Chinese financial market
Gross saving – the sum of household, corporate, government, and non-resident saving; investment – the sum of private-sector and government investment; saving provides the funds needed for gross investment.
Basics: The Financial System and the Allocation of Funds to Real Investment
A financial system consists both of financial institutions, like banks, and financial markets, such as bonds. Provides a means of channeling funds from savers or financial investors to borrowers with profitable investment opportunities.
Provides information to financial investors about which of the many possible uses of their funds are likely to be profitable, and hence pay the highest return. Help financial investors share the risk of lending by permitting them to diversify their financial investments.
In the centrally planned economy: There was only one bank – the People’s Bank of China (BBC, “mono-bank”), no financial markets. Most long-term investment financings were channeled to enterprises through the state budget (with budgetary grants), not through the banking system.
The Tate bank was only responsible for providing working capital to enterprises. 0 Household savings were small relative to government savings – total household bank deposits < 6% of GNP 1978. Reform during the 1980s
In 1983, the state council granted the PBC the authority of a central bank and the PBC subsequently transferred its commercial operations to four state-run specialized banks: 2) 3) 4) the Agriculture Bank for the rural sector the Industrial and Commercial Bank for the industrial sector the Construction Bank for long-term investment, and the Bank of China for foreign trade. Two additional universal banks were established in 1988. 0 Local governments set up urban banks that provide some competition to the traditional “big four”. In the countryside, the system of Rural Credit Cooperatives was separated from the Agriculture Bank.
Unlike the industrial sector, the banking sector was characterized by the monopoly of state ownership dominated by the big four banks which accounted for > 80% of commercial bank loans at the end of the asses. 0 Moreover, the financial system has remained abominated.
Source: Consolidation, Asian Development Bank. Notes: This table shows the sum of total domestic credit provided by the banking sector, total local currency bonds outstanding, and total equity outstanding. Economic Development & Financial Deepening
Economic development is typically accompanied by a gradual process of financial deepening – The ratio of various financial assets to GAP increases steadily as GAP per capita increases.
China, MM (broad money) increased from 32% of GAP 1978 to 167. 26% in 2011. 0 See the Figure. Financial Deepening(1978-2011): Money and quasi money (MM) as % of GAP in China 19 20 Behavior of state banks: The most serious problem with specialized state banks is the mixing of policy-oriented loans and profit-oriented loans. This generates pervasive moral hazard problem It is difficult to monitor diversion of funds from a less to a more profitable use if the same bank is responsible for both policy lending and commercial lending. 0 All levels of government constantly intervene in the operation of banks in the name of policy lending. Objective measurement of performance is difficult to achieve.
Result: bad debt (non-performing loans “stock” problem – NP) – the proportion of bad loans over total outstanding loans in China in late asses was around 20-25%, memorable to those in other transitional economies. CBS Problems The relationship between banks and Goes. Loss-making and CBS of Goes are mutually supporting equilibrium phenomena – due to the CBS problem, there are more projects generating losses; because of projects making losses, subsidies are provided and the budget is soft. 24 sources for the CBS of enterprises: through the state budgetary process, or through the banking system. As government budgetary revenue declined, the government increasingly pressed the banking system to take responsibility.