Banking in China

China is a nation with a long and interesting history when it comes to banking. Although China today has a relatively sophisticated banking system with many of the same features found in the banking system in the United States, China’s financial system was rather archaic until very recently. From bouts with inflation to functioning under the heavy hand of the Chinese government, Chinese banks have come a long way to arrive in their modern state today.

Historically, Chinese banking has been in existence for a very long time. During the Song dynasty, a period of time between 960 and 1279, China already had financial institutions that were making loans and accepting deposits. Paper currency was invented in China in the year 1024. By the mid 1800’s, foreign banks were operating in China. Britain had the strongest foothold there, but soon Japan, France, and Germany all had a presence in China’s port cities. In future years, China would rely on these foreign banks to finance large projects that Chinese banks didn’t have the balance sheets to afford.

Today, the People’s Bank of China, China’s central bank, is the cornerstone of China’s banking system. Much like the Federal Reserve Bank in the US, the People’s Bank of China has the responsibility to control the money supply and interest rates, along with the oversight of many other aspects of China’s economy. The central bank also sets policies for loan reserves, foreign exchange reserves, and gold reserves.

Today, there are four state run banks in China. Each of the four has a different area of specialty. Outside of these four large banks, there are several commercial banks that deal more with day to day banking needs.

Many of the loans written by the four state-run banks have low quality, non performing loans that were directed by the Chinese government. Since 2002, an effort has been made to reform the banking industry, sell the non performing loans to investors, and increase lending standards.

Over the past 20 years, China has issued over 714 million banking cards, with over 96% of those cards being debit cards. China has over 64,000 ATM machines and over 300,000 merchants accept banking cards as a form of payment. In 1994, China launched a project called the “Golden Card Project,” establishing a network allowing bank card users to swipe their cards anywhere in China. As of the end of 2004, over 600 towns and cities in China were part of this network. Until 2002, there was no credit agency that scored the credit worthiness of borrowers applying for loans, so China is playing catch up when it comes to grading the financial health of borrowers.

In 2001, China entered the World Trade Organization, creating even more opportunities for foreign banks to operate on Chinese soil. With the summer Olympic Games being held in Beijing in 2008, China is making an even greater effort to prepare their banking system for the business that is sure to come with an event of that magnitude.