China's banking system has undergone significant reforms over time. It transitioned from a foreign dominated system to a mixed system to a socialist system under Mao and later established four large state-owned commercial banks in the 1970s and 80s. However, low interest rates and preferential lending to state-owned firms has fueled the growth of shadow banking, estimated at $6 trillion. If these risky loans default, it could send China's economy into crisis and impact the global economy. Further reforms are needed to increase lending competition and rates to curb shadow banking and channel funds to smaller private businesses.

1. China’s Banking
System
By: James Huang

2. Brief History
• 1845 – 1896
• A foreign Dominated Banking System
• The Oriental Bank Corporation, a British Bank, opened its Canton
branch in 1845.
• HSBC was established in 1865 to finance the growing trade
between China and Europe

3. Brief History
• 1896-1949
• A Mixed but Undeveloped Modern Banking System
• In 1896 the Imperial Bank of China, the first Chinese modern
bank was established in Shanghai
• Government owned, later named the Commercial Bank of China
• China’s first central bank, the Great Qing Government Bank
opened in 1905.

4. Brief History
• 1949-1978
• A typical Socialist Banking System
• People’s Bank of China was created
• It took over the roll of Central Bank, but also played the role of
Ministry of Finance as well as the only commercial bank in China

5. Banking Reform
• Before 1984 PBOC was a central bank, ministry of Finance, and
a commercial bank.
• Reform of PBOC started near end of 1970s.
• 4 state owned commercial banks established
• ABC – Agricultural Bank of China (1979)
• BOC – Bank of China (1979)
• CBC – Construction Bank of China (1979)
• ICBC – Industrial and Commercial Bank of China (1984)
• 1994, 3 policy banks were set up
• SDBC – the State Development Bank of China
• ADBC – Agricultural Development Bank of China
• IEBC – the Import and Export Bank of China
• Many other commercial banks were also set up

6. Problems with Banking System
now (NEW)
• Chinese banks refuse to loan to small enterprises and
individuals due to the higher risk.
• Favors own State Owned Companies because there is less risk
and they have more control over the future of the company and
have more profits if the company does well.
• Even if State Owned Company may not necessarily do well, China
diverts a lot of money toward them.
• Because most banks in China are state owned, they get to
determine interest rates.
• Hence, they can keep the interest rates quite low, encouraging
people to invest in shadow banking or in dubious investments)

7. Further Reforms Needed
(NEW)
• China’s central bank needs to push for reforms that are
intended to spur competition among state-owned banks and
put more money in consumers’ pockets.
• Need to offer more loans so companies and people aren’t pushed
to Shadow Banking.
• Needs to increase deposit interest rates so people can invest
more in the banks and not sketchy shadow banking investments.
• Financial Reform cannot lose out to the demands of political
leaders struggling to meet GDP growth targets.
• Political Leaders must make Financial reform a priority before a
country wide economic collapse (Needs to be fixed immediately
and not pushed aside).
• By making financial reforms, GDP can be heightened by more
competition/investments from new companies and projects.

8. Shadow Banking
• Shadow Banking has economists very worried.
• Shadow Banking is where banks and finance companies loan
money to business and local governments at high interest
rates outside the regulated financial system.
• Unregulated Lenders, which themselves borrow money from
regulated banks, have made too many dubious loans that
could default.

9. Shadow Banking Growth
• Chinese government has too tightly controlled traditional
banking.
• Keeps interest rates that conventional banks pay to depositors
extremely low and gives out cheap loans to state-owned
enterprises and favored companies that may not be able to
repay the money.
• Banks also sell off loans to companies and other banks.

10. Interest Rates
• These low interest rates, led savers to invest money in
suspicious estate projects or dubious investments offered by
banks and finance companies that promise higher rates of
return.
• Much of this money is then lent to private businesses and
local governments, which cannot get bank loans due to the
tight regulation and preference to SOEs.

11. What could happen?
• Send China’s Economy into a spiral.
• JP Morgan estimates Shadow banking nearly doubled from 2010-
2012 to nearly $6 trillion, or 70% of nation’s GDP.
• Default would cause panic.
• Just in this year alone, $600-900 billion of trust loans are set
to be rolled over.
• Ghost towns & other bad investments.
• Second largest economy = world wide effect.

12. How to fix this?
• Restore China’s Banking system, by increasing the availability
of loans for smaller businesses.
• Consumers should continue to invest in secure internet
banking entities like Alibaba’s Yue Bao, that offers an interest
rate of 3% currently.
• Forces big banks to change and adapt to provide better services
for citizens and private small enterprises.
• Investment in more public companies will have the same effect
too, China is SOE heavy.
• More regulation with Shadow Banking with more
transparency.
• Already too big of economy to stop.
• Only way to decrease it is to start monitoring it more closely.

13. Conclusion
• China’s financial system not as connected to global economy,
could have lessen the effect of a economic crash.
• Still recovering from Great Recession (2007), and having a China
crash is not something the world economy needs right now.
• Loses should be manageable, if China continues to reform it’s
banking system.
• Needs to do it quicker.
• Only time will tell.

14. Questions?

15. Thank You!

16. Sources
• http://time.com/8671/why-you-need-to-worry-about-chinas-
shadow-banking/
• http://www.economist.com/news/finance-and-
economics/21601872-every-time-regulators-curb-one-form-
non-bank-lending-another-begins
• http://www.nytimes.com/2014/01/08/opinion/chinas-
shadow-banking-problem.html?_r=0
• http://www.cnbc.com/id/101597488#.
• http://online.wsj.com/articles/chinas-moment-of-truth-
financial-reform-or-growth-1410815873