What is the Chinese Banking System?
Chinese Banking System Explained in Brief
The Chinese banking system is pivotal when allocating money to investment possibilities. As the Chinese economy has developed over the last decade, so has the country's financial sector, to the point that some of the biggest banks in the world are now headquartered in China. Banks in China have grown increasingly business-focused over the last several years, yet the central government still has a significant say in their operations. This article closely examines the Chinese banking industry, exploring its main features and examining its size and composition.
System of Chinese Banks
The System of Banking Law in China Explained
Historically, the People's Bank of China (PBoC) was the only Chinese financial institution permitted to do business. However, the banking system was liberalised in the early 1980s, allowing five state-owned speciality banks to begin accepting deposits and banking activities. The Industrial and Commercial Bank of China (ICBC), the China Construction Bank (CCB), the Bank of China (BoC), the Bank of Communications (BoC), and the Agricultural Bank of China are the five specialised banks in China (ABC).
In the middle of the last century, the government of China established three different banks, each of which caters to a different kind of borrower. The ADBC, CDB, and ECB are all policy-making financial institutions in China. These specialist banks have all gone public via IPOs, but the public's stake in each differs. Moreover, even after these IPOs, the Chinese government retains control of the banks.
The Chinese government has authorised the operation of over a hundred city commercial banks and a dozen joint-stock commercial banking organisations. As with urban regions, rural communities in China have access to their banks. In addition, according to China's banking news, many state-owned commercial banks in China now accept strategic minority interests from foreign banks, and foreign banks are permitted to set up branches in the country.
By the end of 2021, the total assets of the Chinese banking sector amounted to 288.6 trillion yuan, or $42.7 trillion.
Banking Law in China
Banking Law in China Explained
The China Banking Regulatory Commission (CBRC) was superseded in April 2018 by the China Banking Insurance Regulatory Commission (CBIRC), the primary regulatory agency responsible for overseeing the Chinese banking industry. The China Banking and Insurance Regulatory Commission (CBIRC) is responsible for formulating the laws and guidelines that apply to these industries in China. Furthermore, it authorises the formation or growth of banks and deals with any liquidity, solvency, or other issues that may arise at individual banks. It performs exams and monitoring of banks and insurers.
To a large extent, the People's Bank of China also controls the Chinese banking industry. The People's Bank of China (PBoC) is charged with ensuring the safety and soundness of the financial system while also carrying out the traditional duties of a central bank, such as setting monetary policy and governing the people abroad. Besides overseeing the settlement and payment system, the PBoC controls interbank lending and foreign exchange.
Banking in China: Guaranteed Deposits
In May 2015, new laws regarding deposit insurance were implemented in China. Banks provide deposit insurance to customers to prevent them from losing their money and to prevent a "run on the bank" if rumours of trouble at the bank spread. The agency will also facilitate the orderly liquidation of bankrupt financial institutions.
In April 2021, the Chinese Central Bank received insurance premiums from 4,024 financial institutions, totalling 42.38 billion yuan ($6.27 billion).
Conclusion
China's economy and institutions have developed rapidly during the last several decades. Underneath a social market economy, economic institutions have greater autonomy than in a communist-style economy. The Chinese banking sector is undergoing a reform program to shift to private management and to facilitate the gradual transition to a capitalist economic model, a process projected to take several years.
FAQs on Chinese Banking System: A Detailed Overview
1. What is the basic structure of the Chinese banking system?
China's banking system operates on a two-tier model. At the top is the central bank, the People's Bank of China (PBOC), which sets monetary policy. The second tier consists of various banking institutions, including state-owned commercial banks, policy banks, joint-stock commercial banks, and city-based commercial banks that handle day-to-day banking for individuals and businesses.
2. Who are the 'Big Four' banks in China?
The 'Big Four' are the largest state-owned commercial banks that dominate the Chinese banking sector. They are:
- Industrial and Commercial Bank of China (ICBC)
- China Construction Bank (CCB)
- Agricultural Bank of China (ABC)
- Bank of China (BOC)
These banks play a crucial role in the country's economy and are among the largest in the world by total assets.
3. What is the role of the government in China's banking sector?
The Chinese government has a very significant role. It is the majority shareholder in the largest commercial banks and fully owns the country's policy banks. This control allows the government to direct lending towards specific industries and infrastructure projects to achieve its economic goals, making the banking system a key tool for state policy.
4. What is the difference between a commercial bank and a policy bank in China?
The main difference lies in their objectives. Commercial banks, like the 'Big Four', operate to make a profit by providing standard banking services. In contrast, policy banks (like the China Development Bank) are government-owned institutions that do not focus on profit. Their primary role is to finance government projects and support national economic priorities.
5. How has China's banking system supported its economic growth?
China's state-controlled banking system has been vital for its economic growth by directing huge amounts of capital towards infrastructure development and key manufacturing industries. By providing low-cost loans to state-owned enterprises and strategic sectors, the banks have fuelled rapid industrialisation and expansion, which has been a cornerstone of China's economic model.
6. What are some of the main challenges facing the Chinese banking system?
One of the biggest challenges is the high level of non-performing loans (NPLs), or loans that are unlikely to be repaid. These often arise from lending to inefficient state-owned enterprises and speculative real estate projects. This creates risk within the financial system and concerns about long-term stability.
7. How is the People's Bank of China (PBOC) different from India's Reserve Bank of India (RBI)?
While both are central banks, their level of independence differs. The RBI operates with a significant degree of autonomy from the government in setting monetary policy. The PBOC, on the other hand, works more directly under the guidance of the state council and the Chinese government, meaning its decisions are often closely aligned with the government's broader economic and political objectives.
