Chinese financial system
Encyclopedia
China's financial system is highly regulated and has recently begun to expand rapidly as monetary policy
becomes integral to its overall economic policy
. As a result, banks are becoming more important to China's economy by providing increasingly more finance
to enterprises
for investment
, seeking deposits
from the public to mop up excess liquidity
, and lending
money
to the government.
As part of US$586 billion economic stimulus package of November 2008, the government plans to remove loan quotas and ceilings for all lenders, and increase bank credit for priority projects, including rural areas, small businesses, technology companies, iron and cement companies.
has exercised the functions and powers of a central bank
, as well as handling industrial and commercial credits
and savings business; it was neither the central bank in the true sense, nor a commercial entity conforming to the law of the market economy
. But since reform and opening-up began in 1978, China has carried out a series of significant reforms in its banking system
, and strengthened its opening to the outside world. Consequently, the finance industry
has made steady development. At the end of 2004, the balance of domestic and foreign currency savings deposits stood at 25,318.8 billion yuan and the balance of home and foreign currency loans came to 18,856.6 billion yuan. Now China has basically formed a financial system under the regulation, control and supervision of the central bank, with its state banks as the mainstay, featuring the separation of policy-related finance and commercial finance, the cooperation of various financial institutions with mutually complementary functions.
In 1984, the People's Bank of China stopped handling credit and savings business, and began formally to exercise central bank functions and powers by conducting macro-control and supervision over the nation's banking system
. In 1994, the Industrial and Commercial Bank of China
, the Bank of China
, the Agricultural Bank of China
and the China Construction Bank
were transformed into state-owned commercial banks; and three policy-related banks were founded, namely, the Agricultural Development Bank of China
, the National Development Bank and the China Import and Export Bank. In 1995, the Commercial Bank Law was promulgated, creating the conditions for forming the commercial bank system and organizational structure, and providing a legal basis for changing the specialized state banks to state-owned commercial banks.
Since 1996, the financial organizational system has gradually been improved; the wholly state-owned commercial banks have been transformed into modern financial enterprises handling currencies; over 120 shareholding medium and small-sized commercial banks have been set up or reorganized; and securities and insurance financial institutions have been further standardized and developed. April 2003 saw the formal establishment of the China Banking Regulatory Commission
(CBRC). Since then, a financial regulatory system has been formed in which CBRC, China Securities Regulatory Commission
(CSRC) and China Insurance Regulatory Commission
(CIRC) work in coordination, each body having its own clearly defined responsibilities.
In January 2004, the State Council decided that the Bank of China and the China Construction Bank would start the experiment of transforming the shareholding
system. The main tasks are to establish a standardized corporate governance
and an internal system of rights and responsibilities in accordance with the requirements for modern commercial banks; to restructure the financial system, speed up the disposal of non-performing assets and to reinforce minimum capital requirement to build up first-class modern financial enterprises. Now, six shareholding commercial banks and urban commercial banks in China have begun to accept overseas investors as shareholders.
, coastal open cities and inland central cities have approved a range of wholly foreign-owned and Chinese-foreign joint venture financial institutions. Every year since 2002, China has increased the number of cities where foreign banks are allowed to handle RMB business, and within five years such banks will be allowed to handle RMB business in any city. At the end of 2004, the total assets of foreign financial institutions in China reached over US$47 billion; foreign banks were allowed to handle RMB business in 16 areas, and 62 foreign banks from 19 countries and regions set up 191 business institutions in China, of which 116 were approved to handle RMB business. There were 211 foreign bank branches in China.
The CSRC
has approved the establishment of 13 Sino-foreign equity
joint venture
fund management
companies
, and started to formally handle the application of establishment of joint venture fund management companies with a maximum 49 percent foreign share; the CIRC
declared that: from December 11, 2004 on, foreign insurance companies could handle health insurance, group insurance, life insurance and annuity insurance businesses; regional restrictions on establishing wholly foreign-funded insurance institutions were canceled and the proportion of the foreign share in joint venture insurance agencies was allowed to reach 51 percent.
Foreign banks have expanded their China-related business scope. In November 2003, the CBRC started to implement new policies, e.g., permitting foreign banks to provide RMB services to all kinds of Chinese enterprises in areas with open RMB business (previously, these banks' RMB services were restricted to foreign-funded enterprises, foreigners and people from Hong Kong, Macao and Taiwan in cities with open RMB business). The new policy also encourages qualified international strategic investors to join the restructuring and reforming of China's banking and financial institutions on a voluntary and commercial basis.
Meanwhile, all China's commercial banks have set up branches overseas, and started an international credit business. The Bank of China
ranks first in the number and scale of overseas outlets. In 1980, China resumed membership of the World Bank
, and returned to the International Monetary Fund
. In 1984, China started business contacts with the Bank for International Settlements
. In 1985, China formally joined the African Development Bank
and in 1986 formally became a member of the Asian Development Bank
.
After more than a quarter century of reform and opening to the outside world, by 2005 China’s economy had become the second largest in the world after the United States when measured on a purchasing power parity
(PPP) basis. The government has a goal of quadrupling the gross domestic product
(GDP) by 2020 and more than doubling the per capita GDP
. Central planning has been curtailed, and widespread market mechanisms and a reduced government role have prevailed since 1978. The government fosters a dual economic structure that has evolved from a socialist, centrally planned economy to a socialist market economic system, or a "socialist market economy with Chinese characteristics
". Industry is marked by increasing technological advancements
and productivity
. People’s communes were eliminated by 1984 — after more than 25 years — and the system of township-collective-household production was introduced to the agricultural sector. Private ownership of production assets is legal, although some nonagricultural and industrial facilities are still state-owned and centrally planned. Restraints on international trade
were relaxed when China acceded to the World Trade Organization
in 2001. Joint ventures are encouraged, especially in the coastal Special Economic Zone
s and open coastal cities. A sign of the affluence that the reformed economy has brought to China might be seen in the number of its millionaires (measured in U.S. dollars): a reported 236,000 millionaires in 2004, an increase of 12 percent over two years earlier.
Chinese officials cite two major trends that have an effect on China’s market economy and future development: world multipolarization and regional integration. In relation to these trends, they foresee the roles of China and the United States
in world affairs and with one another as very important. Despite successes, China’s leaders face a variety of challenges to the nation’s future economic development
. They have to maintain a high growth rate, deal effectively with the rural workforce, improve the financial system, continue to reform the state-owned enterprises, foster the productive private sector, establish a social security
system, improve scientific and educational development, promote better international cooperation, and some believe, change the role of the government in the economic system. Despite constraints the international market
has placed on China, it nevertheless became the world’s third largest trading nation in 2004 after only the United States and Germany
.
The Fifth Plenum of the Sixteenth CPC Central Committee took place in October 2005. The Fifth Plenum approved the new Eleventh Five-Year Plan (2006–10), which emphasizes a shift from extensive to intensive growth in order to meet demands for improved economic returns; the conservation of resources to include a 20% reduction in energy consumption
by 2010; and an effort to raise profitability
. Better coordination of urban and rural development and of development between nearby provincial regions also is emphasized in the new plan.
is less than 25% of gross domestic product
(about 22.10% in 2006). (See List of countries by public debt.)
China has a budget deficit of around 1.5% of GDP. China projected a budget deficit of 295 billion yuan in 2006, down 1.7% from 2005. The overall budget deficit in 2004 was approximately US$26 billion, an amount equivalent to about 1.5% of GDP. In 2007, economic planners expect China's already small budget deficit to shrink again. According to economists, this has afforded China to spend more on public services such as education and healthcare.
The government budget
for 2004 was US$330.6 billion in revenue
and US$356.8 billion in expenditures
. 95.5% of revenue was from tax
es and tariff
s, 54.9% of which was collected by the central government
and 45% by local government
. The expenditures were for culture
, education
, science
, and health care
(18%); capital construction
(12%); administration
(14%); national defense
(7.7%); agriculture
, forestry
, and water conservancy
(5.9%); subsidies
to compensate for price increases (2.7%); pension
s and social welfare provisions (1.9%); promotion of innovation
, science
, and technology
(4.3%); operating expenses of industry
, transport
, and commerce
(1.2%); geological
prospecting
(0.4%), and other (31.9%).
es were the mainstay and other tax categories were in coordination with it was initially in place and promoted the control of finances and the economy. In 1994, the reform of the taxation system was deepened, and a complete structural adjustment of the taxation system was made by taking the market economy as the norm. In 1996, China lowered the rate of customs
duties and export drawback, and exercised import supervision.
averaged 6% per year during the 1990–2002 period. Although consumer prices declined by 0.8% in 2002, they increased by 1.2% in 2003. China’s estimated inflation rate in 2006 was 1.8%.
ing system is highly regulated with six major banks, each having specific tasks and duties. The People's Bank of China
is the largest bank in China and acts as the Treasury
. It also issues currency
, monitors money supply
, regulates monetary organizations and formulates monetary policy for the State Council
. The Bank of China
manages foreign exchange
transactions
and manages foreign exchange reserves
. The China Development Bank
distributes foreign capital
from a variety of sources, and the China International Trust and Investment Corporation (CITIC
) was previously a financial organization that smoothed the inflow of foreign funds, but is now a full bank, allowing to compete for foreign investment funds with the Bank of China. The China Construction Bank
lends funds for capital construction projects from the state budget, and finally the Agricultural Bank of China
functions as a lending and deposit taking institution for the agricultural sector
.
and insurance
, and operational boundaries are being slowly eroded to promote competition for customers who are now permitted to choose banks as well as hold accounts in more than one bank.
Banking reform was initiated in China in 1994, and the Commercial Banking Law took effect in July 1995. The aims of these actions were to strengthen the role of the central bank—the People’s Bank of China—and to allow private bank
s to be established. The People’s Bank of China was established in 1948. It issues China’s currency and implements the nation’s monetary policies. China’s oldest bank, founded in 1908, is the Bank of Communications
Limited, a commercial enterprise located in Shanghai
. China’s second oldest bank was established in 1912 as the Bank of China. Since 2004 it has become a shareholding company known as the Bank of China Limited and handles foreign exchange and international financial settlements. The Agricultural Bank of China
, founded in 1951, is mainly involved in rural financing and the provision of services to agricultural, industrial, commercial, and transportation enterprises in rural areas. Other major banks include the China Construction Bank
; established in 1954 as the People’s Construction Bank of China, it has been a state-owned commercial bank since 1994 and maintains some 15,400 business outlets inside and outside China, including six overseas branches and two overseas representative offices. The China Construction Bank was restructured in 2003 into a shareholding bank called the China Construction Bank Corporation, with the state holding the controlling shares. CITIC
was founded in 1979 to assist economic and technological cooperation, finance, banking, investment, and trade. The Industrial and Commercial Bank of China
was founded in 1984 to handle industrial and commercial credits and international business. The Agricultural Development Bank of China
, Export and Import Bank of China, and State Development Bank all were founded in 1994. China’s first private commercial national bank, the China Minsheng Banking Corporation, was opened in 1996. Commercial banks are supervised by the China Banking Regulatory Commission
, which was established in 2003. In 2005 the commission announced the launching of a new postal savings bank to replace the old system and its more than 36,000 outdated outlets nationwide.
and Shenzhen
. Their participation in China's financial system has been limited, but as China starts to borrow more from abroad, their role may become greater in the future.
When first permitted in the mid-1980s, foreign banks were restricted to designated cities and could deal only with transactions by foreign companies in China. After those restrictions were loosened following China’s accession to the World Trade Organization
in 2001, some foreign banks have been allowed to provide services to local residents and businesses. In 2004 there were some 70 foreign banks with more than 150 branches in China. In 2007 a limited number of foreign banks were allowed to issue debit cards in China (and Bank of East Asia
was allowed to issue a credit card). This made banking with a foreign bank more convenient, as money in accounts could be accessed at ATMs like customers of local banks could. In 2009 this number grew to six, but only two of these are not tied to Hong Kong.
, Shanghai
(the third largest in the world), and Shenzhen
and futures exchange
s in Shanghai
, Dalian
, and Zhengzhou
. They are regulated by the China Securities Regulatory Commission
.
and Shenzhen
. In the past decade, the Chinese stock market has completed a journey that took many countries over a century to cover; China's stock market today has capital approaching 3,705.6 billion yuan, 1,377 listed companies and 72.16 million investors.
The Chinese stock market has promoted the reform of government-owned corporation
s and the change of their systems, and enabled a stable transition between the two systems. On the strength of the stock market in the past decade, many large state-owned enterprises have realized system change.
The change also has stimulated medium and small-sized state-owned enterprises to adopt the shareholding
system, thus solving the most important issue - the system problem - during the transition from planned to a market economy
. As for ordinary citizens, bank deposit
is not the only way to put their money, the stock market has become one of the most important channels for investment.
Methods of stock trading are constantly being improved. Today, a network system for securities exchange and account settlement has been formed, with the Shanghai and Shenzhen exchanges as the powerhouse, radiating to all parts of the country. In 2004, China issued 123 kinds of A share, and 23 rights issues, collecting a total of 83.6 billion yuan; and 28 kinds of B and H shares, collecting a total of 67.5 billion yuan.
China has also learnt from Hong Kong's financial system, with the help of the Hong Kong Monetary Authority
.
of US$32 billion in 2004 and US$38.7 billion in 2003. These amounts reflect the general course of a favorable trade balance during the previous eight years. In 1996 China’s trade balance was US$12.2 billion, peaking at US$43.4 billion in 1998 but declining to US$24.1 billion by 2000 before starting its new increase.
balance in 2004 was nearly US$68.7 billion. Added to this total was US$54.9 billion in foreign direct investment
(exceeding that invested in the United States). When other investments, assets, and liabilities are brought into the calculation, the overall balance of payments was US$206.1 billion in 2004, compared with US$75.2 billion in 2002 and US$116.5 billion in 2003.
statistics for 2001, China’s external and public, or publicly guaranteed, long-term debt had reached US$91.7 billion. China’s debt had grown steadily during the 1990s, peaked at US$112.8 billion in 1997, and then declined annually thereafter. By 2004 China had US$618.5 billion in its international reserve account, 98.6 percent of which was from foreign exchange, not including the Bank of China’s foreign exchange holdings.
(UN) system. China received US$112 million in such UN assistance annually in 2001 and 2002, the largest portion coming from the UN Development Programme (UNDP).
China also obtains foreign capital through foreign loans, foreign direct investment
(FDI), and other investment by foreign businesses. Since 1980 foreign businesses from more than 170 countries and regions have invested in Chinese joint-venture enterprises. Most joint-venture activities are located in coastal cities and increasing numbers in inland cities as well. Some 300 of the 500 top transnational companies in the world have invested in China, and foreign investments have become an important capital source for China’s economic development. In 1999 FDI totaled US$40.3 billion. Between 1979 and 1999, cumulative FDI totaled US$305.9 billion, US$40.3 billion of which was invested in 1999 alone. In that year, China had approved the establishment of 342,000 foreign-funded enterprises, more than 100,000 of which have gone into operation. Contracted FDI reached nearly US$82.8 billion in 2002, US$115 billion in 2003, US$153.48 in 2004, and US$130.33 billion in the first nine months of 2005.
In 2007, China enacted a new law for corporate income tax which would unify the rates paid by foreign and domestic firms at 25 percent. Domestic firms used to pay 33 percent and foreign-funded firms 15 percent. Analysts say the overall impact on foreign direct investment would be limited due to China's relatively cheap labor and the promise of a huge market.
(RMB, "people’s currency") or yuan
. The interbank
exchange rate
on August 1, 2006, was US$1 = RMB7.98. The RMB is made up of 100 fen or 10 jiao. Coin
s are issued in denominations of one, two, and five fen; one and five jiao, and one RMB. Banknote
s are issued in denominations of one, two, and five jiao; and one, two, five, 10, 50, and 100 RMB.
The Renminbi is issued and controlled solely by the People's Bank of China
. RMB exchange rates are decided by the People's Bank of China and issued by the State Administration of Foreign Exchange
, the latter exercising the functions and powers of exchange control.
In 1994, China reformed the foreign exchange system, combined the RMB exchange rates, adopted the bank exchange settlement system and set up a unified inter-bank foreign exchange market. On this basis, China included the foreign exchange business of the foreign-invested enterprises in the bank's exchange settlement system in 1996. On December 1, 1996, China formally accepted Article 8 of the Agreement on International Currencies and Funds, and realized RMB convertibility under the current account ahead of schedule. Meanwhile, China has been active in promoting bilateral currency exchange between ASEAN and China, Japan and the Republic of Korea (10+3). At the end of 2004, China's foreign exchange reserves reached US$609.9 billion and its share in the International Monetary Fund
has risen from 11th to 8th place. The variety of financial businesses has been increasing steadily, and China has opened an array of new businesses to become integrated into the various aspects of modern international financial business, such as consumer credit
, securities
investment funds and insurance
-linked investments.
industry started to recover in 1980, after a 20 year standstill. In 1981, the People's Insurance Company of China
was transformed from a government department into a specialized company, with branches or sub-branches in every part of China. 1988 witnessed the founding of the Ping An Insurance
(Group) Company of China and the Pacific Insurance Company, both mainly active in the coastal areas. In 1996, the People's Insurance Company of China made a big step forward in transforming its administration and operational mode, in setting up a modern enterprise system, and integrating with the international market. The Insurance Law of 1985 and the founding of the China Insurance Regulatory Commission
in 1988 provided the legal basis and specific rules for the operation of the insurance market. In 1980, China only had one insurance company; by 2004 there were 62, with a total revenue of premiums of 431.8 billion yuan, of which 100.4 billion were paid as compensation
and payment
.
People
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
becomes integral to its overall economic policy
Economic policy
Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, national ownership, and many other areas of government interventions into the economy.Such policies are often...
. As a result, banks are becoming more important to China's economy by providing increasingly more finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
to enterprises
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
for investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, seeking deposits
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
from the public to mop up excess liquidity
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
, and lending
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
to the government.
As part of US$586 billion economic stimulus package of November 2008, the government plans to remove loan quotas and ceilings for all lenders, and increase bank credit for priority projects, including rural areas, small businesses, technology companies, iron and cement companies.
Financial reform
For the past few decades, the People's Bank of ChinaPeople's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
has exercised the functions and powers of a central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
, as well as handling industrial and commercial credits
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
and savings business; it was neither the central bank in the true sense, nor a commercial entity conforming to the law of the market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
. But since reform and opening-up began in 1978, China has carried out a series of significant reforms in its banking system
Banking in China
China's banking system has undergone significant changes in the last two decades: banks are now functioning more like banks than before. Nevertheless, China's banking industry has remained in the government's hands even though banks have gained more autonomy...
, and strengthened its opening to the outside world. Consequently, the finance industry
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
has made steady development. At the end of 2004, the balance of domestic and foreign currency savings deposits stood at 25,318.8 billion yuan and the balance of home and foreign currency loans came to 18,856.6 billion yuan. Now China has basically formed a financial system under the regulation, control and supervision of the central bank, with its state banks as the mainstay, featuring the separation of policy-related finance and commercial finance, the cooperation of various financial institutions with mutually complementary functions.
In 1984, the People's Bank of China stopped handling credit and savings business, and began formally to exercise central bank functions and powers by conducting macro-control and supervision over the nation's banking system
Banking in China
China's banking system has undergone significant changes in the last two decades: banks are now functioning more like banks than before. Nevertheless, China's banking industry has remained in the government's hands even though banks have gained more autonomy...
. In 1994, the Industrial and Commercial Bank of China
Industrial and Commercial Bank of China
Industrial and Commercial Bank of China Ltd. is the largest bank in the world by profit and market capitalization. It is one China's 'Big Four' state-owned commercial banks .It was founded as a limited company on January 1, 1984...
, the Bank of China
Bank of China
Bank of China Limited is one of the big four state-owned commercial banks of the People's Republic of China. It was founded in 1912 by the Government of the Republic of China, to replace the Government Bank of Imperial China. It is the oldest bank in China...
, the Agricultural Bank of China
Agricultural Bank of China
Agricultural Bank of China Limited , also known as AgBank, is one of the "Big Four" banks in the People's Republic of China. It was founded in 1951, and has its headquarters in Beijing...
and the China Construction Bank
China Construction Bank
China Construction Bank is one of the 'big four' banks in the People's Republic of China. To date, it is ranked as the nation's second largest and the second largest bank in the world by market capitalization and 12th largest company in the world. The bank has approximately 13,629 domestic branches...
were transformed into state-owned commercial banks; and three policy-related banks were founded, namely, the Agricultural Development Bank of China
Agricultural Development Bank of China
The Agricultural Development Bank of China is a Policy Bank under the People's Central Bank of China . As such, is responsible for funding projects related to China's economic growth...
, the National Development Bank and the China Import and Export Bank. In 1995, the Commercial Bank Law was promulgated, creating the conditions for forming the commercial bank system and organizational structure, and providing a legal basis for changing the specialized state banks to state-owned commercial banks.
Since 1996, the financial organizational system has gradually been improved; the wholly state-owned commercial banks have been transformed into modern financial enterprises handling currencies; over 120 shareholding medium and small-sized commercial banks have been set up or reorganized; and securities and insurance financial institutions have been further standardized and developed. April 2003 saw the formal establishment of the China Banking Regulatory Commission
China Banking Regulatory Commission
The China Banking Regulatory Commission is an agency of the People's Republic of China authorised by the State Council to regulate the banking sector of the PRC except the territories of Hong Kong and Macau, both of which are special administrative regions...
(CBRC). Since then, a financial regulatory system has been formed in which CBRC, China Securities Regulatory Commission
China Securities Regulatory Commission
The China Securities Regulatory Commission is an institution of the State Council of the People's Republic of China , with ministry-level rank...
(CSRC) and China Insurance Regulatory Commission
China Insurance Regulatory Commission
The China Insurance Regulatory Commission is an agency of China authorized by the State Council to regulate the Chinese insurance products and services market and maintain legal and stable operations of insurance industry...
(CIRC) work in coordination, each body having its own clearly defined responsibilities.
In January 2004, the State Council decided that the Bank of China and the China Construction Bank would start the experiment of transforming the shareholding
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
system. The main tasks are to establish a standardized corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
and an internal system of rights and responsibilities in accordance with the requirements for modern commercial banks; to restructure the financial system, speed up the disposal of non-performing assets and to reinforce minimum capital requirement to build up first-class modern financial enterprises. Now, six shareholding commercial banks and urban commercial banks in China have begun to accept overseas investors as shareholders.
Opening up of the financial industry
Over the past 20-odd years, China's financial institutions in the Special Economic ZoneSpecial Economic Zone
A Special Economic Zone is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws...
, coastal open cities and inland central cities have approved a range of wholly foreign-owned and Chinese-foreign joint venture financial institutions. Every year since 2002, China has increased the number of cities where foreign banks are allowed to handle RMB business, and within five years such banks will be allowed to handle RMB business in any city. At the end of 2004, the total assets of foreign financial institutions in China reached over US$47 billion; foreign banks were allowed to handle RMB business in 16 areas, and 62 foreign banks from 19 countries and regions set up 191 business institutions in China, of which 116 were approved to handle RMB business. There were 211 foreign bank branches in China.
The CSRC
China Securities Regulatory Commission
The China Securities Regulatory Commission is an institution of the State Council of the People's Republic of China , with ministry-level rank...
has approved the establishment of 13 Sino-foreign equity
Equity (economics)
Equity is the concept or idea of fairness in economics, particularly as to taxation or welfare economics. More specifically it may refer to equal life chances regardless of identity, to provide all citizens with a basic minimum of income/goods/services or to increase funds and commitment for...
joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
fund management
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
companies
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
, and started to formally handle the application of establishment of joint venture fund management companies with a maximum 49 percent foreign share; the CIRC
China Insurance Regulatory Commission
The China Insurance Regulatory Commission is an agency of China authorized by the State Council to regulate the Chinese insurance products and services market and maintain legal and stable operations of insurance industry...
declared that: from December 11, 2004 on, foreign insurance companies could handle health insurance, group insurance, life insurance and annuity insurance businesses; regional restrictions on establishing wholly foreign-funded insurance institutions were canceled and the proportion of the foreign share in joint venture insurance agencies was allowed to reach 51 percent.
Foreign banks have expanded their China-related business scope. In November 2003, the CBRC started to implement new policies, e.g., permitting foreign banks to provide RMB services to all kinds of Chinese enterprises in areas with open RMB business (previously, these banks' RMB services were restricted to foreign-funded enterprises, foreigners and people from Hong Kong, Macao and Taiwan in cities with open RMB business). The new policy also encourages qualified international strategic investors to join the restructuring and reforming of China's banking and financial institutions on a voluntary and commercial basis.
Meanwhile, all China's commercial banks have set up branches overseas, and started an international credit business. The Bank of China
Bank of China
Bank of China Limited is one of the big four state-owned commercial banks of the People's Republic of China. It was founded in 1912 by the Government of the Republic of China, to replace the Government Bank of Imperial China. It is the oldest bank in China...
ranks first in the number and scale of overseas outlets. In 1980, China resumed membership of the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, and returned to the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
. In 1984, China started business contacts with the Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
. In 1985, China formally joined the African Development Bank
African Development Bank
The African Development Bank Group is a development bank established in 1964 with the intention of promoting economic and social development in Africa...
and in 1986 formally became a member of the Asian Development Bank
Asian Development Bank
The Asian Development Bank is a regional development bank established on 22 August 1966 to facilitate economic development of countries in Asia...
.
Economic reform
The ongoing development of China's financial system will play a critical role in the country’s effort to narrow social disparities and pursue balanced growth. Reforming the financial system would increase the rate of GDP growth and help spread China’s new wealth more evenly. If the reforms directed additional funds to private companies — China's new growth engine — the economy would generate significantly higher returns for the same level of investment and GDP would rise. Such a shift will stimulate mass job creation in the strongest areas of China's economy and increase tax revenues to finance social programs.After more than a quarter century of reform and opening to the outside world, by 2005 China’s economy had become the second largest in the world after the United States when measured on a purchasing power parity
Purchasing power parity
In economics, purchasing power parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates...
(PPP) basis. The government has a goal of quadrupling the gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) by 2020 and more than doubling the per capita GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
. Central planning has been curtailed, and widespread market mechanisms and a reduced government role have prevailed since 1978. The government fosters a dual economic structure that has evolved from a socialist, centrally planned economy to a socialist market economic system, or a "socialist market economy with Chinese characteristics
Socialist market economy
The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...
". Industry is marked by increasing technological advancements
Technological escalation
Technological escalation describes the situation where two parties in competition tend to employ continual technological improvements in their attempt to defeat each other. Technology is defined here as a creative invention, either in the form of an object or a methodology...
and productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
. People’s communes were eliminated by 1984 — after more than 25 years — and the system of township-collective-household production was introduced to the agricultural sector. Private ownership of production assets is legal, although some nonagricultural and industrial facilities are still state-owned and centrally planned. Restraints on international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
were relaxed when China acceded to the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
in 2001. Joint ventures are encouraged, especially in the coastal Special Economic Zone
Special Economic Zone
A Special Economic Zone is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws...
s and open coastal cities. A sign of the affluence that the reformed economy has brought to China might be seen in the number of its millionaires (measured in U.S. dollars): a reported 236,000 millionaires in 2004, an increase of 12 percent over two years earlier.
Chinese officials cite two major trends that have an effect on China’s market economy and future development: world multipolarization and regional integration. In relation to these trends, they foresee the roles of China and the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
in world affairs and with one another as very important. Despite successes, China’s leaders face a variety of challenges to the nation’s future economic development
Economic development
Economic development generally refers to the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area...
. They have to maintain a high growth rate, deal effectively with the rural workforce, improve the financial system, continue to reform the state-owned enterprises, foster the productive private sector, establish a social security
Social security
Social security is primarily a social insurance program providing social protection or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
system, improve scientific and educational development, promote better international cooperation, and some believe, change the role of the government in the economic system. Despite constraints the international market
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
has placed on China, it nevertheless became the world’s third largest trading nation in 2004 after only the United States and Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
.
The Fifth Plenum of the Sixteenth CPC Central Committee took place in October 2005. The Fifth Plenum approved the new Eleventh Five-Year Plan (2006–10), which emphasizes a shift from extensive to intensive growth in order to meet demands for improved economic returns; the conservation of resources to include a 20% reduction in energy consumption
World energy resources and consumption
]World energy consumption in 2010: over 5% growthEnergy markets have combined crisis recovery and strong industry dynamism. Energy consumption in the G20 soared by more than 5% in 2010, after the slight decrease of 2009. This strong increase is the result of two converging trends...
by 2010; and an effort to raise profitability
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
. Better coordination of urban and rural development and of development between nearby provincial regions also is emphasized in the new plan.
Government finances and budget
China's government debtGovernment debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...
is less than 25% of gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(about 22.10% in 2006). (See List of countries by public debt.)
China has a budget deficit of around 1.5% of GDP. China projected a budget deficit of 295 billion yuan in 2006, down 1.7% from 2005. The overall budget deficit in 2004 was approximately US$26 billion, an amount equivalent to about 1.5% of GDP. In 2007, economic planners expect China's already small budget deficit to shrink again. According to economists, this has afforded China to spend more on public services such as education and healthcare.
The government budget
Government budget
A government budget is a legal document that is often passed by the legislature, and approved by the chief executive-or president. For example, only certain types of revenue may be imposed and collected...
for 2004 was US$330.6 billion in revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
and US$356.8 billion in expenditures
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
. 95.5% of revenue was from tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es and tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s, 54.9% of which was collected by the central government
Central government
A central government also known as a national government, union government and in federal states, the federal government, is the government at the level of the nation-state. The structure of central governments varies from institution to institution...
and 45% by local government
Local government
Local government refers collectively to administrative authorities over areas that are smaller than a state.The term is used to contrast with offices at nation-state level, which are referred to as the central government, national government, or federal government...
. The expenditures were for culture
Culture
Culture is a term that has many different inter-related meanings. For example, in 1952, Alfred Kroeber and Clyde Kluckhohn compiled a list of 164 definitions of "culture" in Culture: A Critical Review of Concepts and Definitions...
, education
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
, science
Science
Science is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe...
, and health care
Health care
Health care is the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans. Health care is delivered by practitioners in medicine, chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers...
(18%); capital construction
Construction
In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking...
(12%); administration
Administration (government)
The term administration, as used in the context of government, differs according to jurisdiction.-United States:In United States usage, the term refers to the executive branch under a specific president , for example: the "Barack Obama administration." It can also mean an executive branch agency...
(14%); national defense
Defense (military)
Defense has several uses in the sphere of military application.Personal defense implies measures taken by individual soldiers in protecting themselves whether by use of protective materials such as armor, or field construction of trenches or a bunker, or by using weapons that prevent the enemy...
(7.7%); agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
, forestry
Forestry
Forestry is the interdisciplinary profession embracing the science, art, and craft of creating, managing, using, and conserving forests and associated resources in a sustainable manner to meet desired goals, needs, and values for human benefit. Forestry is practiced in plantations and natural stands...
, and water conservancy
Water conservation
Water conservation refers to reducing the usage of water and recycling of waste water for different purposes such as cleaning, manufacturing, and agricultural irrigation.- Water conservation :Water conservation can be defined as:...
(5.9%); subsidies
Subsidy
A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...
to compensate for price increases (2.7%); pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
s and social welfare provisions (1.9%); promotion of innovation
Innovation
Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...
, science
Science
Science is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe...
, and technology
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
(4.3%); operating expenses of industry
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
, transport
Transport
Transport or transportation is the movement of people, cattle, animals and goods from one location to another. Modes of transport include air, rail, road, water, cable, pipeline, and space. The field can be divided into infrastructure, vehicles, and operations...
, and commerce
Commerce
While business refers to the value-creating activities of an organization for profit, commerce means the whole system of an economy that constitutes an environment for business. The system includes legal, economic, political, social, cultural, and technological systems that are in operation in any...
(1.2%); geological
Geology
Geology is the science comprising the study of solid Earth, the rocks of which it is composed, and the processes by which it evolves. Geology gives insight into the history of the Earth, as it provides the primary evidence for plate tectonics, the evolutionary history of life, and past climates...
prospecting
Prospecting
Prospecting is the physical search for minerals, fossils, precious metals or mineral specimens, and is also known as fossicking.Prospecting is a small-scale form of mineral exploration which is an organised, large scale effort undertaken by mineral resource companies to find commercially viable ore...
(0.4%), and other (31.9%).
Taxation
Before the reform and opening, China exercised a single taxation system. Because taxation had no connection with the economic activities of enterprises, this system lacked vitality. In 1981, the Chinese government began to collect income tax from Sino-foreign joint ventures and solely foreign-funded enterprises, taking the first step in taxation system reform. From 1983 to 1984, the reform consisting of the replacement of profits by taxes was carried out in domestic enterprises, and a foreign-related taxation system was set up. As a result, instead of a single tax category, a compound taxation system in which turnover and income taxIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
es were the mainstay and other tax categories were in coordination with it was initially in place and promoted the control of finances and the economy. In 1994, the reform of the taxation system was deepened, and a complete structural adjustment of the taxation system was made by taking the market economy as the norm. In 1996, China lowered the rate of customs
Customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...
duties and export drawback, and exercised import supervision.
Inflation
China’s annual rate of inflationInflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
averaged 6% per year during the 1990–2002 period. Although consumer prices declined by 0.8% in 2002, they increased by 1.2% in 2003. China’s estimated inflation rate in 2006 was 1.8%.
Banking sector
China's bankBank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
ing system is highly regulated with six major banks, each having specific tasks and duties. The People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
is the largest bank in China and acts as the Treasury
Treasury
A treasury is either*A government department related to finance and taxation.*A place where currency or precious items is/are kept....
. It also issues currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
, monitors money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
, regulates monetary organizations and formulates monetary policy for the State Council
State Council of the People's Republic of China
The State Council of the People's Republic of China , which is largely synonymous with the Central People's Government after 1954, is the chief administrative authority of the People's Republic of China. It is chaired by the Premier and includes the heads of each governmental department and agency...
. The Bank of China
Bank of China
Bank of China Limited is one of the big four state-owned commercial banks of the People's Republic of China. It was founded in 1912 by the Government of the Republic of China, to replace the Government Bank of Imperial China. It is the oldest bank in China...
manages foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
transactions
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
and manages foreign exchange reserves
Foreign exchange reserves
Foreign-exchange reserves in a strict sense are 'only' the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, Special Drawing Rights and International Monetary Fund reserve positions...
. The China Development Bank
China Development Bank
The China Development Bank is a financial institution in the People's Republic of China under the direct jurisdiction of the State Council. It is the only bank in China whose governor is a full minister...
distributes foreign capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
from a variety of sources, and the China International Trust and Investment Corporation (CITIC
CITIC
Not to be confused with Citigroup, another large financial services company.Not to be confused with CIT Group, another large financial services company....
) was previously a financial organization that smoothed the inflow of foreign funds, but is now a full bank, allowing to compete for foreign investment funds with the Bank of China. The China Construction Bank
China Construction Bank
China Construction Bank is one of the 'big four' banks in the People's Republic of China. To date, it is ranked as the nation's second largest and the second largest bank in the world by market capitalization and 12th largest company in the world. The bank has approximately 13,629 domestic branches...
lends funds for capital construction projects from the state budget, and finally the Agricultural Bank of China
Agricultural Bank of China
Agricultural Bank of China Limited , also known as AgBank, is one of the "Big Four" banks in the People's Republic of China. It was founded in 1951, and has its headquarters in Beijing...
functions as a lending and deposit taking institution for the agricultural sector
Agriculture in China
Agriculture is an important economic sector of China, employing over 300 million farmers. China ranks first in worldwide farm output, primarily producing rice, wheat, potatoes, sorghum, peanuts, tea, millet, barley, cotton, oilseed, pork, and fish.-History:...
.
Banking reform
Financial reform in China's banking sector include the introduction of leasingLeasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments....
and insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, and operational boundaries are being slowly eroded to promote competition for customers who are now permitted to choose banks as well as hold accounts in more than one bank.
Banking reform was initiated in China in 1994, and the Commercial Banking Law took effect in July 1995. The aims of these actions were to strengthen the role of the central bank—the People’s Bank of China—and to allow private bank
Private bank
Private banks are banks that are not incorporated. A private bank is owned by either an individual or a general partner with limited partner...
s to be established. The People’s Bank of China was established in 1948. It issues China’s currency and implements the nation’s monetary policies. China’s oldest bank, founded in 1908, is the Bank of Communications
Bank of Communications
Bank of Communications Limited , founded in 1908, is one of the largest banks in China.-Before 1949:The Bank of Communications was founded in 1908 and emerged as one of the first few major national and note-issuing banks in the early days of the Republic of China...
Limited, a commercial enterprise located in Shanghai
Shanghai
Shanghai is the largest city by population in China and the largest city proper in the world. It is one of the four province-level municipalities in the People's Republic of China, with a total population of over 23 million as of 2010...
. China’s second oldest bank was established in 1912 as the Bank of China. Since 2004 it has become a shareholding company known as the Bank of China Limited and handles foreign exchange and international financial settlements. The Agricultural Bank of China
Agricultural Bank of China
Agricultural Bank of China Limited , also known as AgBank, is one of the "Big Four" banks in the People's Republic of China. It was founded in 1951, and has its headquarters in Beijing...
, founded in 1951, is mainly involved in rural financing and the provision of services to agricultural, industrial, commercial, and transportation enterprises in rural areas. Other major banks include the China Construction Bank
China Construction Bank
China Construction Bank is one of the 'big four' banks in the People's Republic of China. To date, it is ranked as the nation's second largest and the second largest bank in the world by market capitalization and 12th largest company in the world. The bank has approximately 13,629 domestic branches...
; established in 1954 as the People’s Construction Bank of China, it has been a state-owned commercial bank since 1994 and maintains some 15,400 business outlets inside and outside China, including six overseas branches and two overseas representative offices. The China Construction Bank was restructured in 2003 into a shareholding bank called the China Construction Bank Corporation, with the state holding the controlling shares. CITIC
CITIC
Not to be confused with Citigroup, another large financial services company.Not to be confused with CIT Group, another large financial services company....
was founded in 1979 to assist economic and technological cooperation, finance, banking, investment, and trade. The Industrial and Commercial Bank of China
Industrial and Commercial Bank of China
Industrial and Commercial Bank of China Ltd. is the largest bank in the world by profit and market capitalization. It is one China's 'Big Four' state-owned commercial banks .It was founded as a limited company on January 1, 1984...
was founded in 1984 to handle industrial and commercial credits and international business. The Agricultural Development Bank of China
Agricultural Development Bank of China
The Agricultural Development Bank of China is a Policy Bank under the People's Central Bank of China . As such, is responsible for funding projects related to China's economic growth...
, Export and Import Bank of China, and State Development Bank all were founded in 1994. China’s first private commercial national bank, the China Minsheng Banking Corporation, was opened in 1996. Commercial banks are supervised by the China Banking Regulatory Commission
China Banking Regulatory Commission
The China Banking Regulatory Commission is an agency of the People's Republic of China authorised by the State Council to regulate the banking sector of the PRC except the territories of Hong Kong and Macau, both of which are special administrative regions...
, which was established in 2003. In 2005 the commission announced the launching of a new postal savings bank to replace the old system and its more than 36,000 outdated outlets nationwide.
Foreign banks
Since the inception of the "open door policy", a number of foreign banks have been permitted to open their doors in major cities in China. However, these are largely representative branches, with only a few being permitted to carry out branch functions in ShanghaiShanghai
Shanghai is the largest city by population in China and the largest city proper in the world. It is one of the four province-level municipalities in the People's Republic of China, with a total population of over 23 million as of 2010...
and Shenzhen
Shenzhen
Shenzhen is a major city in the south of Southern China's Guangdong Province, situated immediately north of Hong Kong. The area became China's first—and one of the most successful—Special Economic Zones...
. Their participation in China's financial system has been limited, but as China starts to borrow more from abroad, their role may become greater in the future.
When first permitted in the mid-1980s, foreign banks were restricted to designated cities and could deal only with transactions by foreign companies in China. After those restrictions were loosened following China’s accession to the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
in 2001, some foreign banks have been allowed to provide services to local residents and businesses. In 2004 there were some 70 foreign banks with more than 150 branches in China. In 2007 a limited number of foreign banks were allowed to issue debit cards in China (and Bank of East Asia
Bank of East Asia
The Bank of East Asia Limited often abbreviated to BEA, is the largest independent local bank and the third largest bank in Hong Kong. Its chairman and chief executive is Sir David Li...
was allowed to issue a credit card). This made banking with a foreign bank more convenient, as money in accounts could be accessed at ATMs like customers of local banks could. In 2009 this number grew to six, but only two of these are not tied to Hong Kong.
Stock exchanges
There are stock exchanges in BeijingBeijing
Beijing , also known as Peking , is the capital of the People's Republic of China and one of the most populous cities in the world, with a population of 19,612,368 as of 2010. The city is the country's political, cultural, and educational center, and home to the headquarters for most of China's...
, Shanghai
Shanghai Stock Exchange
The Shanghai Stock Exchange , abbreviated as 上证所/上證所 or 上交所, is a stock exchange that is based in the city of Shanghai, China. It is one of the two stock exchanges operating independently in the People's Republic of China, the other is the Shenzhen Stock Exchange...
(the third largest in the world), and Shenzhen
Shenzhen Stock Exchange
The Shenzhen Stock Exchange is one of the People's Republic of China's two stock exchanges, alongside the Shanghai Stock Exchange. It is based in Shenzhen, China...
and futures exchange
Futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
s in Shanghai
Shanghai
Shanghai is the largest city by population in China and the largest city proper in the world. It is one of the four province-level municipalities in the People's Republic of China, with a total population of over 23 million as of 2010...
, Dalian
Dalian
Dalian is a major city and seaport in the south of Liaoning province, Northeast China. It faces Shandong to the south, the Yellow Sea to the east and the Bohai Sea to the west and south. Holding sub-provincial administrative status, Dalian is the southernmost city of Northeast China and China's...
, and Zhengzhou
Zhengzhou
Zhengzhou , is the capital and largest city of Henan province in north-central China. A prefecture-level city, it also serves as the political, economic, technological, and educational centre of the province, as well as a major transportation hub for Central China...
. They are regulated by the China Securities Regulatory Commission
China Securities Regulatory Commission
The China Securities Regulatory Commission is an institution of the State Council of the People's Republic of China , with ministry-level rank...
.
Stock market
In 1990 and 1991, China set up stock exchanges in ShanghaiShanghai
Shanghai is the largest city by population in China and the largest city proper in the world. It is one of the four province-level municipalities in the People's Republic of China, with a total population of over 23 million as of 2010...
and Shenzhen
Shenzhen
Shenzhen is a major city in the south of Southern China's Guangdong Province, situated immediately north of Hong Kong. The area became China's first—and one of the most successful—Special Economic Zones...
. In the past decade, the Chinese stock market has completed a journey that took many countries over a century to cover; China's stock market today has capital approaching 3,705.6 billion yuan, 1,377 listed companies and 72.16 million investors.
The Chinese stock market has promoted the reform of government-owned corporation
Government-owned corporation
A government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government...
s and the change of their systems, and enabled a stable transition between the two systems. On the strength of the stock market in the past decade, many large state-owned enterprises have realized system change.
The change also has stimulated medium and small-sized state-owned enterprises to adopt the shareholding
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
system, thus solving the most important issue - the system problem - during the transition from planned to a market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
. As for ordinary citizens, bank deposit
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
is not the only way to put their money, the stock market has become one of the most important channels for investment.
Methods of stock trading are constantly being improved. Today, a network system for securities exchange and account settlement has been formed, with the Shanghai and Shenzhen exchanges as the powerhouse, radiating to all parts of the country. In 2004, China issued 123 kinds of A share, and 23 rights issues, collecting a total of 83.6 billion yuan; and 28 kinds of B and H shares, collecting a total of 67.5 billion yuan.
Development
As China's economy becomes more integrated with the rest of the world its financial system will become more in line with international practices.China has also learnt from Hong Kong's financial system, with the help of the Hong Kong Monetary Authority
Hong Kong Monetary Authority
The Hong Kong Monetary Authority or HKMA is Hong Kong's central banking institution . It is a government authority founded on 1 April 1993 via the consolidation of "Office of the Exchange Fund" and the "Office of the Commissioner of Banking"...
.
Trade balance
China had a favorable balance of tradeBalance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
of US$32 billion in 2004 and US$38.7 billion in 2003. These amounts reflect the general course of a favorable trade balance during the previous eight years. In 1996 China’s trade balance was US$12.2 billion, peaking at US$43.4 billion in 1998 but declining to US$24.1 billion by 2000 before starting its new increase.
Balance of payments
China’s current accountCurrent account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
balance in 2004 was nearly US$68.7 billion. Added to this total was US$54.9 billion in foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
(exceeding that invested in the United States). When other investments, assets, and liabilities are brought into the calculation, the overall balance of payments was US$206.1 billion in 2004, compared with US$75.2 billion in 2002 and US$116.5 billion in 2003.
External debt
According to United NationsUnited Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
statistics for 2001, China’s external and public, or publicly guaranteed, long-term debt had reached US$91.7 billion. China’s debt had grown steadily during the 1990s, peaked at US$112.8 billion in 1997, and then declined annually thereafter. By 2004 China had US$618.5 billion in its international reserve account, 98.6 percent of which was from foreign exchange, not including the Bank of China’s foreign exchange holdings.
Foreign aid and foreign investment
China is the recipient of bilateral and multilateral official development assistance and official aid to individual recipients. In 2003 it received US$1.3 billion in such disbursements, or about US$1 per capita. This total was down from the 1999 figures of US$2.4 billion and US$1.90 per capita. Some of this aid comes to China in the form of socioeconomic development assistance through the United NationsUnited Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
(UN) system. China received US$112 million in such UN assistance annually in 2001 and 2002, the largest portion coming from the UN Development Programme (UNDP).
China also obtains foreign capital through foreign loans, foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
(FDI), and other investment by foreign businesses. Since 1980 foreign businesses from more than 170 countries and regions have invested in Chinese joint-venture enterprises. Most joint-venture activities are located in coastal cities and increasing numbers in inland cities as well. Some 300 of the 500 top transnational companies in the world have invested in China, and foreign investments have become an important capital source for China’s economic development. In 1999 FDI totaled US$40.3 billion. Between 1979 and 1999, cumulative FDI totaled US$305.9 billion, US$40.3 billion of which was invested in 1999 alone. In that year, China had approved the establishment of 342,000 foreign-funded enterprises, more than 100,000 of which have gone into operation. Contracted FDI reached nearly US$82.8 billion in 2002, US$115 billion in 2003, US$153.48 in 2004, and US$130.33 billion in the first nine months of 2005.
In 2007, China enacted a new law for corporate income tax which would unify the rates paid by foreign and domestic firms at 25 percent. Domestic firms used to pay 33 percent and foreign-funded firms 15 percent. Analysts say the overall impact on foreign direct investment would be limited due to China's relatively cheap labor and the promise of a huge market.
Currency and foreign exchange control
China’s currency is the renminbiRenminbi
The Renminbi is the official currency of the People's Republic of China . Renminbi is legal tender in mainland China, but not in Hong Kong or Macau. It is issued by the People's Bank of China, the monetary authority of the PRC...
(RMB, "people’s currency") or yuan
Chinese yuan
The yuan is the base unit of a number of modern Chinese currencies. The yuan is the primary unit of account of the Renminbi.A yuán is also known colloquially as a kuài . One yuán is divided into 10 jiǎo or colloquially máo...
. The interbank
Interbank
Interbank is a Peruvian provider of financial services.-History:In 1897, Elias Mujica opened an agency at Jiron de la Union in Lima's historical center under the name of Banco Internacional...
exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
on August 1, 2006, was US$1 = RMB7.98. The RMB is made up of 100 fen or 10 jiao. Coin
Coin
A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....
s are issued in denominations of one, two, and five fen; one and five jiao, and one RMB. Banknote
Banknote
A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...
s are issued in denominations of one, two, and five jiao; and one, two, five, 10, 50, and 100 RMB.
The Renminbi is issued and controlled solely by the People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
. RMB exchange rates are decided by the People's Bank of China and issued by the State Administration of Foreign Exchange
State Administration of Foreign Exchange
The State Administration of Foreign Exchange of the People's Republic of China is an administrative agency tasked with drafting rules and regulations governing foreign exchange market activities, and managing the state foreign exchange reserves, which at the end of July 2011 stood at $3.2 trillion...
, the latter exercising the functions and powers of exchange control.
In 1994, China reformed the foreign exchange system, combined the RMB exchange rates, adopted the bank exchange settlement system and set up a unified inter-bank foreign exchange market. On this basis, China included the foreign exchange business of the foreign-invested enterprises in the bank's exchange settlement system in 1996. On December 1, 1996, China formally accepted Article 8 of the Agreement on International Currencies and Funds, and realized RMB convertibility under the current account ahead of schedule. Meanwhile, China has been active in promoting bilateral currency exchange between ASEAN and China, Japan and the Republic of Korea (10+3). At the end of 2004, China's foreign exchange reserves reached US$609.9 billion and its share in the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
has risen from 11th to 8th place. The variety of financial businesses has been increasing steadily, and China has opened an array of new businesses to become integrated into the various aspects of modern international financial business, such as consumer credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
, securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
investment funds and insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
-linked investments.
Insurance
China's insuranceInsurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
industry started to recover in 1980, after a 20 year standstill. In 1981, the People's Insurance Company of China
People's Insurance Company of China
People's Insurance Company of China Holdings Company is a state-owned company in the People's Republic of China. The holding company promotes its subsidiaries, PICC Asset Management Company Limited and PICC Property and Casualty Company Limited .PICC P&C is China's largest insurer of casualty...
was transformed from a government department into a specialized company, with branches or sub-branches in every part of China. 1988 witnessed the founding of the Ping An Insurance
Ping An Insurance
Ping An , full name Ping An Insurance Company of China, Ltd. is a holding company whose subsidiaries mainly deal with insurance and financial services. The company was founded in 1988 and has its headquarters in Shenzhen.-Business:...
(Group) Company of China and the Pacific Insurance Company, both mainly active in the coastal areas. In 1996, the People's Insurance Company of China made a big step forward in transforming its administration and operational mode, in setting up a modern enterprise system, and integrating with the international market. The Insurance Law of 1985 and the founding of the China Insurance Regulatory Commission
China Insurance Regulatory Commission
The China Insurance Regulatory Commission is an agency of China authorized by the State Council to regulate the Chinese insurance products and services market and maintain legal and stable operations of insurance industry...
in 1988 provided the legal basis and specific rules for the operation of the insurance market. In 1980, China only had one insurance company; by 2004 there were 62, with a total revenue of premiums of 431.8 billion yuan, of which 100.4 billion were paid as compensation
Deferred compensation
Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a date after which that income is actually earned. Examples of deferred compensation include pensions, retirement plans, and stock options...
and payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....
.
See also
- Central Financial Work CommissionCentral Financial Work CommissionThe Central Financial Work Commission was created in 1998 to supervise the Chinese financial system on behalf of the Chinese Communist Party and to prevent deviations on the part of CCP-appointed managers...
- Ministry of Finance of the People's Republic of ChinaMinistry of Finance of the People's Republic of ChinaThe Ministry of Finance of the People's Republic of China is the national executive agency of the Central People's Government which administers macroeconomic policies and the national annual budget. It also handles fiscal policy, economic regulations and government expenditure for the state.The...
- Financial services in the People's Republic of ChinaFinancial services in the People's Republic of ChinaFinancial services in the People's Republic of China refers to the services provided in PRC by the finance industry: banks, investment banks, insurance companies, credit card companies, consumer finance companies, government sponsored enterprises, and stock brokerages.-Securities trading:The China...
- Foreign exchange reserve of the People's Republic of ChinaForeign exchange reserve of the People's Republic of ChinaThe Foreign exchange reserves of the People's Republic of China are mainly composed of US dollar in the forms of US government bonds and institutional bonds, and excludes reserves held by Hong Kong and Macau...
- State Administration of Foreign ExchangeState Administration of Foreign ExchangeThe State Administration of Foreign Exchange of the People's Republic of China is an administrative agency tasked with drafting rules and regulations governing foreign exchange market activities, and managing the state foreign exchange reserves, which at the end of July 2011 stood at $3.2 trillion...
- China Investment CorporationChina Investment CorporationChina Investment Corporation is a sovereign wealth fund responsible for managing part of the People's Republic of China's foreign exchange reserves. CIC was established in 2007 with approximately US$200 billion of assets under management, making it one of the largest sovereign wealth funds...
, CITICCITICNot to be confused with Citigroup, another large financial services company.Not to be confused with CIT Group, another large financial services company.... - Panda bondPanda bondA Panda bond is a Chinese renminbi-denominated bond from a non-Chinese issuer, sold in the People's Republic of China. The first two Panda bonds were issued in October 2005 on the same day by the International Finance Corporation and the Asian Development Bank. Their terms were 1.13 billion yuan of...
- Qualified Domestic Institutional InvestorQualified Domestic Institutional InvestorQualified Domestic Institutional Investor , also known as QDII, is a scheme relating to the capital market set up to allow financial institutions to invest in offshore markets such as securities and bonds...
- Hedge fund industry in ChinaHedge fund industry in ChinaHedge funds started in PR China in the early 1990s, and has so far undergone four stages: infancy, formation, rapid expansion, and adjustment and standardization.-Categories:Currently hedge funds in China fall into two categories...
- List of asset management companies of the People's Republic of China
- China Securities JournalChina Securities JournalThe China Securities Journal is a national securities newspaper, sponsored by Xinhua News Agency. It is based in Beijing, and has two offices in Shanghai and Shenzhen...
- History of banking in ChinaHistory of banking in ChinaThe history of banking in China includes the business of dealing with money and credit transactions in China.- Early Chinese banks :Chinese financial institutions were conducting all major banking functions, including the acceptance of deposits, the making of loans, issuing notes, money exchange,...
- Fengbo Zhang Analysis of Chinese MacroeconomyAnalysis of Chinese MacroeconomyAnalysis of Chinese Macroeconomy is a book written by , a Chinese economist.-Reception:The first edition was published in Chinese by People's Press. the first place winner of the annual Chinese National Book Award in 1987...
People
- K. P. ChenK. P. ChenK. P. Chen was a Shanghai-based Chinese banker and State Councillor, was a great innovator, as one of China's most successful entrepreneurs in the twentieth century, and was particularly influential in the financial and business world of Shanghai.In fact, in "Banking in Modern China:...
Reference sources
- Gregory C. Chow (2007). China's Economic Transformation. Blackwell. ISBN 1405156244
- Cecil R. Dipchand, Zhang Yichun, Ma Mingjia (1994). The Chinese Financial System. Greenwood Press. ISBN 0313292825
- Franklin Allen, Jun Qian, Meijun Qian (2007) China’s Financial System: Past, Present, and Future, in China's Great Economic Transformation, edited by Thomas G. Rawski and Loren Brandt. Cambridge University Press. ISBN 0521885574
Further reading
- Twitchett, D., Financial Administration under the Tang Dynasty (Cambridge Univ Press, 1970)
- Pitfalls of a State-Dominated Financial System: The Case of China - Genevieve Boyreau-Debray, Shang-Jin Wei
External links
- China Society for Finance and Banking
- Institute of Finance of the People's Bank of ChinaPeople's Bank of ChinaThe People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
- China Finance Association
- China Center for Financial Research of Tsinghua UniversityTsinghua UniversityTsinghua University , colloquially known in Chinese as Qinghua, is a university in Beijing, China. The school is one of the nine universities of the C9 League. It was established in 1911 under the name "Tsinghua Xuetang" or "Tsinghua College" and was renamed the "Tsinghua School" one year later...