The China Venture

2.3.1.1 Financial sector development in China
In 1949, all banks were expropriated and merged into a monobank system. The monobank,
named The People’s Bank of China (PBOC), had an administrative function within the
centrally planned economy, funnelling budgetary funds to the agricultural and industrial
sectors and acting as a book-keeper. It served the function of retail bank, wholesale bank and
central bank concurrently. The PBOC has undergone a number of fundamental changes in the
reform years, leading to a total restructuring of China’s banking landscape.
Before 1978, the financial system was largely irrelevant to the country’s macroeconomic
performance. The overall paradigm of financial sector reform changed from a moderate to a
more radical stance during four phases of reform beginning in the late 1970s. In the first
phase, from 1979 to 1983, the scope of financial reform was limited to changes in the
structure and operation of the state banking system. At the macro-level, financial institutions
had to be adapted to fulfil the role of the financial intermediaries. On the one hand, the
decentralisation of financial resources into the hands of households led to an explosion in
their saving deposits. On the other hand, bank credit replaced the state budget as the main
source of investment finance. At the micro-level, banks had to start including profitability
among the objectives of their operations. They began to learn to be more selective in granting
loans to enterprises, and to monitor the performance of the latter in order to contribute to
some timid hardening of their budget constraint. In addition, some non-bank financial
institutions (NBFIs) started to develop. 25
The second phase, from 1984 through 1988, was the real start of financial-sector reform. The
rationing of capital in line with the physical plan was abandoned, specialised banks emerged
from the former unified state bank to become the pillars of the new financial system, and new
NBFIs were created. The People’s Bank of China (PBOC) started to lose some of its powers,
becoming solely the central bank in charge of enforcing a direct monetary policy within a
system of directed capital.
The third phase, from 1988 through 1992, was characterised by the experimental nature of
financial-sector reforms. Within the context of a slowdown in reform, caused by the
authorities’ exclusive focus on controlling inflationary pressures, most reforms were limited
in scope, continuously reviewed and sometimes reversed. The authorities faced the dilemma
25 Girardin, 1997, pp. 21.
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