The China Venture

them, while a branch with a shortage of funds could in no way get in contact with another
branch. 51
The reforms in 1979 put limits on the credit banks could extend and made their lending
capacity conditional on their deposit-raising abilities. In 1983, an unofficial interbank market
was created on an experimental basis by a regional branch of the ABC. This horizontal
interface between branches marked a change from the previous, vertical system. The
experiment proved such a success that branches of other banks were included in the system.
As a result of early moves to liberalise the financial sector, sporadic interbank trading
between branches of specialised banks emerged in 1985. The reason was the increasing need
for local interbank markets which came from the shortage of credit through a restrictive
monetary policy implemented by the PBOC in 1985. In November 1995, the PBOC
announced its intentions to link the banks and the most important regional money markets
electronically. But still, the interest rates are tightly controlled, which makes the money
market not very effective. By the end of 1987, interbank markets existed in nearly all regions.
But the lack of proper regulatory framework and of supervision by monetary authorities
allowed the creation of „finance companies“ and development of unauthorised activities, such
as short-term borrowing and long-term lending. As the PBOC declared that no authorities
would intervene in any way, interbank activities of various kind sprang up in most large cities
across the country.
In 1989, these finance companies were abolished by the PBOC and in 1990, standardised
operating principles of interbank markets came into effect. The interbank activities were
centralised in some well-defined market places in Shanghai, Wuhan, Beijing/Tianjin,
Shenyang, Xi’an and Chongqing. In Shanghai, the market took a more structured form in
August 1986 with the establishment of the „Shanghai Money Market“, organised by the
ICBC. The ICBC often accounts for more than three quarters of all interbank activities in
China, although in principle, any financial institution may operate on this market after
approval by the PBOC. Still, the interbank market is quite segmented while the extent of
segmentation depends on the stature of the region or centre concerned. It is organised in three
layers: markets, centres and networks. The market itself is organised locally by financial
institutions and sponsored by local branches of the PBOC. Links between these three layers
are poor due to the underdeveloped telecommunications, the inadequacy of organisation by
51 See Dipchand et. Al, 1994; Girardin, 1997 and Xia, 1995.
39