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Chapter 19

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Economics (Arts)
ECON 336
Christopher Green

Chapter 19 Financial System - The banking sector has been China’s most protected industries, overregulates, dominated by state ownership, and protected from international competition. Financial Deepening= The ratio of financial assets to GDP. Measures the extent to which past savings have been transformed into investments through the intermediation of financial institutions. Deepening occurs when more wealth has been created, relative to income. Financial Broadening= Refers to an increase in the variety of financial institutions and instruments. It implies a greater choice for savers and investors. -China’s market is said to be deep but narrow. 19.1 The Financial System in the Planned Economy and Under Reform -The financial system made up entirely by the government-run banking system was considered very “passive.” It was merely accommodated the physical flows that the planners arranged. -Due to the large amount of household savings in the post reform era the banking sector grew rapidly. The government began relying on using bank surpluses to finance the failing SOEs. This orientation helps explain why the financial system remains dominated by the banking system. 19.2 The Banking System - Consists of a core of state-owned institutions, most of which are leftover from the planned economy 19.2.1 State-Owned Commercial Banks - The four state-owned banks are decedents of the planned economy and have sometimes been referred to as the “monobank” since they were subsidiaries under a single organization (under the planned economy). The control over 50% of financial assets. -In the mid-1980s they became private banks and were further reformed in the 1994 reforms. They had been making a ton of unrecoverable loans to party officials. 19.2.2 Joint-Stock Commercial Banks (JSCBs) - These banks are new and unhindered by the entanglement from the planned economy era. They are usually owned by a collection of SOES and government agencies. They are growing in size. 19.2.3 City Banks - Even smaller than JSCBs, these banks provide lending services to small-scale urban firms. 19.2.4 Other Banks - Represent about 25% of assets and are largely made up by two planned era institutions Policy Banks - Banks set up to take over lending in support of government policy objectives Rural Credit Cooperatives(RCCs) - Set up in the 1950s as part of the collective organization in the countryside. They lent money to farmers to purchase machinery to increase productivity. -They thrived in the early years of reform by lending to TVEs but lost a lot as the TVEs declined. The Fringe - A random hodgepodge of banks. Containing mostly the old failing ones and some of the very small and new private ones. 19.2.5 Central Banking and Regulatory Apparatus - The China Bank Regulatory Commission (CBRC) was set up to keep regulatory oversight independent from the monetary-policy functions of the central bank (PBC). 19.3 Weakness of the Banking System - A large weakness of the banking system comes from the large amount of nonperforming loans (NPLs) that were made during the period of “reform without losers” to buffer workers from the consequences of increased competition. This could represent the cost of transition. -During the Asian Financial Crisis of 1997-1998 the government realized they needed to help the financial sector and injected large amounts of money into the banks. -There is still a “stock” problem of clearing off the existing NPLs as well as a “flow” problem of promoting healthier lending and borrowing habits. 19.3.1 Measures to Reduce the Stock of Nonperforming Loans - In order to reduce the damage done by the NPLs the government created state-run Asset Management Companies (AMCs), one for each bank. -The AMCs tried to recover as much value as possible from the NPLs they bought from the banks by selling the loans to third parties, foreclosing on assets and auctioning them off, or swapping loans for equity. 19.3.2 The “Flow” problem: Ensuring good Lending Decisions - The current institutions are still doing a poor job at moving capital to profitable investments. Causes:  Redefining the Scope of Business o Chinese banks have not made the shift from lending houses to “fee for service”  Poor Internal
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