Reform of financial system
For the past few decades, the People's Bank of China has exercised the functions and powers of a central bank, as well as handling industrial and commercial credits and savings business; it was neither the central bank in the true sense, nor a commercial entity conforming to the law of the market economy. But since reform and opening-up began in 1979, China has carried out a series of significant reforms in its banking system, and strengthened its opening to the outside world. Consequently, the finance industry has made steady development. At the end of 2004, the balance of domestic and foreign currency savings deposits stood at 25,318.8 billion yuan and the balance of home and foreign currency loans came to 18,856.6 billion yuan. Now China has basically formed a financial system under the regulation, control and supervision of the central bank, with its state banks as the mainstay, featuring the separation of policy-related finance and commercial finance, the cooperation of various financial institutions with mutually complementary functions.
In 1984, the People's Bank of China stopped handling credit and savings business, and began formally to exercise central bank functions and powers by conducting macro-control and supervision over the nation's banking system. In 1994, the Industrial and Commercial Bank of China, the Bank of China, the Agricultural Bank of China and the China Construction Bank were transformed into state-owned commercial banks; and three policy-related banks were founded, namely, the Agricultural Development Bank of China, the National Development Bank and the China Import and Export Bank. In 1995, the Commercial Bank Law was promulgated, creating the conditions for forming the commercial bank system and organizational structure, and providing a legal basis for changing the specialized state banks to state-owned commercial banks. Since 1996, the financial organizational system has gradually been perfected; the wholly state-owned commercial banks have been transformed into modern financial enterprises handling currencies; over 120 shareholding medium and small-sized commercial banks have been set up or reorganized; and securities and insurance financial institutions have been further standardized and developed. April 2003 saw the formal establishment of the China Banking Regulatory Commission (CBRC). Since then, a financial regulatory system has been formed in which CBRC, China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC) work in coordination, each body having its own clearly defined responsibilities.
In January 2004, the State Council decided that the Bank of China and the China Construction Bank would start the experiment of transforming the shareholding system. The main tasks are to establish a standardized corporate governance and an internal system of rights and responsibilities in accordance with the requirements for modern commercial banks; to restructure the financial system, speed up the disposal of non-performing assets and to reinforce minimum capital requirement to build up first-class modern financial enterprises. Now, six shareholding commercial banks and urban commercial banks in China have begun to accept overseas investors as shareholders.
Renminbi and foreign exchange control
The Renminbi (RMB), China's legal currency, is issued and controlled solely by the People's Bank of China. RMB exchange rates are decided by the People's Bank of China and issued by the State Administration of Foreign Exchange, the latter exercising the functions and powers of exchange control.
In 1994, China reformed the foreign exchange system, combined the RMB exchange rates, adopted the bank exchange settlement system and set up a unified inter-bank foreign exchange market. On this basis, China included the foreign exchange business of the foreign-invested enterprises in the bank's exchange settlement system in 1996. On December 1, 1996, China formally accepted Article 8 of the Agreement on International Currencies and Funds, and realized RMB convertibility under the current account ahead of schedule. Meanwhile, China has been active in promoting bilateral currency exchange between ASEAN and China, Japan and the Republic of Korea (10+3). At the end of 2004, China's foreign exchange reserves reached US$609.9 billion and its share in the International Monetary Fund has risen from 11th to 8th place. The variety of financial businesses has been increasing steadily, and China has opened an array of new businesses to become integrated into the various aspects of modern international financial business, such as consumer credit, securities investment funds and insurance-linked investments.
In 1994, China started the "Golden Card Project," enabling cards issued by banks to be used all over the country through a network. The establishment of the China Association of Banks rapidly promoted the inter-bank card network and by the end of 2004, the inter-region-inter-bank network had reached 600 cities, including all prefecture-level cities and more than 300 economically developed county-level cities.
Opening-up of financial industry
Over the past 20-odd years, China's financial institutions in the special economic zones, coastal open cities and inland central cities have approved a range of wholly foreign-owned and Chinese-foreign joint venture financial institutions. Every year since 2002, China has increased the number of cities where foreign banks are allowed to handle RMB business, and within five years such banks will be allowed to handle RMB business in any city. At the end of 2004, the total assets of foreign financial institutions in China reached over US$47 billion; foreign banks were allowed to handle RMB business in 16 areas, and 62 foreign banks from 19 countries and regions set up 191 business institutions in China, of which 116 were approved to handle RMB business. There were 211 foreign bank branches in China.
The CSRC has approved the establishment of 13 Sino-foreign equity joint venture fund management companies, and started to formally handle the application of establishment of joint venture fund management companies with a maximum 49 percent foreign share; the CIRC declared that: from December 11, 2004 on, foreign insurance companies could handle health insurance, group insurance, life insurance and annuity insurance businesses; regional restrictions on establishing wholly foreign-funded insurance institutions were canceled and the proportion of the foreign share in joint venture insurance agencies was allowed to reach 51 percent.
Foreign banks have expanded their China-related business scope. In November 2003, the CBRC started to implement new policies, e.g., permitting foreign banks to provide RMB services to all kinds of Chinese enterprises in areas with open RMB business (previously, these banks' RMB services were restricted to foreign-funded enterprises, foreigners and people from Hong Kong, Macao and Taiwan in cities with open RMB business). The new policy also encourages qualified international strategic investors to join the restructuring and reforming of China's banking and financial institutions on a voluntary and commercial basis.
Meanwhile, all China's commercial banks have set up branches overseas, and started an international credit business. The Bank of China ranks first in the number and scale of overseas outlets. In 1980, China resumed membership of the World Bank, and returned to the International Monetary Fund. In 1984, China started business contacts with the Bank for International Settlements. In 1985, China formally joined the African Development Bank and in 1986 formally became a member of the Asian Development Bank.
In 1990 and 1991, China set up stock exchanges in Shanghai and Shenzhen. In the past decade, the Chinese stock market has completed a journey that took many countries over a century to cover; China's stock market today has capital approaching 3,705.6 billion yuan, 1,377 listed companies and 72.16 million investors.
The Chinese stock market has promoted the reform of state-owned enterprises and the change of their systems, and enabled a stable transition between the two systems. On the strength of the stock market in the past decade, many large state-owned enterprises have realized system change.
The change also has stimulated medium and small-sized state-owned enterprises to adopt the shareholding system, thus solving the most important issue - the system problem - during the transition from planned to a market economy. As for ordinary citizens, bank deposit is not the only way to put their money, the stock market has become one of the most important channels for investment.
Methods of stock trading are constantly being improved. Today, a network system for securities exchange and account settlement has been formed, with the Shanghai and Shenzhen exchanges as the powerhouse, radiating to all parts of the country. In 2004, China issued 123 kinds of A share, and 23 rights issues, collecting a total of 83.6 billion yuan; and 28 kinds of B and H shares, collecting a total of 67.5 billion yuan.
China's insurance industry started to recover in 1980, after 20 years' standstill. In 1981, the People's Insurance Company of China was transformed from a government department into a specialized company, with branches or sub-branches in every part of China. 1988 witnessed the founding of the Ping An Insurance (Group) Company of China and the Pacific Insurance Company, both mainly active in the coastal areas. In 1996, the People's Insurance Company of China made a big step forward in transforming its administration and operational mode, in setting up a modern enterprise system, and integrating with the international market. The Insurance Law of 1985 and the founding of the CIRC in 1988 provided the legal basis and specific rules for the operation of the insurance market. In 1980, China only had one insurance company; by 2004 there were 62, with a total revenue of premiums of 431.8 billion yuan, of which 100.4 billion were paid as compensation and payment.