The Handbook of China's Financial System

Marlene Amstad, Guofeng Sun, Wei Xiong

• Publisher: Princeton University Press
• Year: 2020
• Print ISBN: 9780691205731
• eBook ISBN: 9780691205847
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

A comprehensive, in-depth, and authoritative guide to China's financial system

The Chinese economy is one of the most important in the world, and its success is driven in large part by its financial system. Though closely scrutinized, this system is poorly understood and vastly different than those in the West. The Handbook of China's Financial System will serve as a standard reference guide and invaluable resource to the workings of this critical institution.

The handbook looks in depth at the central aspects of the system, including banking, bonds, the stock market, asset management, the pension system, and financial technology. Each chapter is written by leading experts in the field, and the contributors represent a unique mix of scholars and policymakers, many with firsthand knowledge of setting and carrying out Chinese financial policy. The first authoritative volume on China's financial system, this handbook sheds new light on how it developed, how it works, and the prospects and direction of significant reforms to come.

Contributors include Franklin Allen, Marlene Amstad, Kaiji Chen, Tuo Deng, Hanming Fang, Jin Feng, Tingting Ge, Kai Guo, Zhiguo He, Yiping Huang, Zhaojun Huang, Ningxin Jiang, Wenxi Jiang, Chang Liu, Jun Ma, Yanliang Mao, Fan Qi, Jun Qian, Chenyu Shan, Guofeng Sun, Xuan Tian, Chu Wang, Cong Wang, Tao Wang, Wei Xiong, Yi Xiong, Tao Zha, Bohui Zhang, Tianyu Zhang, Zhiwei Zhang, Ye Zhao, and Julie Lei Zhu.

PART 1

BANKING AND MONETARY POLICY

1

BANKING INSTITUTIONS AND BANKING REGULATIONS

Guofeng Sun

China’s financial sector has undergone dramatic changes over the last 40 years. Before the start of China’s market-oriented reform in 1978, the sector consisted of a handful of institutions with extremely limited functions, whereas today it is home to some of the world’s largest banks. The recovery and reconstruction of the Agriculture Bank of China (ABC), the Bank of China (BOC), and the China Construction Bank (CCB) in 1979 signaled the start of the reform of China’s banking industry. The Industrial and Commercial Bank of China (ICBC) was founded in January 1984; shortly afterward, on April 1, 1987, the Bank of Communications (BCM) was restructured. ABC, BOC, CCB, and BCM existed before these reconstructions in different names or as subsidiaries of other institutions.

To understand China’s financial sector, it is necessary to view it within the broad context of economic reform, which transformed China from a closed, stagnant, centrally planned, agrarian economy to an open, dynamic, market-oriented, industrial economy. Before the reforms, the financial sector was largely sidelined or even eliminated and played no role in the central-planning machinery other than that of cashier and accountancy; it gradually gained greater prominence as the market started to play a larger role in allocating resources as a result of China’s market reforms (Yi, 2009). Today, China’s banking industry is the synthesis of China’s economic reforms and its historical legacy. Through a series of reforms, China’s banking institutions have become some of the best in the world and dominate China’s financial system (Yi and Guo, 2014).

This chapter gives an overview of the ongoing development of banking institutions and banking regulations in China, with a focus on the main characteristics, formation, and reform processes that have changed the sector since 1978. The first section introduces the main characteristics of the banking institutions, which are at the center of the financial system. The sector is highly concentrated in large, state-owned commercial banks. The second section describes the major types of China’s banking institutions. The third section discusses the reforms of the state-owned commercial banks, and then reviews the recent reforms of the banking industry. The fourth section describes the regulators of China’s banking industry—the People’s Bank of China (PBC), the China Banking and Insurance Regulatory Commission (CBIRC), the Ministry of Finance (MOF), and the State Administration of Foreign Exchange (SAFE). The fifth section summarizes both what has been achieved through the implementation of regulations, including micro-prudential supervision initiatives and macro-prudential policies, and what remains to be done. The sixth section introduces China’s shadow banking, detailing its composition, size, development, financial risk, monetary policy challenges, and recent regulations.

1. INTRODUCTION

1.1. Banking Institutions Dominate China’s Financial System

Banking institutions make up most of China’s financial system (Sun, 2015a). In the 40 years since the beginning of China’s economic reform and opening-up policy, China’s banking industry has made rapid progress and has now established its leading role in the world (table 1.1). In The Banker’s list of the 1,000 top banks in the world, 136 were Chinese. Among the top ten banks ranked by tier-one capital, China’s banks and U.S. banks took four places each.

Banking institutions have consistently dominated China’s financial system. The banking industry has been the major financial support for substantive economic development throughout the country.

The total assets of China’s banking system are enormous; in fact, most of the assets in China’s financial system are concentrated in the banking system (Demirgüç-Kunt and Levin, 2004). As shown in table 1.2, the banking industry owns more than 97% of the financial system’s total assets.

In addition, the scale of the banking industry far exceeds the total financing of the bond and stock markets (Sun, 2015b). As demonstrated in table 1.3, in 2002, the loans by the banking industry accounted for more than 90% of the flow of Aggregate Financing to the Real Economy (AFRE)¹. As it was developed, the banking industry has decreased its share of support to the real economy, but it remains very high—in 2018, it accounted for 65% of the flow of AFRE. There are two points worth noting. First, although the banking industry has decreased the amount of loans for AFRE, its asset management business, as listed in table 1.3, is rapidly growing. Second, the main source of funding for trust loans, a key component of the shadow banking, is still the banking industry.

1.2. High Concentration in Big Banks

In China’s banking system, the five big state-owned commercial banks have always maintained their d...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword
• Introduction
• Part 1: Banking and Monetary Policy
• Part 2: Bond and Money Markets
• Part 3: Financial System and the Real Economy
• Part 4: Ongoing Reforms
• Part 5: Stock Market
• Part 6: Asset Management
• Part 7: Pension System
• Part 8: New Developments
• Editors and Contributors
• Index