CHINESE FINANCIAL SYSTEM

INTRODUCTION

The financial sector has played a vital part in China's rise, which has expanded to become the
world's second largest economy and is on track to overtake the United States. For decades,
China's financial system has performed admirably enough to support the country's extremely
rapid economic expansion. The Chinese Financial System is hard to asses because it is highly
opaque and continuously developing. Also, China's financial legislation, structure, and
operation undergo significant changes every decade, reflecting the country's rapid economic
and political development. The private financial sector did not exist until a few decades ago,
and all banking was done through branches of the state-owned People's Bank of China.
China's national, regional, and municipal governments play a significantly larger role in
directing the activities of banks and other financial intermediaries than in America, Europe,
or India, which encourages opacity.

STRUCTURE AND SIZE OF THE CHINEESE FINANCIAL SYSTEM

Few noteworthy points regarding Structure of Chinese Financial System:

● To begin with, China’s financial system has been dominated by a huge banking
system in comparison to other established and rising nations. Despite the admission
and growth of numerous domestic and foreign banks and financial organizations in
recent years, the banking industry remains dominated by the five largest state-owned
banks. All of the “Big Five” banks have already been publicly listed in recent years
 ● Both the stock and bond markets in China have seen significant growth in recent
years. However, because they remain speculative and driven by insider trading in the
equities market, their current magnitude and importance are not comparable to those
of the banking sector, and they may not be successful in allocating resources in the
economy. Nonetheless, with the rest of the globe speeding up, markets are set to play
an increasingly important role in the economy.

● The alternative financial sector, which comprises informal financial intermediaries,

internal financing, and trade credits, has been critical in meeting financing demand
and preserving the real economy’s strong growth rate.

● Finally, avoiding devastating financial crises that can seriously impair economic
stability is a big issue for China’s financial system. Traditional financial crises include
a banking sector crisis arising from an accumulation of nonperforming loans (NPLs)
and a sharp reduction in bank earnings, as well as a crisis/crash resulting from
speculative asset bubbles in the real estate or stock markets.

FACT *The Chinese economy is the second-largest economy in the world in terms of
nominal GDP. China is the largest foreign exchange reserve holder in the world also.*
Structure of Chinese Financial System:

1. Banking and Intermediation Structure : The Bank of China, China Construction

Bank, Industrial and Commercial Bank of China, and Agricultural Bank of China are
the "big four/five" state-owned commercial banks, all of which are among the world's
largest banks as of 2018.
2. Financial Markets : Stock exchanges, bank loans, bonds, and some overseas equities
are all part of China's financial markets, as they are in most developed countries.
China has been attempting to liberalize its markets and embrace a more open and
competitive environment for investors for the past two decades under DENG
Xiaoping.

3. Non-Standard Financial Sector : The non-standard financial sectors basically

include informal financial institutions and coalitions/ institutions among hybrid sector
firms and their investors

4. Foreign Sector: China was the world's second-largest FDI recipient in 2019, trailing
only the United States and ahead of Singapore. The country is Asia's largest receiver.

REFORMS

Financial reform, like other aspects of the Chinese economy, has been characterized
by pragmatism and gradualism rather than a rigorous, comprehensive blueprint. In
short, China's reforms have been evolutionary rather than revolutionary.

● The establishment of stock exchanges at the end of the 1980s

Shanghai and Shenzhen local governments initially pushed the development of stock
markets in respective localities without the assistance of the national government.
Shanghai was designated as the nation's principal stock exchange experiment by the
federal government in 1990. It went on to acknowledge the growth of the Shenzhen
exchange in 1991.

● Special Economic Zones (SEZs)

The Chinese authorities have chosen specific provinces or regions to play major roles
in the reform effort from the start. The most visible examples of this are Special
Economic Zones (SEZs).
● Intermediate control mechanisms
To ease the transition from one economic system to the next and familiarize economic
agents with the features and operations of the newly emerging system, intermediate
control mechanisms have been devised.

IMPACT OF THESE REFORMS

● The Chinese government has taken a number of initiatives to develop the stock
market since it first opened in 1990. As a result of these developments, China's stock
market has become the world's fastest expanding stock exchange. The market
capitalization of public listed firms A-share companies on the Shanghai Stock
Exchange climbed from 63.59 billion Chinese yuan with 29 listed companies in 1992
to 49.3 trillion Chinese yuan with 1800 listed companies in 2020, according to the
Shanghai Stock Exchange's 2006 yearbook.

● Special Economic Zones (SEZ) were given the authority to offer special (financial
and other) benefits in order to entice international investors. Foreign banks could open
branches in the SEZs. In SEZs, credit quotas were more flexible, and bank branches
had greater leeway in determining lending and deposit rates than in other parts of
China. As a result, the SEZs' economic growth has outpaced that of the rest of the
country.

● Establishing a two-tier pricing system, introducing a swap market in foreign exchange

retention rights to improve the use of foreign exchange, introducing indirect monetary
policy instruments, granting banks more flexibility in setting interest rates, and
establishing local interbank markets to encourage banks' liquidity management are all
examples of Intermediate control mechanisms