Current Financial System of China

The Macro-Financial Environment: China has maintained high growth rates over the past three decades. Since the start of reforms in 1978, growth has averaged close to 10 percent and inflation has remained relatively subdued. Productivity growth has been rapid and capacity has been expanded by very high levels of investment. The commercial banking sector has also grown rapidly and become more diversified. Banks lending to households, though low compared with other countries, has picked up sharply following the housing sector reform a decade ago. The following figures give us a brief about the performance of banks in china. 1.Evolution of banking system:

2. Growth of mortgage lending:

Chinese Banking Structure The banking system in China used to be monolithic, with the People's Bank of China (PBC), which is the central bank, as the main entity authorized to conduct operations in that country. In the early 1980s, the government started opening up the banking system and allowed four state owned specialized banks to accept deposits and conduct banking business. These four specialized banks are the Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC). In 1994, the Chinese government established three more banks, each of which is dedicated to a specific lending purpose. These policymaking banks include the Agricultural Development Bank of China (ADBC), the China Development Bank (CDB) and the Export-Import Bank of China. The four specialized banks have all conducted initial public offerings and have varying degrees of ownership by the public. Despite these IPOs, the banks are all still majority owned by the Chinese government. China has also allowed a dozen joint stock commercial banking institutions and more than a hundred city commercial banks to operate in the country. There are also banks in China dedicated to rural areas of the country. Foreign banks were also allowed to establish branches in China, and to make strategic minority investments in many of the state owned commercial banks. Regulatory frame work: The banking sector of China and the financial market watchdogs The banking sector has been playing an indispensable role in Chinas economic development. Various banking institutions, including state-owned commercial banks, joint-stock commercial banks, urban credit cooperatives, city commercial banks, rural financial institutions, foreignfunded banks, policy banks and non-bank financial institutions, serve different areas and different segments of the economy. Currently, the total assets of the banking sector registered RMB 62.4 trillion. The China Banking Regulatory Commission (CBRC) is the main regulator of the banking sector. Along with the CBRC, there are several other regulators holding different responsibilities.

Peoples Bank of China (PBC) and State Administration of Foreign Exchange (SAFE) The Peoples Bank of China (PBC) was established on December 1, 1948. Until 1984, PBC functioned as the central bank as well as a commercial bank. With the promulgation of The Law of the People's Republic of China on the People's Bank of China on March 18, 1995, PBC was granted its central bank status legally and empowered to supervise the financial industry as a whole. Over the past ten years, the supervisory responsibilities of the PBC for various financial sectors were shifted to a few newly established regulatory bodies, i.e., CBRC, the China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC). Now, the main tasks of PBC are to formulate and implement monetary policy, prevent and resolve financial risks, and safeguard financial stability. Along with that, PBC also maintains the banking sector's payment, clearing and settlement systems, takes responsibility for anti-money laundering work and manages Chinas official foreign exchange and gold reserves. It cooperates with the State Administration of Foreign Exchange (SAFE) for setting foreign exchange policies. China Securities Regulatory Commission (CSRC) CSRC, the supervisory body of Chinas capital market, was established in October 1992. It is mainly responsible for the regulation and supervision of the securities and futures markets, including the following: setting rules for these markets; regulating the behavior of stock exchanges, listed companies, securities houses, futures companies, funds, brokers and settlement institutions; overseeing the issuance, trading, custody and settlement of various instruments on the market; supervising information disclosure related to the capital market; and investigating and penalizing activities that violating the securities and futures laws and regulations. China Insurance Regulatory Commission (CIRC) CIRC was established on November 11, 1998, to administer, supervise and regulate Chinas insurance market. Insurance companies and their branches, insurance groups, and insurance asset management companies as well as insurance intermediaries are subject to the supervision of CIRC. CIRC is also responsible for market admission, management qualification, and setting of industry standards for the insurance market. One of CIRCs duties is to investigate market

irregularities and impose penalties. It also examines and approves the clauses and premium rates of insurance companies, the business operation of public policy-oriented insurance and statutory insurance, and supervises organizational forms and the operations such as captive insurance and mutual insurance.

The role of China Banking Regulatory Commission (CBRC)

CBRC was established on April 28, 2003, an important step in Chinas economic reform and consistent with the requirements for developing a socialist market economy. It was also a significant initiative to deepen financial reform, strengthen financial supervision and improve the financial system, thus helping position the industry to cope with the demand of economic development. CBRC comprises the head office and 36 local offices under which 296 field offices operate. As authorized by the State Council, CBRC is responsible for the regulation and supervision of banks, asset management companies, and trust and investment companies as well as other deposit-taking financial institutions. Its major responsibilities are as follows: Formulate supervisory rules and regulations for banking institutions Authorize the establishment, changes, termination, branching and business scope of banking institutions Conduct fit and proper tests for directors and senior managers Conduct off-site surveillance and on-site examinations of banking institutions Investigate, penalize and take enforcement actions on activities that violate relevant laws and regulations Compile and publish statistics and reports of the overall banking sector in accordance with relevant regulations

 Make proposals on the resolution of problem deposit-taking institutions in consultation with relevant authorities Be responsible for the administration of the supervisory boards of state-owned financial institutions
Perform other responsibilities delegated by the State Council

Supervisory Focus Conducting consolidated supervision in order to assess, monitor and mitigate the overall risks of each banking institution as a legal entity Using a risk-based supervisory approach to improve supervisory process and methods, so as to ensure the efficiency of banking supervision Urging banking institutions to put in place and maintain a sound and effective system of internal controls Enhancing transparency in line with international best practices Regulatory Standards Promoting financial stability as well financial innovation; Improving the competitiveness of the Chinese banking sector in the global financial market; Formulating objective and appropriate regulatory requirements to remove all unnecessary restrictions; Encouraging fair competition and preventing disorderly competition; Putting in place clear and rigorous accountability systems for both regulators and regulated entities; ; Allocating supervisory resources in a cost-efficient way.

Financial Development indicators 2005-2010:

Chinas capital markets: The development of Chinas capital markets can be divided into three phases Between early 1978 and 1992 full-scale economic reform took place, with capital markets emerging in response to the beginning incorporation process of Chinese enterprises as the concept of privatisation took off following the introduction of the Open Door policy. In the second phase (1993-1998), the focus shifted to strengthening the capital markets in terms of institutional framework as well as supervisory framework. Supervision of capital markets was consolidated, leading to the formation of the China Securities Regulatory Commission (CSRC) in its current form. Regional pilot programmes were expanded nationwide. The promulgation of the Securities Law marked a milestone in the third phase between 1999 and 2007, resulting in formalisation and strengthening of the legal status of Chinas capital markets. The emphasis rested on refinement of the legal and regulatory system to create a more transparent and efficient market. Concepts such as corporate governance and market discipline were introduced. Further, a series of reforms were implemented to facilitate future development of national capital markets in terms of product diversification. While substantial progress has been made and reforms are generally heading in the right direction, several areas are still subject to further work. These include, among others, corporate governance as well as capital market infrastructure and rating agencies. In order to make Chinas financial markets really world class they have to become freer, more transparent and better regulated. Aside from increasing the share of institutional investors, especially in the stock market, it is necessary to raise the general level of financial literacy. By successfully implementing these reforms, Chinas financial markets will be in better shape to serve investors and fund raisers needs at the same time, and thus support Chinas longterm growth in a more efficient manner. Structure of Chinas capital markets: Compared to industrial countries, Chinas financial markets are still relatively shallow as measured in relation to nominal GDP. Bank loans to the private sector account for the lions share not least due to the recent steep decline in the stock market. However, in a BRIC comparison, China leads in terms of combined financial market depth. The comparatively large share of private sector credit shows that the Chinese economy remains heavily dependent on bank finance. Bank loans account for more than 80% of total financing to the nonfinancial sector, while equity and bond issuance plays a subordinated role

Aside from financial risk concentration in the banking system2 this signals that capital markets are still underdeveloped.

China GDP Growth Rate The Gross Domestic Product (GDP) in China expanded 1.80 percent in the first quarter of 2012 over the previous quarter. Historically, from 2011 until 2012, China GDP Growth Rate averaged 2.1200 Percent reaching an all time high of 2.4000 Percent in September of 2011 and a record low of 1.8000 Percent in March of 2012. The Gross Domestic Product (GDP) growth rate provides an aggregated measure of changes in value of the goods and services produced by an economy. China's economy is the second largest in the world after that of the United States. During the past 30 years China's economy has changed from a centrally planned system that was largely closed to international trade to a more market-oriented that has a rapidly growing private sector. A major component supporting China's rapid economic growth has been exports growth. This page includes a chart with historical data for China GDP Growth Rate.

China's Balance of Payments Statement for Q1 of 2011: In Q1 of 2011, China's surplus under the current account totaled USD28.8 billion, a decrease of 21 percent year on year. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods, income, and current transfers reached USD20.8 billion,

USD5.1 billion, and USD11.6 billion, respectively, whereas the deficit in trade in services amounted to USD8.7 billion. Meanwhile, in Q1 of 2011 China's surplus under the capital and financial account totaled USD86.1 billion, an increase of 41 percent year on year. In particular, net inflows of direct investments and other investments amounted to USD44.8 billion and USD42.5 billion respectively, whereas net outflows of portfolio investments reached USD2.7 billion. China's international reserve assets from transactions increased by USD141.2 billion. Specifically, foreign exchange reserve assets registered a net increase of USD138 billion (exclusive of the influence of non-transaction value change factors such as exchange rates, prices, and so forth), reserve investment in the IMF registered an increase of USD3.2 billion, and special drawing rights registered a decrease of USD100 million.

Foreign exchange reserves: Year

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

US $ Billon
2.5 5.1 11.3 15 17.4 12.7 11.5 16.3 18.5 18 29.6 43.7 *20.6 22.4 52.9 75.4 107 142.8 149.2

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

146.2 165.6 212.2 286.4 403.3 609.9 818.9 1066.3 1528.2 1946 2399.2 2874.3 3181.1

China Inflation Rate The inflation rate in China was recorded at 3 percent in May of 2012. Historically, from 1994 until 2012, China Inflation Rate averaged 4.3000 Percent reaching an all time high of 27.7000 Percent in October of 1994 and a record low of -2.2000 Percent in March of 1999. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes a chart with historical data for China Inflation Rate.