The History of the Chinese Financial System
Co-Written By Sam Mills
The narratives that have given rise to the identity of modern China provide important context to an analysis of China’s financial system. The “Century of Humiliation,” a 110-year period stretching from the beginning of the First Opium War in 1839 to the founding of the People’s Republic of China in 1949, is as compelling a national narrative for China as the Revolutionary War is for the United States. With the Qing dynasty suffering disastrous defeats against Britain, France, Russia, and Japan in wars during the 19th century before collapsing entirely in favor of Sun Yat-sen’s republic in 1912, the country was humiliated as it fell from grace as a great civilization into its own version of the Dark Ages. This woeful stretch of history has persisted in the memories of Chinese citizens, intellectuals and politicians. In contemporary discourse, Communist Party propaganda has culminated in the belief that Maoist revolution was the path towards successful liberation from Western and Japanese influence in the region. The Kuomintang never had the ability to claim this legitimacy considering its relegation to the island of Formosa. On this note, we can see that the “Century of Humiliation” is a huge piece of legitimacy for the Communist Party in the eyes of Chinese citizens and therefore its authority to play a major role in the international system. With the rapid rise of China’s economy since the implementation of reforms by Deng Xiaoping in the 1980s, the institutionalization of the “Century of Humiliation” narrative has substantially contributed to the success of China’s financial giants. Without the reform that would follow, the Chinese financial services industry would not be in the advantageous position it is today.
In order to understand the current developments of China’s rapidly changing financial sector, it is important to study its history and what economic and political forces have come to shape it. At the beginning of the CCP’s rule from the 1950s to the 1980s, the People’s Bank of China dominated the financial sector, serving as both the central bank and the main commercial bank of the country. However, during the 80s, the central government decided to create five state-owned banks to cater to the different aspects of the Chinese economy: the Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BoC), Bank of Communications (BoCom), and Agricultural Bank of China (ABC). During the following decades, the financial sector saw significant changes as it had to accommodate China’s burgeoning economy. Two defining trends were the development of the sector leading up to China’s entrance into the WTO and the role the major banks played in supporting the inefficient yet economically and socially crucial state-owned enterprises (SOEs) which dominated significant portions of the economy. As the major banks ramped up their operations, the financial sector saw the emergence of institutional investors in the mid 1990s along with other features characteristic of a healthy financial system. Furthermore, in an effort to strengthen China’s financial markets, the Shanghai and Shenzhen Exchanges opened in 1990 with little short-term impact on the banking sector’s dominance.
The following decades illuminated the tension between SOEs, the traditional banking institutions, and the local and central government. Because China has both a state-controlled and private sector, distributing funds fairly has always been a challenge. This problem was only compounded by the fact that local government, due to a tax law passed in 1994, relied on local SOEs for significant portions of their revenue. Consequently, the state would often pressure state-owned banks to favor SOEs over private firms when providing loans, a trend exacerbated by the fact that SOEs had better institutional relationships with the banks. This also led to a rise in non-performing loans which destabilized the sector with banks often providing large loans to inefficient SOEs. This was in fact a major concern for policymakers up until recently when the central government succeeded in bringing NPLs under control.
In the conversations with the Global Macro Team membership, we discussed China’s role in the international system, the economic implications of its financial services industry, and the emergence of unity around the “Century of Humiliation” narrative that has largely motivated China’s unique standing in the world. The group realized that China’s current position is rapidly evolving and is often at odds with Western powers partially due to its unique governing system. Most participants agreed that China is looking to operate within the status quo for now before seeking to reform international practices on its own terms, following the philosophy of Deng Xiaoping, "Hide your strength, bide your time." Beijing’s foreign policy was also discussed in relation to Chinese financial might, with neocolonialism and debt traps frequently referenced as means for China to gain political leverage over foreign nations in Latin America, Africa, Asia, and the Pacific. This was also invoked in a conversation surrounding our Latin America Team’s presentation on Venezuela, as China had lent extensively to the Bolivarian petrostate. As a whole, the conversations were very productive and allowed for a highly informative discourse, and the China Team intends to incorporate what was learned from the discussion into our research moving forward.
