China Banking System: A Domestic and Global Perspective

The Chinese banking system is a complex and multifaceted entity, with a rich history dating back to the early 20th century.

The People's Bank of China (PBOC), established in 1948, is the central bank of China and plays a crucial role in regulating the country's banking system.

With over 4,000 commercial banks operating in China, the banking system is one of the largest in the world, with assets totaling over $40 trillion.

China's banking system is also heavily influenced by the state, with the government holding significant stakes in many major banks.

The Chinese banking system has undergone significant changes over the years, transforming from a monolithic structure to a more complex and diversified system. In the early 1980s, the government opened up the banking system, allowing five state-owned specialized banks to accept deposits and conduct banking business.

These five specialized banks, including the Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BoC), Bank of Communications (BoCom), and the Agricultural Bank of China (ABC), have all conducted initial public offerings (IPOs) and have varying degrees of ownership by the public. Despite these IPOs, the banks are still majority owned by the Chinese government.

The Chinese banking system has also seen the establishment of policymaking banks, including the Agricultural Development Bank of China (ADBC), the China Development Bank (CDB), and the Export-Import Bank of China, each dedicated to a specific lending purpose.

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The Chinese banking system has undergone significant changes over the years. The People's Bank of China, the central bank, used to be the main entity conducting operations in the country.

In the early 1980s, the government opened up the banking system and allowed five state-owned specialized banks to accept deposits and conduct banking business. These banks are the Industrial & Commercial Bank of China, China Construction Bank, Bank of China, Bank of Communications, and the Agricultural Bank of China.

The specialized banks have all conducted initial public offerings and have varying degrees of ownership by the public. Despite these IPOs, the banks are still majority owned by the Chinese government.

China has also allowed a dozen joint-stock commercial banking institutions and more than a hundred city commercial banks to operate in the country.

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Banking in China is a complex system, but at its core, it's based on the concept of credit and debit. Banks act as intermediaries between depositors and borrowers, matching those who have excess funds with those who need them.

The People's Bank of China (PBOC) is the central bank and regulator of the banking system, responsible for setting monetary policy and maintaining financial stability. It was established in 1948.

Chinese banks offer a range of deposit products, including savings accounts, time deposits, and certificates of deposit. These products allow individuals to earn interest on their deposits.

The banking system in China is divided into four main types: commercial banks, policy banks, city commercial banks, and rural commercial banks. Commercial banks, like the Industrial and Commercial Bank of China, are the largest and most influential type.

Banks in China use a variety of payment systems, including the China UnionPay card and the Alipay mobile payment service. These systems allow for fast and secure transactions.

The China Banking Regulatory Commission (CBRC) oversees the banking industry, ensuring that banks operate safely and soundly. It was established in 2003.

Chinese banks are also involved in the country's stock market, providing financing for companies and facilitating share trading.

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The Chinese banking system has a complex regulatory framework, with the China Banking Insurance Regulatory Commission (CBIRC) playing a crucial role in overseeing the banking and insurance sectors.

The CBIRC is responsible for writing rules and regulations, conducting examinations, and collecting statistics on the banking system. It also approves the establishment of new banks and resolves potential problems that might emerge.

The People's Bank of China (PBoC) has significant authority over the banking system, with responsibilities including reducing overall risk and promoting financial stability. The PBoC regulates lending and foreign exchange, and supervises the payment and settlement system.

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The Chinese banking system has a robust regulatory framework in place to ensure stability and soundness. The China Banking Insurance Regulatory Commission (CBIRC) is the main regulatory body overseeing the banking system.

The CBIRC replaced the China Banking Regulatory Commission (CBRC) in April 2018 and is responsible for writing rules and regulations for the banking and insurance sectors. It conducts examinations and oversight of banks and insurers.

The CBIRC also collects and publishes statistics on the banking system and approves the establishment or expansion of banks. It resolves potential liquidity, solvency, or other problems that might emerge at individual banks.

The People's Bank of China (PBoC) has significant authority over the banking system, including regulating lending and foreign exchange between banks. The PBoC also supervises the payment and settlement system of the country.

The PBoC's role is to reduce overall risk and promote the stability of the financial system.

The Chinese government's efforts to deregulate interest rates have been a step in the right direction, but the largest banks still struggle to price loans effectively due to a lack of loan-pricing skills.

Banks in China lack the skills to accurately assess the risks of their customers, which is hindering their ability to make more loans to the private sector.

The government-set benchmark rate still influences the pricing of most loans, which could be improved with better information on borrowers.

Regulators must make it clear that bailouts for bad loans are a thing of the past in order to align the banks' incentives with China's economic interests.

Chinese banks still don't have enough information on borrowers, or strong enough lending skills, to prevent more bad loans from accruing.

The state bought most of the nonperforming loans from the largest banks and transferred them to state-owned asset-management companies, which successfully eliminated the risk of a systemic banking failure.

However, few banks reward their loan officers for avoiding nonperforming loans, which is a major obstacle to improving lending skills.

The task of improving lending skills is huge, and the ratio of bad loans to good ones could rise again, particularly if economic growth slows.

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Deposit insurance is a crucial component of China's banking system, providing protection to depositors in the event of bank failures. China's deposit insurance regulations went into effect in May 2015.

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The agency collects insurance premiums from financial institutions to fund the protection of deposits. As of 2021, China's Central Bank had collected premiums from 4,024 institutions with a balance of 42.38 billion yuan, or $6.27 billion.

This protection eliminates the possibility of a run on the bank if negative rumors spread about problems associated with a particular bank, helping to maintain financial stability.

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China's deposit insurance regulations went into effect in May 2015. This means that depositors in China have some protection against losing their funds.

Deposit insurance is designed to prevent bank runs by protecting depositors' funds in case of bank failure. This helps maintain confidence in the banking system.

In China, the Central Bank collects insurance premiums from financial institutions. As of April 2021, they had collected premiums from 4,024 institutions.

The total balance of these premiums was a significant 42.38 billion yuan, or $6.27 billion. This amount is used to compensate depositors in case of bank failure.

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In China, households keep a large portion of their assets in savings accounts, which has led to high bank liquidity.

The yields on bank deposits have been unusually low because the government regulates deposit rates, making them an attractive option for households despite the low returns.

Bank deposits represented 59 percent of household wealth in 2003, down from 76 percent in 1997, although the absolute value of deposits continued to grow over that period.

Over the past ten years, returns on household financial assets after inflation have come to only 0.5 percent a year in China, compared with 1.8 percent in South Korea and 3.1 percent in the United States.

More people have begun to invest in real estate, reducing the share of household assets kept in savings accounts and making bank deposits vulnerable to changes in the market.

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The Chinese banking system is a complex entity with a monolithic past. The People's Bank of China, the central bank, used to be the sole entity authorized to conduct operations in the country.

In the early 1980s, the government opened up the banking system, allowing five state-owned specialized banks to accept deposits and conduct banking business. These banks include the Industrial & Commercial Bank of China, China Construction Bank, Bank of China, Bank of Communications, and the Agricultural Bank of China.

The Chinese government established three policymaking banks in the mid-1990s, each dedicated to a specific lending purpose: the Agricultural Development Bank of China, the China Development Bank, and the Export-Import Bank of China.

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China's banks incur higher costs than banks in other countries, with a margin of 4.3 percent compared to 3.1 percent in countries like the United States.

This extra cost translates to an additional $25 billion a year for bank customers.

Poor capital allocation in China's banking system sustains inefficient companies at the expense of more productive ones.

Addressing this shortcoming could raise China's GDP by $259 billion, or 13 percent.

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The country's banking system is inefficient, with a huge impact on the economy.

China's banks lend primarily to large SOEs, even though they are less productive than private small and midsize enterprises.

This lending bias is rational, but it perpetuates inefficiency in the system.

The country's financial system needs a drastic change in mindset to meet the needs of a modern competitive economy.

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The Big Four dominate China's banking sector, and regulators are trying to raise them to world-class standards through broader ownership and improved governance.

These four large banks are the Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BoC), and Bank of Communications (BoCom).

Regulators are trying to improve governance at these banks, which are still majority owned by the Chinese government.

In fact, the government's majority ownership of these banks is one reason regulators are pushing for broader ownership through strategic foreign investments and IPOs.

The big four have a significant impact on the Chinese banking sector, and their dominance is not expected to change anytime soon.

In 2004, for the first time, the proportion of new loans made by the big four dipped below 50 percent, indicating that smaller banks are gaining market share.

However, some smaller banks are struggling to compete with the big four, and their lending skills are often worse than those of the larger banks.

To make competition effective, regulators are encouraging the big four to purchase smaller banks, which could lead to industry consolidation.

The recent and forthcoming IPOs of the largest banks could facilitate this process, allowing for more efficient allocation of resources and improved governance.

Domestic assets make up about 97% of Chinese banks' balance sheets, based on aggregate official data from 2016.

This is largely due to a lending boom that resulted from a focus on hitting GDP growth targets and protecting employment during China's economic transition.

The country is shifting from a high-growth model based on exports and investment to one based on services and consumption.

Chinese banks' foreign claims, although relatively small, have been growing at an even faster rate than domestic exposures.

In fact, foreign assets have grown more than 200% from their 2011 level.

This growth in foreign assets has accelerated in the past three years, outpacing domestic growth.

Given this context, it's clear that Chinese banks' foreign operations are becoming increasingly important.

China's banking relationships with other countries are not just about trade finance, but also about foreign direct investment (FDI). China's cross-border lending is actually more synchronized with its outward FDI, with large FDI stocks often accompanied by large bilateral exposures on cross-border lending.

The relationship between trade and banking linkages with China is not apparent, with no correlation between a country's gross trade with China and China's share of banking claims on them. This suggests that Chinese banks are major lenders to many African and emerging and developing Asian countries, even if China is not a major trade partner with these countries.

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China's cross-border lending is often used to fund large-scale infrastructure projects, such as the hydropower station in Laos, supported by a $1.3 billion loan from China Construction Bank. This is a clear example of how FDI and cross-border lending are intertwined.

The amount of cumulative FDI tends to be large when China has a large bilateral exposure on cross-border lending, as shown in Figure 7. This highlights the importance of FDI in driving China's cross-border lending activities.

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China's banking industry is particularly vulnerable to the possibility that affluent customers might switch out of deposits. This is because some 2 percent of the country's households own 60 percent of its wealth, making it highly concentrated.

The gap between rich and poor in China is larger than in the United States, as measured by the Gini coefficient. This means that a small percentage of the population holds a disproportionate amount of wealth.

Banks in China rely heavily on the wealthy few for their profits, making them susceptible to a decline in deposits if these customers seek better returns elsewhere.

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The financial sector in China is a complex and rapidly evolving landscape. China's banking system is dominated by the Big Four state-owned banks, which account for over 50% of the country's total banking assets.

These state-owned banks have a significant impact on the Chinese economy, with the Industrial and Commercial Bank of China (ICBC) being the largest bank in the country by assets. ICBC's assets exceed $4 trillion, making it one of the largest banks in the world.

China's banking system has undergone significant reforms in recent years, with a focus on increasing competition and improving financial stability. The China Banking Regulatory Commission (CBRC) has implemented new regulations to reduce the risk of bank failures and promote more efficient lending practices.

The CBRC has also encouraged the development of private banks in China, with several new private banks having been established in recent years. However, private banks still account for a relatively small share of the country's banking assets.

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China's shadow banking sector has been a major concern in recent years, with many experts warning of the risks of unregulated lending and financial instability. The CBRC has implemented new regulations to address these concerns, including stricter requirements for shadow banking institutions.

The Chinese government has also implemented policies to promote financial inclusion and reduce poverty, such as the establishment of rural credit cooperatives and microfinance institutions. These initiatives have helped to increase access to financial services for millions of Chinese citizens.

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The Chinese banking system has undergone significant reforms since the 1990s. China's banking system is dominated by the "Big Four" state-owned banks: Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China.

These banks are responsible for a significant portion of the country's lending, and are often used to implement government policies. The Chinese government has a significant influence over the banking system, which can sometimes lead to concerns about the independence of banks.

The Big Four banks have made significant efforts to increase their lending to smaller businesses and rural areas. For example, China Construction Bank has implemented a program to provide credit to small and medium-sized enterprises.

China's banking system has also been working to improve its risk management practices, including the use of credit scoring. The China Banking Regulatory Commission has been promoting the use of credit scoring to help banks better assess the creditworthiness of borrowers.

The Chinese government has been working to increase the transparency of the banking system, including the disclosure of bank financial statements. This has helped to increase investor confidence in the banking system.

The Big Four banks have been working to improve their efficiency and reduce costs, including through the use of technology. For example, Industrial and Commercial Bank of China has implemented a mobile banking app to allow customers to manage their accounts remotely.

Overall, the Chinese banking system has made significant progress in recent years, but there is still more work to be done to improve its stability and efficiency.

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