China's Banking Reform: From Mono-Banking to Globalisation

Abstract

China’s banking sector under the People’s Republic of China (PRC) started with a mono-banking system consisting of the Bank of China (BOC) and the China Construction Bank (CCB), which were subordinate to the People’s Bank of China (PBOC) and the Ministry of Finance (MOF) respectively in the 1950s. Unlike their counterparts in market economies, Chinese banks functioned primarily as fiscal agents to finance state projects blueprinted in the government’s economic plan. The re-institutionalisation of the specialised banks (SBs) in the late 1970s and early 1980s marked the commencement of China’s banking reform, but the state banks continued to serve principally as fiscal arms for the central government to accomplish planned targets from the 1980s to the early 1990s. More far-reaching reforms were carried out in the mid-1990s to transform the SBs into state-owned commercial banks (SOCBs), which indicated the central government’s determination to enhance the efficiency of the state banks by separating commercial lending from policy lending. However, instead of instituting practical changes, the reforms had limited impacts on the actual banking operation in the 1990s. The SOCBs were still largely state-owned and they lacked a credit culture. Lending decisions were still mainly influenced by state directives rather than efficiency considerations. To enable foreign competition to enhance banking efficiency in China, in particular the SOCBs, the pace of banking reform has been quickened since China’s admission to the World Trade Organisation (WTO) in 2001.