1. Perspectives on China’s Financial
System And Policy Reforms
REGMI Milan
2014
regmimilan7@gmail.com

2. History- Chinese Financial System
• It conducted all banking functions like accept
deposit, loans, issue notes, money exchange and remittance
by Song Dynasty (960-1279).
• Due to the chronic structural weaknesses of traditional
Chinese law, Chinese financial institutions focused primarily
on commercial banking based on close familial and personal
relationships, and their working capital was primarily based
on the float from short-term money transfers rather than long-
term demand deposits.
• The modern concepts of consumer banking and fractional
reserve banking never developed among traditional Chinese
banks and were introduced to China by Western bankers in
the 19th century.
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3. Major Chinese financial system
• Piaohao
– An early Chinese banking institution was called
the piaohao, also known as Shanxi banks
– All piaohao were organised as single
proprietaries or partnerships, where the owners
carried unlimited liability.
– To deal with the transfer of large amounts of cash from
one branch to another, the company introduced
drafts, cashable in the company's many branches around
China.
– By the end of the nineteenth century, thirty-
two piaohao with 475 branches were in business covering
most of China.
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4. Contd…
• Qianzhuang
– Independent of the nationwide network of piaohao there were a
large number of small native banks, generally called qianzhuang.
– The first qianzhuang can be traced to at least the mid-eighteenth
century.
– This was local and functioned as commercial banks by
conducting local money exchange, issuing cash notes, exchanging
bills and notes, and discounting for the local business community.
– It maintained close relationships with Chinese merchants, and
grew with the expansion of China's foreign trade.
– When Western banks first entered China, they issued "chop loans"
(caipiao) to the qianzhuang, who would then lend this money to
Chinese merchants who used it to purchase goods from foreign
firms. It is estimated that there were around 10,000 qianzhuang in
China in the early 1890s
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5. Entry of foreign banks
• British and other European banks entered China around the
middle of the nineteenth century to service the growing
number of Western trade firms.
• The first foreign bank in China was the Bombay-based
British Oriental Bank.
• The British enjoyed a virtual monopoly on modern banking
for forty years.
• They also enjoyed complete control over China's
international remittance and foreign trade financing.
• They were not regulated by the Chinese government, they
were free to issue banknotes for circulation, accept deposits
from Chinese citizens, and make loans to the qianzhuang.
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6. After 1949
• (1949-52)People's Bank of China moved very
effectively to halt raging inflation and bring the
nation's finances under central control.
• During the 1980s the banking system was expanded
and diversified to meet the needs of the reform
program, and the scale of banking activity rose sharply.
• Between 1979 and 1985, the volume of deposits nearly
tripled and the value of bank loans rose by 260 percent.
• By 1987 the banking system included the People's
Bank of China, Agricultural Bank of China, Bank of
China (which handled foreign exchange matters), China
Investment Bank, China Industrial and Commercial
Bank, People's Construction Bank, Communications
Bank, People's Insurance Company of China, rural
credit cooperatives, and urban credit cooperatives.
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7. Comparison between Islamic, Indian and
Chinese Regional Financial System
Islamic regional Finance
• The Islamic financial
system starts from 8th
and 12th century.
• The monetary
economy of the
period was based on
widely
circulated currency
the gold dinar.
• It is based on
elimination of riba
and ensure a profit
sharing mechanism in
the financial system.
Indian Regional
Finance
• Indian system starts
from starting of
1950’s.
• Control of Money
Lenders
• No Laws / Total
Private Sector
• No Regulatory
Bodies
• Hardly any
industrialization
• Banks – Traditional
lenders for Trade
and that too short
term
Chinese Regional
Finance
• Chinese Financial
System is highly
regulated.
• It has recently
begun to expand
rapidly as monetary
policy becomes
integral to its
overall economic
policy.
• Banks are becoming
more important to
China's economy
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8. • It promotes symmetry
of risks and rewards.
• It is based on equity.
• It maintains the
relation between
investors to
institutions.
• Many capitalist
concepts were
adopted and further
advanced in medieval
Europe from the 13th
century onwards.
• Main concentration
on Traditional
Agriculture .
• Narrow industrial
securities market (i.e.
Gold/Bullion/Metal
but largely linked to
London Market.
• Intermediately
institutions was
absence in long-term
financing of industry
• Export Driven
economy
• US$586 billion
economy stimulus
package
• It has lower rate
of custom duties and
export drawback, and
exercises import
supervision.
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9.  The financial organization
of Islamic financial
system are Savings Bank ,
Pilgrims saving
corporation, Economic
and community
development, Insurance,
Mutual Fund, Standard
for accounting and
auditing, Bond market,
Investment fund.
Reforms (ethical reforms)
 Behavioral norms and
moral foundations"
derived from the Quran.
 Prohibition of tax.
 Zattax as the basis of
Islamic fiscal policy
 The financial system of
Indian financial system are
regulators, financial
instruments(money mrkt
and capital mrkt), financial
intermediaries, financial
market(capital, forex,
money and credit market).
Reforms (1960’s -1990’s)
 Administered
interest rates
 Industrial licensing
and controls
 Dominant public
sector
 Limited
competition
 High capital-output
ratio
The financial organization
of Chinese financial
system are Agricultural
Development Bank of
China, the China
Development Bank and
the China Import, Export
Bank and other
Commercial Banks.
Reforms (1978)
 Steady development
 China financial system
is under the central
bank, with its state
banks as the mainstay.
 People's Bank of China
stopped handling
credit and savings
business
 financial regulatory
system has been
formed.
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10. Instrument of Chinese Financial
System
1. Price-based Instruments:
It consists of four categories:
-Instrument with ratios(reserve requirement)
-Instrument with interest rate(central bank lending rates)
-Quantitative instrument(open market operations)
-Other instruments(central bank bills)
2. Quantity based Instruments:
Those instrument that are non market conform. i.e.
instruments that change the amount of money in the
financial system without taking into account the price of
money.
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11. Financial Regulators
1. China Banking Regulatory Commission (CBRC):
- It is responsible for the supervision and regulation of
banking sector of china’s financial services industry.
2. China Securities Regulatory Commission (CSRC):
- It is responsible for the oversight and regulation of the
securities and future segment of Chinese financial services
industry.
3. China Insurance Regulatory Commission(CIRC):
- It is an agency of china authorized by the state council to
regulate the Chinese insurance product and services market
and maintain legal and stable operations of insurance
industry.
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12. • The bank-centric model of Chinese Financial
System was effective in mobilizing savings to
satisfy investment needs during China’s earlier
stages of development..
• Imbalance in China’s financial system started
from the prominent role played by bank
intermediation in growth, experiencing an
increase in bank credit accounting for close to
80 to 90 percent of funds raised by the
corporate sector.
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13.  China’s equity and bond markets remain
relatively small but have developed imbalances
of their own.
 Although the private sector now accounts for
more than 60 % of GDP ,
 state-owned enterprises have benefited
disproportionately from initial public offering
(IPO)
 When comparing the depth of China’s financial
system to those of more developed market
economies, the most notable differences are the
relatively small size of outstanding debt
securities and a near-absence of securitized
loans.
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14.  One of the main aims of the current round of
reforms is to increase the proportion of direct
financing as a share of total social financing:
a measure that includes items such as entrusted loans,
trust loans, bankers acceptance bills, corporate bond
financing and equity raising by non-financial
enterprises, in addition to regular bank loans.
According to data from the People’s Bank of China
(PBOC), bond and equity fundraising (by non-
financial companies) together accounted for only
16.1% of total social financing in 2012, although
this represented an increase from 14.1 % in 2011.
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15. Financial depth Comparison –year End 2010 (% of GDP)
Comparison between Strong Economies
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17. The securities regulator’s reform agenda
• In early 2012, the newly-appointed China Securities
Regulatory Commission (CSRC) Chairman Guo
Shuqing renewed the regulator’s commitment to market
reforms and set out the following priorities:
INCREASING THE ROLE OF DOMESTIC
INSTITUTIONS—CSRC will encourage long-term
institutional investors, including state and corporate
pension funds, insurance companies, national
endowment insurance fund, as well as housing funds to
increase the proportion of capital markets investments
in their portfolios.
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18. • REFORM OF LISTING/DELISTING
MECHANISM—The CSRC will pursue reforms in the
IPO pricing mechanism and underwriting process to
prevent excessively high IPO prices and subsequent
speculation and market manipulation.
• STRENGTHEN CHINA’S PRICESETTING
ABILITY FOR KEY COMMODITIES—
The regulator has allowed the launch of silver
futures on the Shanghai Futures Exchange and will
explore the introduction of other new products such
as a market for crude oil and other major
commodities.
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19. • EXPANSION IN OTC MARKET—Small
and medium-sized non-public companies will
be allowed to have their securities traded on a
national over-thecounter market.
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20. Thank  You
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