China’s Banking System: Past, Present and Future

We’ve covered various concerns pertaining to China’s shadow banking system in a previous article, so it makes sense to also pay attention to… well, its “actual” banking system. And, right off the bat, let’s just say the “Past” dimension of this article will be very brief, for the simple fact that there isn’t really all that much to say prior to the 80s. Simply put, the central bank of China (People’s Bank of China) used to be the only game in town.

Let’s just say that prior to 1978, the banking system of China was not exactly considered a priority but once Deng Xiaoping’s reform started kicking in and China embarked on a journey toward modernization and the growth it would bring about, a modern(ized) banking system was required. And, indeed, as of the early eighties, four specialized banks were allowed to conduct business (accept deposits, facilitate transactions between various entities and so on). Needless to say, the so-called “Big Four” were state-owned:

1. Bank of China (BOC)
2. Industrial & Commercial Bank of China (ICBC)
3. China Construction Bank (CCB)
4. Agricultural Bank of China (ABC)

As of 1994, three more banks appeared, once again specialized institutions:

1. China Development Bank (CDB)
2. The Export-Import Bank of China
3. The Agricultural Development Bank of China (ADBC)

When it comes to the three previously mentioned entities, while there have been IPOs which resulted in varying degrees of private ownership, the Chinese government still has a majority stake in them. However, a low double-digit number of joint stock commercial banks were allowed to enter the market and a low three-figure number of city commercial banks also appeared. Furthermore, to encourage access to capital and the development of its banking sector, the Chinese authorities gradually allowed foreign banks to establish branches in China as well as hold a minority stake in various state-owned banks.

Last year (based on preliminary 2018 data), the Chinese banking system had over $14 trillion in assets and while there is currently quite a bit more diversification going on, five state-owned banks still account for over a third of the total asset volume.

Aside from (of course) the People’s Bank of China that inevitably still plays an extremely important role in the Chinese banking system, the main regulatory entity is the CBIRC (China Banking Insurance Regulatory Commission), which replaced the CBRC (China Banking Regulatory Commission) in 2018. It is also worth noting that just like in other jurisdictions such as the United States (through the FDIC) or European Union (with each EU member state having its own system in place), deposit insurance frameworks have been introduced in China as of 2015 so as to tackle banking system vulnerabilities such as bank run scenario.

As far as the future is concerned, things seem to be on the right track when it comes to the transition process, away from PBOC domination and toward a banking system that more closely resembles its Western counterparts. While this transition has facilitated much easier access to capital and provided the financial support China’s impressive growth plans needed, there are risks involved.

As mentioned in another article, while Western banks help the Chinese banking system through transfers of technology, business practices and so on… the “business practices” dimension sometimes get tricky, as reckless investing-related behaviors have also emerged and given birth to a systemically dangerous shadow banking system in China. However, in light of the fact that 2018 represented the first year in which a 6.5% YOY decline of the shadow banking system was observed, in no small part due to the attention given to this problem by the Chinese authorities, there are reasons to be moderately hopeful that China’s banking system can be kept on its modernization path without the negative aspects associated with this modernization proving to be deal-breakers.