The Evolution of the Banking System in China

Early Years: The Establishment of the People’s Bank of China

The People’s Bank of China (PBC) was established as the central bank in 1949, taking over commercial banking functions from other institutions. In 1979, the PBC re-established itself to focus on rural banking and lead nationwide rural credit cooperatives. By 1984, the PBC’s remaining commercial banking functions were transferred to the Industrial and Commercial Bank of China (ICBC).

Introduction of Market Forces in the Banking System

In the 1980s and 1990s, the Chinese government introduced market forces into the banking system by establishing specialized policy banks, including:

China Development Bank (CDB): focused on promoting economic development
China Agricultural Development Bank (ADBC): focused on agricultural development
Export-Import Bank of China (Chexim): focused on export and import financing

Other types of banks and urban and rural credit cooperatives were also founded during this period.

Challenges Facing the State-Controlled Banks

Despite these reforms, the state-controlled banks continued to face significant challenges:

Uneven allocation of loans: more than 90% of bank loans went to state-owned enterprises (SOEs) that did not have to repay the loans, even though they only produced 30% of the national GDP
High non-performing loan rates: by the end of 1999, non-performing loans (NPLs) had reached 32.67% of all state bank loans

Consequences of Discretionary Power and Corruption

The banks’ use of discretionary power to allocate up to 30% of their loans led to widespread corruption and fraud:

Depositors at risk: depositors could lose their money in the event of an economic crisis
Banks vulnerable to sudden demands: the banks were vulnerable to sudden demands from depositors to withdraw their deposits

Key Statistics

Real GDP growth rate: 9.7% per year (1979-1995)
Volume of deposits: increased by more than 5000%
Value of bank loans: rose by 2700%

Key Institutions

People’s Bank of China (PBC): central bank
Industrial and Commercial Bank of China (ICBC): largest commercial bank in China
China Development Bank (CDB): policy bank focused on economic development
China Agricultural Development Bank (ADBC): policy bank focused on agricultural development
Export-Import Bank of China (Chexim): policy bank focused on export and import financing