Current Financial System of China

7/31/2019 Current Financial System of China

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Current Financial System of China

The Macro-Financial Environment: China has maintained high growth rates over the past

three decades. Since the start of reforms in 1978, growth has averaged close to 10 percent and

inflation has remained relatively subdued. Productivity growth has been rapid and capacity hasbeen expanded by very high levels of investment. The commercial banking sector has also grown

rapidly and become more diversified. Banks lending to households, though low compared with

other countries, has picked up sharply following the housing sector reform a decade ago. The

following figures give us a brief about the performance of banks in china.

1.Evolution of banking system:

2. Growth of mortgage lending:


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Chinese Banking Structure

The banking system in China used to be monolithic, with the People's Bank of China (PBC),

which is the central bank, as the main entity authorized to conduct operations in that country. In

the early 1980s, the government started opening up the banking system and allowed four state

owned specialized banks to accept deposits and conduct banking business. These four

specialized banks are the Industrial & Commercial Bank of China (ICBC), China Construction

Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC).

In 1994, the Chinese government established three more banks, each of which is dedicated to a

specific lending purpose. These policymaking banks include the Agricultural Development Bank

of China (ADBC), the China Development Bank (CDB) and the Export-Import Bank of China.

The four specialized banks have all conducted initial public offerings and have varying degrees

of ownership by the public. Despite these IPOs, the banks are all still majority owned by the

Chinese government.

China has also allowed a dozen joint stock commercial banking institutions and more than a

hundred city commercial banks to operate in the country. There are also banks in China

dedicated to rural areas of the country. Foreign banks were also allowed to establish branches in

China, and to make strategic minority investments in many of the state owned commercial banks.

Regulatory frame work:

The banking sector of China and the financial market watchdogs

The banking sector has been playing an indispensable role in Chinas economic development.

Various banking institutions, including state-owned commercial banks, joint-stock commercial

banks, urban credit cooperatives, city commercial banks, rural financial institutions, foreign-

funded banks, policy banks and non-bank financial institutions, serve different areas and

different segments of the economy. Currently, the total assets of the banking sector registeredRMB 62.4 trillion. The China Banking Regulatory Commission (CBRC) is the main regulator of

the banking sector. Along with the CBRC, there are several other regulators holding different

responsibilities.


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Peoples Bank of China (PBC) and State Administration of Foreign Exchange (SAFE)

The Peoples Bank of China (PBC) was established on December 1, 1948. Until 1984, PBC

functioned as the central bank as well as a commercial bank. With the promulgation of The Law

of the People's Republic of China on the People's Bank of China on March 18, 1995, PBC was

granted its central bank status legally and empowered to supervise the financial industry as a

whole.

Over the past ten years, the supervisory responsibilities of the PBC for various financial sectors

were shifted to a few newly established regulatory bodies, i.e., CBRC, the China Securities

Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC).

Now, the main tasks of PBC are to formulate and implement monetary policy, prevent and

resolve financial risks, and safeguard financial stability. Along with that, PBC also maintains the

banking sector's payment, clearing and settlement systems, takes responsibility for anti-money

laundering work and manages Chinas official foreign exchange and gold reserves. It cooperates

with the State Administration of Foreign Exchange (SAFE) for setting foreign exchange policies.

China Securities Regulatory Commission (CSRC)

CSRC, the supervisory body of Chinas capital market, was established in October 1992. It is

mainly responsible for the regulation and supervision of the securities and futures markets,

including the following: setting rules for these markets; regulating the behavior of stock

exchanges, listed companies, securities houses, futures companies, funds, brokers and settlement

institutions; overseeing the issuance, trading,custody and settlement of various instruments on

the market; supervising information disclosure related to the capital market; and investigating

and penalizing activities that violating the securities and futures laws and regulations.

China Insurance Regulatory Commission (CIRC)

CIRC was established on November 11, 1998, to administer, supervise and regulate Chinas

insurance market. Insurance companies and their branches, insurance groups, and insurance asset

management companies as well as insurance intermediaries are subject to the supervision of

CIRC. CIRC is also responsible for market admission, management qualification, and setting of

industry standards for the insurance market. One of CIRCs duties is to investigate market


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irregularities and impose penalties. It also examines and approves the clauses and premium rates

of insurance companies, the business operation of public policy-oriented insurance and statutory

insurance, and supervises organizational forms and the operations such as captive insurance and

mutual insurance.

The role of China Banking Regulatory Commission (CBRC)

CBRC was established on April 28, 2003, an important step in Chinas economic reform and

consistent with the requirements for developing a socialist market economy. It was also a

significant initiative to deepen financial reform, strengthen financial supervision and improve the

financial system, thus helping position the industry to cope with the demand of economic

development.

CBRC comprises the head office and 36 local offices under which 296 field offices operate. As

authorized by the State Council, CBRC is responsible for the regulation and supervision of

banks, asset management companies, and trust and investment companies as well as other

deposit-taking financial institutions. Its major responsibilities are as follows:

Formulate supervisory rules and regulations for banking institutions

Authorize the establishment, changes, termination, branching and business scope of banking

institutions

Conduct fit and proper tests for directors and senior managers

Conduct off-site surveillance and on-site examinations of banking institutions

Investigate, penalize and take enforcement actions on activities that violate relevant laws and

regulations

Compile and publish statistics and reports of the overall banking sector in accordance with

relevant regulations


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Financial Development indicators 2005-2010:


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Chinas capital markets:

The development of Chinas capital markets can be divided into three phases

Between early 1978 and 1992 full-scale economic reform took place, with capital markets

emerging in response to the beginning incorporation process of Chinese enterprises as the

concept of privatisation took off following the introduction of the Open Door policy. In the

second phase (1993-1998), the focus shifted to strengthening the capital markets in terms of

institutional framework as well as supervisory framework. Supervision of capital markets was

consolidated, leading to the formation of the China Securities Regulatory Commission (CSRC)

in its current form. Regional pilot programmes were expanded nationwide. The promulgation of

the Securities Law marked a milestone in the third phase between 1999 and 2007, resulting in

formalisation and strengthening of the legal status of Chinas capital markets. The emphasis

rested on refinement of the legal and regulatory system to create a more transparent and efficient

market. Concepts such as corporate governance and market discipline were introduced. Further,

a series of reforms were implemented to facilitate future development of national capital markets

in terms of product diversification. While substantial progress has been made and reforms are

generally heading in the right direction, several areas are still subject to further work. These

include, among others, corporate governance as well as capital market infrastructure and rating

agencies. In order to make Chinas financial markets really world class they have to become

freer, more transparent and better regulated. Aside from increasing the share of institutional

investors, especially in the stock market, it is necessary to raise the general level of financial

literacy. By successfully implementing these reforms, Chinas financial markets will be in better

shape to serve investors and fund raisers needs at the same time, and thussupport Chinas long-

term growth in a more efficient manner.

Structure of Chinas capital markets: Compared to industrial countries, Chinas financial

markets are still relatively shallow as measured in relation to nominal GDP. Bank loans to theprivate sector account for the lions sharenot least due to the recent steep decline in the stock

market. However, in a BRIC comparison, China leads in terms of combined financial market

depth. The comparatively large share of private sector credit shows that the Chinese economy

remains heavily dependent on bank finance. Bank loans account for more than 80% of total

financing to the nonfinancial sector, while equity and bond issuance plays a subordinated role


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Aside from financial risk concentration in the banking system2 this signals that capital markets

are still underdeveloped.


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China GDP Growth Rate

The Gross Domestic Product (GDP) in China expanded 1.80 percent in the first quarter of 2012

over the previous quarter. Historically, from 2011 until 2012, China GDP Growth Rate averaged

2.1200 Percent reaching an all time high of 2.4000 Percent in September of 2011 and a record

low of 1.8000 Percent in March of 2012. The Gross Domestic Product (GDP) growth rate

provides an aggregated measure of changes in value of the goods and services produced by an

economy. China's economy is the second largest in the world after that of the United States.

During the past 30 years China's economy has changed from a centrally planned system that was

largely closed to international trade to a more market-oriented that has a rapidly growing private

sector. A major component supporting China's rapid economic growth has been exports growth.

This page includes a chart with historical data for China GDP Growth Rate.

China's Balance of Payments Statement for Q1 of 2011:

In Q1 of 2011, China's surplus under the current account totaled USD28.8 billion, a decrease of

21 percent year on year. Specifically, according to the statistical coverage of the balance of

payments, the surpluses in goods, income, and current transfers reached USD20.8 billion,


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USD5.1 billion, and USD11.6 billion, respectively, whereas the deficit in trade in services

amounted to USD8.7 billion.

Meanwhile, in Q1 of 2011 China's surplus under the capital and financial account totaled

USD86.1 billion, an increase of 41 percent year on year. In particular, net inflows of direct

investments and other investments amounted to USD44.8 billion and USD42.5 billion

respectively, whereas net outflows of portfolio investments reached USD2.7 billion.

China's international reserve assets from transactions increased by USD141.2 billion.

Specifically, foreign exchange reserve assets registered a net increase of USD138 billion

(exclusive of the influence of non-transaction value change factors such as exchange rates,

prices, and so forth), reserve investment in the IMF registered an increase of USD3.2 billion, and

special drawing rights registered a decrease of USD100 million.

Foreign exchange reserves:

Year US $ Billon

1980 2.5

1981 5.1

1982 11.3

1983 15

1984 17.4

1985 12.7

1986 11.5

1987 16.3

1988 18.5

1989 18

1990 29.6

1991 43.7

1992 *20.6

1993 22.4

1994 52.9

1995 75.4

1996 107

1997 142.8

1998 149.2


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1999 146.2

2000 165.6

2001 212.2

2002 286.4

2003 403.3

2004 609.9

2005 818.9

2006 1066.3

2007 1528.2

2008 1946

2009 2399.2

2010 2874.3

2011 3181.1

China Inflation Rate

The inflation rate in China was recorded at 3 percent in May of 2012. Historically, from 1994

until 2012, China Inflation Rate averaged 4.3000 Percent reaching an all time high of 27.7000

Percent in October of 1994 and a record low of -2.2000 Percent in March of 1999. Inflation rate

refers to a general rise in prices measured against a standard level of purchasing power. The most

well known measures of Inflation are the CPI which measures consumer prices, and the GDP

deflator, which measures inflation in the whole of the domestic economy. This page includes a

chart with historical data for China Inflation Rate.


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Current Financial System of China

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