurance Company of China, rural credit cooperatives, and urban credit cooperatives.
The People's Bank of China was the central bank and the foundation of the banking system.
Although the bank overlapped in function with the Ministry of Finance and lost many of its
responsibilities during the Cultural Revolution, in the 1970s it was restored to its leading position.
As the central bank, the People's Bank of China had sole responsibility for issuing currency and
controlling the money supply. It also served as the government treasury, the main source of credit
for economic units, the clearing center for financial transactions, the holder of enterprise deposits,
the national savings bank, and a ubiquitous monitor of economic activities.
Another financial institution, the Bank of China, handled all dealings in foreign exchange. It was
responsible for allocating the country's foreign exchange reserves, arranging foreign loans, setting
exchange rates for China's currency, issuing letters of credit, and generally carrying out all financial
transactions with foreign firms and individuals. The Bank of China had offices in Beijing and other
cities engaged in foreign trade and maintained overseas offices in major international financial
centers, including Hong Kong, London, New York, Singapore, and Luxembourg.
The Agricultural Bank was created in the 1950s to facilitate financial operations in the rural areas.
The Agricultural Bank provided financial support to agricultural units. It issued loans, handled
state appropriations for agriculture, directed the operations of the rural credit cooperatives, and
carried out overall supervision of rural financial affairs. The Agricultural Bank was headquartered
in Beijing and had a network of branches throughout the country. It flourished in the late 1950s
and mid-1960s but languished thereafter until the late 1970s, when the functions and autonomy of
the Agricultural Bank were increased substantially to help promote higher agricultural production.
In the 1980s it was restructured again and given greater authority in order to support the growth
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and diversification of agriculture under the responsibility system.
The People's Construction Bank managed state appropriations and loans for capital construction.
It checked the activities of loan recipients to ensure that the funds were used for their designated
construction purpose. 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.
Rural credit cooperatives were small, collectively owned savings and lending organizations that
were the main source of small-scale financial services at the local level in the countryside. They
handled deposits and short-term loans for individual farm families, villages, and cooperative
organizations. Subject to the direction of the Agricultural Bank, they followed uniform state
banking policies but acted as independent units for accounting purposes. In 1985 rural credit
cooperatives held total deposits of -Y72.5 billion.
Urban credit cooperatives were a relatively new addition to the banking system in the mid-1980s,
when they first began widespread operations. 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. In 1986 there were more than 1,100 urban credit cooperatives, which held a
total of -Y3.7 billion in deposits and made loans worth -Y1.9 billion.
In the mid-1980s the banking system still lacked some of the services and characteristics that
were considered basic in most countries. Interbank relations were very limited, and interbank
borrowing and lending was virtually unknown. Checking accounts were used by very few
individuals, and bank credit cards did not exist. In 1986 initial steps were taken in some of these
areas. Interbank borrowing and lending networks were created among twenty-seven cities along
the Chang Jiang and among fourteen cities in north China. Interregional financial networks were
created to link banks in eleven leading cities all over China, including Shenyang, Guangzhou,
Wuhan, Chongqing, and Xi'an and also to link the branches of the Agricultural Bank. The first
Chinese credit card, the Great Wall Card, was introduced in June 1986 to be used for foreign
exchange transactions. Another financial innovation in 1986 was the opening of China's first stock
exchanges since 1949. Small stock exchanges began operations somewhat tentatively in
Shenyang, Liaoning Province, in August 1986 and in Shanghai in September 1986.
Throughout the history of the People's Republic, the banking system has exerted close control
over financial transactions and the money supply. All government departments, publicly and
collectively owned economic units, and social, political, military, 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; all 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.
Since 1949 China's leaders have urged the Chinese people to build up personal savings accounts
to reduce the demand for consumer goods and increase the amount of capital available for
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investment. Small branch offices of savings banks were conveniently located throughout the urban
areas. In the countryside savings were deposited with the rural credit cooperatives, which could
be found in most towns and villages. In 1986 savings deposits for the entire country totaled over -
Y223.7 billion.
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Source: U.S. Library of Congress

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