Over the years the PRC existence, the country's banking system passed a difficult and contradictory path of development, reflecting the peculiarities of the economic policy pursued by the state at a particular stage. In the late 70-ies of the last century in China economic and social reform was launched in order to create a model of “socialism with Chinese specifics” which would combine the primacy of market principles and effective macro control of the administering state agencies. In the process of creation of this model, an important role is given to China's banking system, as it is an institution, which has economic and social importance for society, all its units and public, and can help to reduce direct administrative interference of the state in the economy and society in the development of market relations. In this regard, intensive reform of China's banking system, taking into account a combination of market principles and Chinese realities, is of great relevance.
In different historical periods through various institutions accumulation of temporarily free funds and their redistribution and use in public interest of or specific groups interest occurred. Money and credit as social wealth growth factors made China richer in periods when management of sphere of circulation was based on clear and transparent rules. Their absence or violation often became a brake on economic growth and prosperity of the country (Hess, 2014).
Prior to 1979 in China there were only three banks: People’s Bank of China, Bank of China and Construction Bank. The functions of these banks were divided in rather strange way. So, the PBC, which had on one side all the signs of the central bank, on the other hand was controlling the vast majority of loans and deposits in the country. PBC linked China to the outside world: all foreign currency transactions passed through it. Construction Bank was only a little help in the public financing of investment projects, because almost all investment in the economy took the form of non-bank loans and budget subsidies. Diversity in this tough and poorly differentiated structure was contributed only by a small network of rural credit cooperatives (Hess, 2014).
A fundamental change in the development of China's banking system followed immediately after the change of the general course of development of the country. The banking system in the entire history of China, and especially since 1978, is an important lever of management of economic and social processes in the country. Under the conditions of intensive development of commodity-money relations, the deepening of the monetization and commercialization of relations the banking system objectively is subject to great responsibility for the stability of monetary circulation, the stability of the national currency, provision cash for agriculture, the largest industrial enterprises, forming the supporting framework of the entire economy and society, as well both small and medium businesses. A new reform of the banking system, conducted since 1994, is aimed, on the one hand, to streamline and stabilize the financial situation in the country, and on the other - on sresolving of strategic forecasting tasks in the 21st century (Ma & Miao, 2013). One of the general objectives of the reformed banking system is to establish closer financial and monetary connection with the production, in proving financial resources for production, taking into account a combination of central and local government and the provision of a specific space for economic initiative of businesses (Martin, 2012).
China's banking sector is in the process of constant development. The banking system as a whole, its organizational structure and management system, mainly corresponded to the peculiarities of the Chinese transition period and ensured servicing of a smooth transition from the “Chinese socialism” to the new economic system of the country, in terms of today are a deterrent on the path to a market economy. This is due, primarily, to the fact that the level of banking sector reform is insufficient and is clearly inferior to the degree of “market extent” of other sectors of the economy.
Entry into the WTO opened for the Chinese banking sector the door to the world economy. But participation in this organization not only provides opportunities to Chinese banks, but at the same time puts them in front of the numerous new challenges. Faced with their own inherent weaknesses and gaps in the competition with foreign banks, Chinese banks will accelerate the pace of reforms and external liberalization. But first, for the Chinese banks and the entire banking system it is necessary to develop adequate responses to challenges emerging from the accession to the WTO, and then to solve existing problems and plan further development, taking into account the world experience. On whether the Government and its banking system in China will be able to solve the problem of bad debts, stability of the Chinese banks depends on, at the background of increased competition and the liberalization of interest rates (Chun et al., 2014).
In the modern form China's banking system was formed in 1994, it consists of 4 groups: the People's Bank of China (PBOC); specialized banks based in the state capital (the so-called “political” banks); commercial banks; non-bank financial institutions. The development of China's banking system at the present stage is accompanied by an increase in the number of banking institutions, deepening their specialization, expanding the range of their functions and redistribution of functions between them. Chinese government has placed the functions of the central bank on the PBC in 1983. These include (Werner & Chung, 2010):
• Development and implementation of monetary policy;
• Implementation of the issue and the regulation of the national currency circulation;
• Monitoring and control of monetary authorities;
• Supervision and regulation of the circulation of money;
• Issuing of orders and regulations relating to the control and management in the sphere of money circulation;
• Transactions with government foreign exchange reserves;
• Management of the State Treasury;
• Provision of a system of payments and settlements;
• Research, analysis and forecasting in the sphere of money circulation;
• Implementation of the relevant activities in the field of international monetary circulation;
• Implementation of other obligations set by the State Council.
In 1998, PBC thoroughly reformed its structure. In place of the branches opened by the administrative-territorial basis, departments came, that have stepped border between the provinces, autonomous regions and municipalities under the central government. In the provincial centers, where such subsidiaries have not been established, there were offices of financial supervision agencies that are responsible for the supervision of banking and non-banking institutions of subordinated areas. Central PBC branches in the main cities of provinces are not subject to local authorities, which helps PBC to eliminate the administrative interference and to perform fully its supervisory functions (Ma & Miao, 2013).
In 2003 oversight was transferred from the People's Bank of China, which serves as the central bank of China, to the newly formed Committee for the Banking Regulation (China Banking Regulatory Commission, CBRC). Separation of the supervisory and monetary banking regulation platforms was designed to minimize the potential conflict of interest associated with the micro- and macro-control, to demonstrate the independence of the banking regulation and supervision, and at the same time to enhance market discipline and effective management of operational and financial risks. In addition, the indirect stimulus of reform was the increased interest of foreign investors in the Chinese economy, including the banking sector, and the need to lay the foundations for the rapidly growing share of the private sector as the driving force of China's reforms, including non-state financial institutions (Lee & Chih, 2013). At the same time for RBC functions to ensure systemic stability of China's banking sector preserved, including the control of the interbank market and risk, credit and payment areas. Supervision of currency regime PBC carries out through State Administration of Foreign Exchange (SAFE).
So called political banks are specialized banks which provide the money to support the government's economic policy. Acting on the basis of planned management, target accumulating and use of funds, self balancing and break-even they are not intended to profitability. Political banks have emerged as one of the measures to accelerate the commercialization of state-owned commercial banks.
Currently, these include three banks. State Development Bank loans mainly the approved state programs in the sphere of production, large and medium-sized capital construction, technical renovation. Bank of China for the development of agriculture mainly handles financial transactions related to the State's agricultural policy, manages the funds that are going to support the agricultural sector. Import and Export Bank of China credit the export of large equipment, as well as engineering products and electronics.
Commercial banks are the basis of the Chinese financial system. They are divided into two groups. The first group are state-owned commercial banks (Industrial and Commercial Bank of China, Bank of China (BC), Agricultural Bank of China and the People's Construction Bank of China. They perform a vital function of providing financial support for the reform process in China. This task was particularly relevant in the initial stage of reform, and Chinese banks have coped with it quite well.
The second group of commercial banks consists of joint-stock commercial banks. The largest of them are: Bank of Communication, Industrial Bank CITIC, Guangda Bank (China Everbright Bank), China Banking Corporation Minshen (China Minsheng Banking Corp., Ltd), Nua Xia Bank, China Merchants Bank, Shanghai Pudong Development Bank, Guangdong Development Bank, Fujian Industrial Bank, Shenzhen Development Bank Co., Ltd.
In accordance with the provisions of the “Law on Commercial Banks”, Chinese national banks do not have the right to develop investment activities, which to some extent hinders the further development of the banking sector. At the same time, foreign commercial banks to a large extent are actively involved in management of facilities of mixed economic type, such as participation in the capital of commercial banks, investment banks, as well as carry out operations on purchase and sale of shares in the stock market. Moreover, the share of foreign bank capital in the area of provision of services in the market of insurance operations is also high (Heep, 2014).
Chinese banks have traditionally focused their efforts on rather narrow though important segments of the banking business - attracting deposits and granting loans; other operations such as brokerage transactions until now occupy not very significant share in the banking operations. Provision of mainly such banking products leads to the growth and concentration of financial risks, continued weakening of the competitiveness of China's commercial banks.
China perfectly fulfilled its obligations under the WTO: after 11 December 2006, foreign banks have rushed to China. The last several years we can observe a fierce competition in the Chinese financial market. China's banking system, as a whole adapted to the situation, still bears the imprint of its past, which sometimes greatly complicates (and often impedes) its functioning in the new conditions.
The regions with increased competition in the banking sector in the first place include economically developed areas of the country (for example, the city of Beijing, Shanghai, Guangzhou, etc.). The most effective activities of banks is in major cities, so namely there competition from foreign banks is a serious threat (Heep, 2014). In this conditions, Chinese commercial banks should actively improve competitiveness by reforming their management system.
One of the important aspects of increasing competition between foreign financial institutions and Chinese national banks is attraction of professionals. Due to the high salaries and better working conditions, foreign banks have been able to recruit a substantial number of bankers-professionals. As a result, it led to additional outflow of senior officials of the state-owned banks, which in the future could further widen the gap between foreign and Chinese domestic banks.
Currently, the main problem is the duty of banks to inviolately provide credits to state-owned enterprises and to finance unprofitable public projects. Often Chinese banks, especially the largest of them, give credits not on the basis of commercial gain, but by order of the state bodies. As a result, banks are spending a significant part of their resources to finance the loss-making state-owned enterprises, reducing lending to profitable commercial projects (Hess, 2014).
Thus, the evolution of China's banking system is just a typical case of true development of the Chinese version. Rapidly opening to the outside world, actively perceiving the advanced experience of developed countries, China at the same time paves its way for success on solid ground of its millennial traditions and national mentality.
It appears that the achievement of a balanced market dynamics in a prevailing regulatory format in China will largely depend on the fact on what extent regulatory management practice will co-exist with the principles of financial regulation Basel III. Given the unprecedented volume and rates of growth of bank assets, such effectiveness must be accompanied by continuous monitoring of the interdependence between the need for credit and asset growth boundaries, and combined with the process of synchronization of regulatory reform with the international banking regulation practice. Challenges of the Chinese regulatory reform, raised to the specificity of its coordination, will soon largely determine the ability of regulators to translate Chinese banks on the rails of stress resistance to the external challenges and to minimize systemic risks, is the quintessence of the international regulatory reform, and simultaneously create an equivalent market environment for all participants of banking sector.
References
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Heep, S (2014). China in global finance: domestic financial repression and international financial power. Springer, Berlin.
Hess, Patrick (2014). China’s Financial System: Past Reforms, Future Ambitions and Current State. In: F. Rövekamp & H. G. Hilpert (eds.), Currency Cooperation in East Asia, Financial and Monetary Policy Studies, 38, Springer.
Lee, T.-H. & Chih, S.-H. (2013). Does financial regulation affect the profit efficiency and risk of banks? Evidence from China’s commercial banks. The North American Journal of Economics and Finance, No26, 705–724.
Ma, J. & Miao, H. (2013). The impact of financial liberalization on China’s financial sector. In: Das US, Fiechter J, Sun T (eds) China’s road to greater financial stability: some policy perspectives. International Monetary Fund, Washington, DC, 191–199.
Martin, M. F. (2012). China’s banking system: Issues for Congress. Congressional Research Service. CRS Report R42380.
Werner, M. & Chung, A. (2010). Chinese Banking: A Primer on the Market. White book. Bernstein Research.
