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. Between1979 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 andcontrolling 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 Beijingand 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 createda 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 alongthe 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 Shanghaiin 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 andcollectively 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

China - The Banking System

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