China’s Capital Markets

China’s Capital Markets

Challenges from WTO Membership

Advances in Chinese Economic Studies series

Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu

China’s economy has been growing rapidly since the late 1970s and is expected to maintain this momentum in the foreseeable future. Coupled with the biggest population in the world, there is tremendous growth potential for China’s capital markets and financial services industry, both vital to the continued development of the economy. The contributors present research on all facets of China’s markets including: stock and bond markets; futures and over-the-counter markets; regulatory issues; and the development and roles of financial institutions such as brokerage firms, banks and insurance companies. Also addressed are the recent performance of equity markets, the emergence of small and medium enterprises, and the state banks’ bids to be listed in overseas stock exchanges. Taken together, the book sheds a welcome light on China’s overall economic growth.

Chapter 5: The Banking System – Development and Current Issues

Hung-gay Fung and Qingfeng ‘Wilson’ Liu

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation

Extract

Hung-gay Fung and Qingfeng ‘Wilson’ Liu INTRODUCTION In the three decades before Deng Xiaoping’s reform and open-up policies began implementation in 1978, the state-owned banks had almost made up the entire financial system in China’s economy. Under a central-planning system, all enterprises, including the banking sectors, are under the directives of the government. That is, firms received production orders from the authorities that were also responsible for distributing the products. The funds for acquiring raw materials, buying machines and parts, and paying workers’ salaries were allocated to the enterprises by the government, usually through the state-owned banks. They were required to hold their financial balances as bank deposits, and to keep only enough cash to meet daily expenses. Payments for transactions were conducted by debiting the account of the purchasing unit and crediting that of the selling unit, which essentially reduced the need for currency.1 Replacement, expansion, and new venture project decisions were mostly not made by the enterprises themselves, but by officials of the overseeing government agencies, who also had the authority to issue financing directives to the state-owned banks to allocate the required funds. The banking system then was actually a branch of the government serving the fiscal and account functions and a policy tool designed to carry out economic plans of the Central Government. As many decisionmaking officials did not have adequate financial expertise and skills to make informed sound financial decisions, and those who did might well be hampered by political considerations like their...

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