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The PRC's Financial System

Andrew Papadimos

This articles is from Chinese Business Center

The PRC's financial system is highly regulated and relatively underdeveloped, but has recently begun to expand rapidly as monetary policy becomes integral to its overall economic policy. As a result, banks are becoming more important to the PRC's economy by providing increasingly more finance to enterprises for investment, seeking deposits from the public to mop up excess liquidity, and lending money to the government.

As would be expected, the PRC's banking system is also highly regulated with six major banks, each having specific tasks and duties. The People's Bank of China is the largest bank in the PRC and acts as the Treasury. It also issues currency, monitors money supply, regulates monetary organisations and formulates monetary policy for the State Council. The Bank of China manages foreign exchange transactions and manages foreign exchange reserves. The China Investment Bank distributes foreign capital from a variety of sources, and the China International Trust and Investment Corporation (CITIC) was previously a financial organisation that smoothed the inflow of foreign funds, but is now a full bank, allowing to compete for foreign investment funds with the Bank of China. The People's Construction Bank lends funds for capital construction projects from the state budget, and finally the Agricultural Bank of China functions as a lending and deposit taking institution for the agricultural sector.

Financial reform in the PRC's banking sector include the introduction of leasing and insurance, and operational boundaries are being slowly eroded to promote competition for customers who are now permitted to choose banks as well as hold accounts in more than one bank.

Since the inception of the open door policy, a number of international banks have been permitted to open their doors in major cities in the PRC. However, these are largely representative branches, with only a few being permitted to carry out branch functions in Shanghai and Shenzhen. Their participation in the PRC's financial system has been very limited, but as the PRC starts to borrow more from abroad, their role may become greater in the future.


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