China’s Banking SystemBy: James Huang

Brief History• 1845 – 1896 • A foreign Dominated Banking System• The Oriental Bank Corporation, a British Bank, opened its Canton

branch in 1845.• HSBC was established in 1865 to finance the growing trade

between China and Europe

Brief History • 1896-1949• A Mixed but Undeveloped Modern Banking System• In 1896 the Imperial Bank of China, the first Chinese modern

bank was established in Shanghai • Government owned, later named the Commercial Bank of China• China’s first central bank, the Great Qing Government Bank

opened in 1905.

Brief History• 1949-1978• A typical Socialist Banking System• People’s Bank of China was created• It took over the roll of Central Bank, but also played the role of

Ministry of Finance as well as the only commercial bank in China

Banking Reform• Before 1984 PBOC was a central bank, ministry of Finance, and

a commercial bank.• Reform of PBOC started near end of 1970s.• 4 state owned commercial banks established

• ABC – Agricultural Bank of China (1979)• BOC – Bank of China (1979)• CBC – Construction Bank of China (1979)• ICBC – Industrial and Commercial Bank of China (1984)

• 1994, 3 policy banks were set up• SDBC – the State Development Bank of China• ADBC – Agricultural Development Bank of China• IEBC – the Import and Export Bank of China

• Many other commercial banks were also set up

Problems with Banking System now (NEW)• Chinese banks refuse to loan to small enterprises and

individuals due to the higher risk.• Favors own State Owned Companies because there is less risk

and they have more control over the future of the company and have more profits if the company does well.

• Even if State Owned Company may not necessarily do well, China diverts a lot of money toward them.

• Because most banks in China are state owned, they get to determine interest rates.• Hence, they can keep the interest rates quite low, encouraging

people to invest in shadow banking or in dubious investments)

Further Reforms Needed (NEW)• China’s central bank needs to push for reforms that are

intended to spur competition among state-owned banks and put more money in consumers’ pockets. • Need to offer more loans so companies and people aren’t pushed

to Shadow Banking.• Needs to increase deposit interest rates so people can invest

more in the banks and not sketchy shadow banking investments.• Financial Reform cannot lose out to the demands of political

leaders struggling to meet GDP growth targets. • Political Leaders must make Financial reform a priority before a

country wide economic collapse (Needs to be fixed immediately and not pushed aside).

• By making financial reforms, GDP can be heightened by more competition/investments from new companies and projects.

Shadow Banking• Shadow Banking has economists very worried.• Shadow Banking is where banks and finance companies loan

money to business and local governments at high interest rates outside the regulated financial system.

• Unregulated Lenders, which themselves borrow money from regulated banks, have made too many dubious loans that could default.

Shadow Banking Growth• Chinese government has too tightly controlled traditional

banking. • Keeps interest rates that conventional banks pay to depositors

extremely low and gives out cheap loans to state-owned enterprises and favored companies that may not be able to repay the money.

• Banks also sell off loans to companies and other banks.

Interest Rates• These low interest rates, led savers to invest money in

suspicious estate projects or dubious investments offered by banks and finance companies that promise higher rates of return.

• Much of this money is then lent to private businesses and local governments, which cannot get bank loans due to the tight regulation and preference to SOEs.

What could happen?• Send China’s Economy into a spiral.• JP Morgan estimates Shadow banking nearly doubled from 2010-

2012 to nearly $6 trillion, or 70% of nation’s GDP.• Default would cause panic.

• Just in this year alone, $600-900 billion of trust loans are set to be rolled over.

• Ghost towns & other bad investments.• Second largest economy = world wide effect.

How to fix this?• Restore China’s Banking system, by increasing the availability

of loans for smaller businesses.• Consumers should continue to invest in secure internet

banking entities like Alibaba’s Yue Bao, that offers an interest rate of 3% currently. • Forces big banks to change and adapt to provide better services

for citizens and private small enterprises. • Investment in more public companies will have the same effect

too, China is SOE heavy.• More regulation with Shadow Banking with more

transparency. • Already too big of economy to stop. • Only way to decrease it is to start monitoring it more closely.

Conclusion

• China’s financial system not as connected to global economy, could have lessen the effect of a economic crash.• Still recovering from Great Recession (2007), and having a China

crash is not something the world economy needs right now.

• Loses should be manageable, if China continues to reform it’s banking system.• Needs to do it quicker.

• Only time will tell.

Questions?

Thank You!

Sources

• http://time.com/8671/why-you-need-to-worry-about-chinas-shadow-banking/

• http://www.economist.com/news/finance-and-economics/21601872-every-time-regulators-curb-one-form-non-bank-lending-another-begins

• http://www.nytimes.com/2014/01/08/opinion/chinas-shadow-banking-problem.html?_r=0

• http://www.cnbc.com/id/101597488#.• http://online.wsj.com/articles/chinas-moment-of-truth-financi

al-reform-or-growth-1410815873