China

Finance

China’s financial institutions are owned by the state. The principal instruments of fiscal and financial control are the People’s Bank of China and the Ministry of Finance, both subject to the authority of the State Council. The People’s Bank, which replaced the Central Bank of China in 1950 and gradually took over private banks, fulfills many of the functions of Western central and commercial banks. It issues the renminbi (yuan; the national currency), controls circulation, and plays an important role in disbursing budgetary expenditures. Furthermore, it handles the accounts, payments, and receipts of government organizations and other bodies, which enables it to exercise detailed supervision over their financial and general performance in the light of the state’s economic plans.

The People’s Bank is also responsible for foreign trade and other overseas transactions (including remittances by overseas Chinese), but these functions are exercised through the Bank of China, which maintains branch offices in a number of European and Asian countries.

Other important financial institutions include the China Construction Bank (formerly People’s Construction Bank of China), responsible for capitalizing a portion of overall investment and for providing capital funds for certain industrial and construction enterprises; the Industrial and Commercial Bank of China, which conducts ordinary commercial transactions and acts as a savings bank for the public; the Agricultural Bank of China, which serves the agricultural sector; and the China Investment Bank, which handles foreign investment. Many foreign banks maintain offices in China’s larger cities and the special economic zones. In 2005 the China Construction Bank became the first of China’s “big four” banks to be publicly traded. The Bank of China and the Industrial and Commercial Bank followed in step soon thereafter. When the last of the four, the Agricultural Bank of China, went public in 2010, it was the world’s largest initial public offering (IPO) to date.

China’s economic reforms greatly increased the economic role of the banking system. Whereas virtually all investment capital was previously provided on a grant basis in the state plan, policy has shifted to a loan basis through the various state financial institutions. More generally, increasing amounts of funds are made available through the banks for economic purposes. Enterprises and individuals can go to the banks to obtain loans outside the state plan, and this has proved to be a major source of financing both for new firms and for the expansion and modernization of older enterprises.

Foreign sources of capital also have become increasingly important. China has received loans from the World Bank and several United Nations programs, as well as from several countries (particularly Japan) and from commercial banks. Hong Kong and Taiwan have become major conduits for—as well as sources of—this investment. Stock exchanges have been operating at Shanghai and Shenzhen since 1990, and the government began allowing the first foreign firms to trade in the market in 2003.