The Chinese banking system compared to the British banking system

The British and Chinese banking systems were some of the first banking systems in the world. The Chinese systems date back song dynasty. The British system much like the Chinese has had many changes over the years due to the ever-changing ways of the two very diverse economies. In this essay I aim to highlight the differences in both the systems in the way their financial institutions operate and I am going to mainly focus on role of the two countries central banks for Britain the Bank Of England and for China The People's Bank Of China.

The banking system of China was very different to what it is now. During the 18th century, most banks were run my dynasties and were on a small scale in the big metropolis cities. Due to the ever-growing size of china's population, economy, and the increase in foreign trade international banks soon began to emerge on Chinese soil. British banks and French banks were part of the first few followed soon by Russian banks who had similar communist methods to china after 1949.

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How ever, the biggest change occurred in 1949 after the Chinese civil war. The Peoples Bank of China was appointed as the central bank of china and has newer rules and responsibilities appointed to it. It was mainly in charge of money supply and foreign exchange policies.

Before it was nationalised during the 1600's ( http://www.bankofengland.co.uk/about/history/index.htm ) The Bank of England was appointed as the English government's bank.

At this time, the Bank of England is in charge of monetary stability and financial stability. The instiution works along side the HM Treasury and many other international banks to make sure the economy remains stable and there is continuous growth. Just as the PBC works with the ministry of finance.

There was a key difference between British banking and chinese banking in the way its main financial institutions operated. In Britain it was mainly private owned banks which had most market share and control. Banks such as Barclays and Citigroup worked together with the government but only because they had a legal obligation to do so.Compared to the chinese institutions, china had four key instituions which show us that is the reason china was able to sustain its huge growth and expansion.The Agricultural Bank of China, China industrial and Commercial Bank, Peoples Construction Bank, and The People's Bank of China. Each of these instituions specialised in each sector of the chinese economy due to this method it meant that the economy was able to grow. In the UK financial instituions were profit driven, although the government consulted them time to time they were not a key driver of economic growth. Due to them being privately owned they were able to give out loans to a certain extent and most cases loans were normally greater then deposits. And as we have learnt from experience this is the reason that led to many banks being nationalised and government owned and controlled. How ever the chinese instituions were run by the government already meaning that no such problem would occur. They had strict rules to ensure that loans were never greater then deposits. To promote competition between banks the PBC allowed smaller and medium sized firms to open up on the condition that a percentage of their deposits were put into the central bank. With this condition they were able to maintian constant owenership and were able to regulate the amount of borrowing and saving.

As a result of this state ownership in china we can see that compared to the British system it was a much more regulated sysem. Even though it was run by the state it did not compramise its economics growth or profitability. British institutions had no restrictions put upon them although British institutions are regulated by the Fianancial Services Authority if often takes a while to regulate the banks due to them knowing the power they hold in the economy. One of the many reasons that during the recent recession the government were not letting any banks fold as it would have a domino affect on the rest of the economy.

A further positive of the chinese system compared to that of the British was the status the country held. China was a communist country and so had the ability to restrict foreign financial houses from setting up. This restriciton meant that even during the late 1990s the state owned over 84% of loans and 78% of deposits. leaving forgeing loans and deposits to about 1%. (Heffernan, S 2005 Modern banking Jonh Wiley & Sons pg 305)

The lack of regulation and control of private banks or too much regulation as others would argue and not getting the right balance of regualtion led to many failures in the UK. An example would be the small bank failures and liquidity problems they faced during 1991-1993. (Heffernan, S 2005 Modern banking Jonh Wiley & Sons) Britian saw a great rise in foreign investment and was going through a boom. With so many small and medium sized instiutions opening up specialising in property. Institutions would often lend out up to 125% mortgages which left the lender ad borrower with negative equity as time went on the loan book got greater then the deposits.( Heffernan, S 2005 Modern banking Jonh Wiley & Sons) The decline and speculative concerns grew and as a result the values of assets droped. As the small instituions played no role on the main economy as there was so many of them, together all of them collapsing would have a great impact. The bank of england had to step in to finance and bail out over 40 small firms from going bank rupt. The Bank of England did step in but it was a too late. Banks were given the option to either close down or increase their liquidity or decrease loans. At the end of it 25 small firms failed and the Bank Of England decided to more closely monitor the big banks as they were deemed to great to fail. Most international institutions have records of failing or being having to be bailed out how ever china never has.

How ever this does not mean that they are not in trouble. Reform talks in the mid 1990's were over the growing concerns of the bad debts that the big four chinese banks held. They often lent to loss making state owned firms, but the key factor between Britiain and China were the confidance of its people. During the recent recession we were given a real life example as to how the talk of collapse of one bank can lead to a domino affect on other banks. The nationalisation of Northern Rock put many other banks in terrible situations with ques forming outside banks with anxious customers as to whether their deposits were safe in the instituions. China have no problem like that. Although there are bad debts in the big four banks, liquidty ratios the amount of phyical cash banks had compared to the deposits aveage about 57% (http://www.pbc.gov.cn/publish/english/966/index.html

)which is close to the big UK banks but the difference is that savings are much higher in china compared to the UK. The Chinese people have confidance that the state will always bail out banks and keep their deposits safe.

Further more I think the ability for China to keep out foreign banks has helped them greatly. This means that other services are also kept in china and regulated by the government. In britian we see the role of banks changing from just banking and expanding to banking and financial services includining investment and securities as well as asset managerment and insurance. This gives banks in the UK even greater power in the economy. They control a much wider market meaning their collapse is likely to happen meaning they will be in the media about their bad debt but the Bank of England as a lender of last resort will always bail them out.Due to the size and power they hold. This can lead to bad practises. We have seen examples of firms giving out more loans then they have deposits, these are often not on record as the investors try to recoupe the money often loosing even more.

Yet again we are led back to the recent recession as an example where banks offered mortgages but on top offered house insurance as well. A mortgage loan may be given to a consumer but the consumer is inclined to buy the insurance as they will get a greater saving but when the consumer is unable to pay back to the bank the bank would often get money from other depositors but as it all comes at the same time the banks are stuck and the Bank Of England are forced to step in. China's "Commercial Banking Law" has been introduced so that banks remain what they are as banks and don't diverse their services into financial services. The introduction of this law meant banks terminated their current operations and the state opened up 4 big institutions who specialised in financial services alone these in turn worked with the four big banks of china but it could raise the question that one could just dump its debts on the other.

In conclusion there is reason to believe that although the Bank Of Englands model is the base model for many other central banks around the world its lack of regulation and control is questionable. It is the bank of the government and the lender of last resorts. Comparing the chinese central bank and the responsibilities it holds and shows that the chinese model of banking where the state is controlling the majority of it is more succesfull in terms that there are more closely monitored as they are open to scrutiny if they show any signs of failure and as a result could loose their position as government. How ever some might argue that is so much state control and ownership that good. The British banking industry is booming with firms and as a result competition is tight resulting in the consumer getting a better deal where as the consumer in china is much worse off due to the lack of competition. Both economies are very different in the way they operate how ever they are both able to boast one similarity and that is they are still key players on the world stage in terms of their financial instituions and are still able to maintain their importance to the world economy as a whole.