/ world today news/ China’s banking system has come a long way since the beginning of its reform. It will soon be the 45th anniversary of the establishment of the country’s first state-owned commercial banks (Bank of China, Agricultural Bank of China, Construction Bank of China) and the placement of the People’s Bank of China as their regulator. During this period, financial institutions managed to catch up and even in some respects surpass their Western counterparts. After a period of explosive growth in bank lending that began in 2008, the assets of the Chinese banking system surpassed the reported volumes in some of the largest economies, and in 2016 this system became the largest in the world, reaching a gross volume of 33 trillion US dollars. Thus, the Eurozone remains second with assets amounting to USD 31 trillion, followed by the US with USD 16 trillion and Japan (USD 7 trillion).
Economists debate whether this is good for China, as the high ratio of GDP to banking system assets means domestic investment is heavily dependent on bank lending, which in turn hinders risk diversification. Also discussed is the problem of guarantees of private interest in state-owned banks, as well as the question of whether supremacy in such institutions belongs to the state or to private initiative. Concerns are expressed about the sustainability of the system, as both state-owned banks and those with mixed ownership as a rule rarely give sufficiently timely signals of a possible impending deterioration in their sustainability.
The paradoxical thing is that in fact the Chinese banking system turned out to be significantly more resilient than others in times of crisis, this necessitates a certain rethinking of views on the issue of the most appropriate form of ownership and structure of banking in general. The collapse of most Western banking systems during the Great Recession (after 2008) brought to the fore the question of whose system is better, since the very direction in which Western private banking systems developed made them quite susceptible to shocks. In parallel, the actions of the European Central Bank and the European Banking Authority after the beginning of the crisis, contrary to most expectations, had a pro-cyclical character as they led to a fall in property prices and to a restriction of credit precisely at a time when the real sector had most need of it.
This is impossible in China, because its banking system is built in a way that maximally serves economic activity through a direct stimulating effect on the economy. The so-called “big four” banks, including China Construction Bank Corp (CCB), Agricultural Bank of China (AgBank), Bank of Communications (BoCom) and Bank of China (BoC), are used as the main leverage. . These companies hold about 40% of the banking system’s assets and are majority state-owned, and small blocks of their shares are freely traded on the stock exchange. The second pillar of the banking system is made up of other commercial banks, twelve of which were created in the form of a public-private partnership and are not listed on the stock exchange (18% of BS assets) and another 112 are also mixed, but registered as City Commercial Banks (12% of assets). A considerable share is occupied by the assets of the three policy landing banks, established in 1994 with 100% state participation. Their activity is primarily aimed at supporting agriculture and exports.
China has been criticized for the discriminatory lending policies of the country’s banks, as well as for its political leadership not being liberal enough regarding private initiative and foreign investment. Nevertheless, the country has managed to withstand the pressure through various compromises and has so far maintained the structure of the banking system in the way it best serves the interests of the real economy, refraining from taking a course towards self-sufficiency (something they did most western financial systems).
An interesting detail that should be mentioned is that, for example, in most former socialist countries (including Bulgaria) privatization was implicitly linked to the uncritical admission of foreign investments. In our country, for example, shortly after the introduction of the currency board, Western investors bought (practically for nothing) almost half of the control over the assets in the banking system. Unlike us and other transition economies, China adheres to an extremely strict policy regarding the admission of foreign investment in its banking sector, and for this reason the share of foreign banks in total assets is in the single digits. This is understandable and explainable for several reasons. Firstly because it is the most profitable segment of an economy (excluding retail) and secondly because control of the banking system is actually control of the most key element (after defence) for any country. It is for this reason that there are strict limits in China limiting the share of one foreign investor in one bank to 20%, and the total amount of foreign investment in an individual bank was maintained at the level of 25% until 2006.
Although subject to serious criticism, in fact this banking system (and its stimulating effect on Chinese growth) is a living refutation of the theory defended by Robinson and Acemoglu in “Why Nations Fail”. As is known, the two authors defend the thesis of the so-called “inclusive growth”, which is based on institutions created as a result of the “political pluralism” of society. The analysis of Chinese growth shows that it is possible precisely thanks to maintaining a course of development in the opposite direction. Of extractive (in the terminology of the two authors) institutions created entirely under the pressure of political hegemony, not pluralism. The achievements of this system and its sustainability during the previous crisis unsettled many supporters of the liberal approach in the financial sector. It is possible that the crisis that is looming now will lead to a complete change in the direction in which banking is developing in general. A direction that will bring the west closer to China.
* Report of the discussion “China and the world – let’s create a wonderful future together”, organized by the Bulgarian edition of the Chinese National Radio and world today news:
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