Challenges from WTO Membership
Advances in Chinese Economic Studies series
Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu
Chapter 5: The Banking System – Development and Current Issues
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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