China & the World Economy Week 9: Lecture 1 & 2 - 'Monetary Policy in China - Past, present and future'

Question 1

Describe a brief history of the banking sector

Answer 1

• The introduction of a centrally-planned economy in 1949 led to the creation of a
  mono-banking system (PBOC)
• The start of the market reforms in 1978 led to the development of a specialised
  banking system with four major banks (BOC,ABC, CCB, ICBC) with specific
  responsibilities for particular areas of the economy
  
  • BOC = Bank of China, ABC = Agricultural Bank of China, CCB = China Construction Bank, ICBC = Industrial & Commercial Bank of China
• In 1993 moves were made to commercialise the banking sector. Policy Banks were
  introduced in 1994 and in 1995 the big four were officially designated as state-
  owned commercial banks. The rural credit cooperatives were released from the
  ABC control and Urban credit cooperatives were converted into city commercial
  banks. The banks were commercialised with a view to make them compete with each other. ‘Commercialised’ does not mean ‘privatised’, they were still owned by government but could now compete with each other
• The WTO Accession in 2001 had a requirement for China to open its domestic
  financial markets (particularly banking) to foreign firms over a 5-10 year period of
  time. Some foreign banks entered but had difficulty establishing themselves in local
  markets. Foreign banks had trouble making traction in China, because the big 4 banks are considered the safest to invest in. So, foreign banks have tried to partner with smaller banks, but to no avail
• Also, when China was given access to WTO, China knew that it needed its own banks to be able to compete with foreign banks, so they completely cleared out its balance sheet in 2003 to wipe out record of the non-performing loans
• From 2003 the big four banks were subject to a share ownership reform which
  cleared NPLs (to separate AMC units), recapitalised the banks and introduced
  strategic foreign investors. The Bank of Communications joined the big four in 2007
  (which now became the big five). The big five launched successful IPO’s during
  2005-10 and the Postal Savings Bank of China became a state-owned commercial
  bank in 2018 creating a big six

Question 2

Describe financial institutions and markets in China other than the banking sector

Answer 2

• Over the 80s and 90s there was the creation of Urban and Rural Credit
  Cooperatives and these have developed into alternative small banks supporting
  small and medium-sized businesses (see discussion above)
• In 1990 Stock Markets in Shanghai and Shenzhen were created. Ownership
  structures for listed companies were heavily skewed towards retaining State
  control, either through direct State ownership of shares or indirect ownership
  through Legal Persons. However this has changed (split share reform of 2005)
  and now most shares are privately held although key part s of the economy are
  still State-owned. There is a very limited amount of manager ownership.
• There have been bursts of public listings (through A Share market) and foreign
  ownership (through B Share Market). Some firms did issue shares in Hong Kong
  and New York but shares did not provide any control rights.
• Other financial markets such as for Corporate Bonds and Bills have been
  developed and are growing. The Government is a major issuer of debt and the
  Government Bond market is important domestically.
• Pension funds have been created but are still limited in scope although they
  are investing directly in stock and bond markets rather than just holding SOE
  shares

Question 3

What does China’s Monetary Policy reflect? Elaborate

Answer 3

• China’s monetary policy reflects the institutional structure
  in which it has operated
  – The financial markets and institutions are relatively
  underdeveloped
  – The banking market has been dominated by State-Owned
  Banks
  – Much of the bank lending has, in the past, gone to the
  (former) State-Owned Enterprises and this led to bad loan
  problems for banks.
  – Bank recapitalisation in early 2000s has restored banks’
  financial stability
  – Direct control over lending and interest rates have operated in
  the past as monetary policy instruments. Policy moves to
  market determined interest rates include moving towards a
  more interest rate based monetary policy has taken place in
  the last 10 years