Linsun CHENG

For centuries Chinese money consisted of circular coins with a square hole in the center to facilitate their being transported on a string. These particular coins belonged to the Prince of Pin, in the Tang dynasty (618–907 CE). Collection of the Imperial Palace in Beijing. PHOTO BY JOAN LEBOLD COHEN.

Foreign banks and two traditional types of Chinese banking institutions dominated China’s financial market during the Qing dynasty. Modern banks combining Western techniques with China’s indigenous practices would emerge to play an important role in Chinese economy by the mid-1930s. But Japanese invasion, subsequent civil war, and the establishment of the Peoples Republic of China put a halt to this development.

During the entire nineteenth century, China’s financial market was dominated by foreign banks and two traditional Chinese financial institutions: piaohao ?? and qianzhuang ??. The piaohao, started in the early nineteenth century, rapidly developed into the most powerful force in the contemporary Chinese financial market. Piaohao focused on interprovincial remittances and conducted government services; high officials and big merchants were their main customers. By the end of the nineteenth century, thirty-two piaohao, with 475 branches, were in business covering all of China’s eighteen provinces, plus Manchuria, Mongolia, Xinjiang, and other frontier areas.

Independent of the nationwide network of piaohao were a large number of small native banks called qianzhuang. From the beginning, qianzhuang had their own field of business complementary to, but distinct from that of, the piaohao. Most qianzhuang were local and functioned as commercial banks by conducting local money exchange, issuing cash notes, exchanging bills and notes, and accepting discounts for the local business community. Until the middle of the nineteenth century, qianzhuang and piaohao served the Chinese economy and society well.

The growth of China’s import and export business in the nineteenth century attracted Western banks into China’s financial market. A British-Indian bank introduced modern banking into China in 1845; other European, American, and Japanese banks followed. By the end of the nineteenth century, there were nine foreign banks with forty-five branches in China’s treaty ports, all of which, by virtue of extraterritoriality treaties imposed on China, operated outside the jurisdiction of the Chinese government. Not only did these banks completely control China’s international-remittance and foreign-trade financing, they also issued their own banknotes, accepted deposits from Chinese citizens, and extended loans to traditional Chinese financial institutions.

By end of the nineteenth century, foreign banks dominated the financing of China’s import and export trade, while piaohao monopolized the domestic remittance business and qianzhuang controlled credit markets for domestic trade throughout China. Complementing and cooperating with each other these three institutions monopolized the Chinese financial market so tightly that there seemed to be little room for modern Chinese banks.

Emergence of Modern Chinese Banks

The dominance of foreign banks, qianzhuang, and piaohao in the Chinese financial market was finally broken when China’s first modern bank, the Imperial Bank of China, opened for business in Shanghai in 1897.

China’s New Financial Demands

The birth of the modern Chinese bank was first the result of China’s new financial demands. Decades of commercial contacts with the outside world and the bitter experiences of military defeats at the hands of Western industrial nations convinced increasing numbers of Chinese of the superiority of machine production over the century-old handicraft method of production. Starting in the 1860s, various munitions works, railway companies, and modern factories that manufactured military and commercial goods were created by the Qing government and private industrialists.

Unlike native Chinese handicraft workshops, modern industry needed large amounts of capital for long periods of time. The capital demands of railroad construction and other infrastructure were even greater. But the Qing government’s deteriorating financial situation prevented it from appropriating large funds to initiate more new projects.

Incompetence of Existing Institutions

Though the existing financial arrangements previously had provided sufficient credit and transfer facilities to support domestic trade within the Chinese economy, they could hardly meet China’s new financial demands. Neither qianzhuang nor piaohao, as single proprietorships or partnerships with limited capital resources, proved able to provide funding for China’s modern adventures. To extend their business, most qianzhuang in Shanghai and other large treaty ports increasingly relied on the loans from piaohao and foreign banks for their working capital. Since these loans were made on a daily basis, qianzhuang had no choice but to make short-term loans to merchants rather than long-term loans to modern industrialists. Piaohao ’s branch system dispersed their relatively greater capital base. Their extremely conservative owners failed to appreciate the potential profitability of the new opportunities and refused to provide funding to modern industrialists. Thus, until the end of the nineteenth century, qianzhuang and piaohao were rarely involved in China’s modern industry. Foreign banks were more interested in making quick profits by financing China’s international trade and providing loans to the Qing government than investing in the long-term development of industry in China. Furthermore, complicated Chinese business customs and procedures with which they were unfamiliar made the risk of industrial financing extremely high for foreign banks and thus prevented them from being a capital source for China’s new entrepreneurs.

Inspiration of Nationalism

Awareness of foreign intrusion into the Chinese financial market was another significant factor leading to the appearance of modern Chinese banks. After China’s defeat in the First Sino-Japanese War (1894–1895) the Qing government was forced to pay a war indemnity almost three times its annual revenue and had to borrow from foreign banks. The intensive struggle among foreign powers attempting to seize spheres of influence in China imprinted strong political meaning on these loans. It was often stipulated in loan agreements between foreign banks and the Chinese government that the latter had to assign special taxes or revenues earmarked as guarantees for loans (Wang 1983, 239–260). Many Chinese officials and intellectuals saw the situation as a sign of China’s possible demise.

The establishment of modern Chinese banks was seen as an important way to protect China from economic exploitation and invasion by foreign powers. As Sheng Xuanhuai, the founder of the first Chinese bank, said, “Should China not establish its own bank, [foreign powers] would seize all China’s profit and power” (Cheng 2007, 24). Many influential Chinese had highly appraised the bank’s role in supporting the state treasury and facilitating economy. They believed that China could not be wealthy and powerful without modern industry, but modern industry was not possible wit
hout the modernization of China’s financial institutions.

Expansion and Privatization

The Chinese nationalism triggered by the 1911 Revolution and the May Fourth demonstrations of 1919 greatly stimulated modern Chinese banking; immediately after the inauguration of the new Republican government, modern banks mushroomed throughout the country. While the power of government-owned banks declined due to government corruption and mismanagement, private bank sand privatized state banks emerged as the backbone of Chinese banking. The most prominent were the Bank of China, the Bank of Communications, the so-called Three Southern Banks (Shanghai Commercial and Savings Bank, Zhejiang Industrial Bank, and National Commercial Bank), and Four Northern Banks (Jincheng Banking Corporation, Continental Bank, Yanye Commercial Bank, and China & South Sea Bank). Private banks dominated modern Chinese banking before the Beijing government was eliminated in 1928.

With China’s political unification under the Nationalist government, piaohao almost disappeared from the scene, while those of foreign banks and qianzhuang showed only a moderate expansion. Modern Chinese banks, however experienced a quantitative expansion as well as a qualitative improvement, more than doubling their paid-up capital and reserve funds, tripling their loans, and quadrupling their deposits from 1927 to 1936. The banknotes they issued increased even more than five times. By 1936, modern Chinese banks held 81 percent of China’s capital power including paid-up capital, deposits, and circulated notes (Cheng 2007, 78). By 1937, the total assets of modern Chinese banks reached more than 7.27 billion fabi (Cheng 2007, 69). (In 1935 the central government prohibited the use and ownership of silver coins and issued the fabi as China’s legal tender note; fabi were replaced by jinyuanjuan [golden yuan] in 1948.)

Change of Power Balance in the Chinese Financial Market

The expansion of modern Chinese banks finally changed the balance of power in the Chinese financial market. Gone forever was the domination of piaohao, qianzhuang, and foreign banks in China’s financial market, thanks to the development of modern Chinese banks. Had not the development been brutally interrupted by the Japanese invasion of China, modern Chinese banks would have had the opportunity to make even further progress and greater contributions to the development of the modern Chinese economy.

Why Modern Banks Succeeded

While the many historical factors discussed above contributed to the advancement of modern Chinese banks throughout these years, the most pivotal but least-studied factor actually lies embedded in these banks themselves. Although the relationship between banks and government was full of complications, and some government policies favored the improvement of the modern banking system, the government played a very limited role in this entire process.

By the middle of the 1930s, about three-quarters of the total capital and more than 80 percent of the total assets of modern Chinese banks were concentrated among a score of principal banks. The Bank of China, Bank of Communications, the Southern Three, and Northern Four banks did the best. The total assets of these nine banks reached almost 3 billion fabi. Together these nine banks conducted about 60 percent of the loans and deposits and made up 54 percent of the assets of all Chinese banks (Cheng 2007, 70). Decisions and policies made by these principal banks largely explain why the modern Chinese banks could succeed in those years.

Adopting Western Business Methods

Credit for the success of these banks should be largely attributed to a group of prominent bankers who were in charge of these banks for most of the time during this period. As a group of Chinese entrepreneurs, they shared native-place ties and similar educational backgrounds. All of them had a solid Chinese classical education, while the majority had gone abroad to study at Western or Japanese colleges before starting their banking careers. Armed with knowledge of both the Western and Chinese business worlds, these bankers masterfully combined modern banking business techniques with China’s indigenous business traditions. Adjusting to the changing financial market, these people constantly introduced reforms into their banks’ business practices and management.

Overcoming Old Habits

A bank functions as a bank only when it starts to do business with its customers’ money. Attracting deposits for reinvestment is therefore the key to a bank’s business. To do so, however, China’s new banks had to discourage the age-old Chinese habits of hoarding gold and silver—something that neither the piaohao nor the qianzhuang had attempted. Piaohao were uninterested in attracting deposits because their monopoly on domestic remittances already gave them access to considerable amounts of floating funds that could be used to make loans and were free of interest charges. Qianzhuang, for their part, usually did not accept, let alone try to attract, deposits from common people, unless the depositors were the bank manager’s relatives or friends.

Modern Chinese banks, by contrast, envisioned deposits as their lifeline and went to great lengths to persuade people of the advantages they would gain by earning interest under the guidance of the new banks rather than letting money languish hidden in drawers in their homes or buried in the ground. Various saving accounts were designed to meet different customers’ requirements. By 1936, modern Chinese banks attracted more than 4.55 billion fabi of deposits from various sources, thirty-three times more than they did in 1911 (Cheng 2007, 34, 78) thus laid the foundation for their business expansion.

Reforms in Making Loans

While laying the foundation for their business expansion by increasing their deposits, China’s new banks also turned their attention to loans. Unsecured credit loans were the most prevalent type of loan offered by piaohao and qianzhuang; these were extended based on a customer’s business aptitude and reputation. The necessity to provide guaranty for a loan was seen as reflecting unfavorably on a person’s credit standing; only people whose credit was in question had to provide collateral to receive a loan from a bank. A merchant with good credit could easily get a loan without any material guaranty; on the other hand, a debtor would make every effort to clear his debt on time.

This manner of dealing on the basis of mutual trust was very common in the Chinese business world and for the most part worked very well, so long as the financial environment remained relatively simple. With the quantitative increase and geographic expansion of commerce in the twentieth century, however, it became extremely difficult for a lender to judge the safety of a loan based only on his clients’ personal reputation. Without material guaranties, qianzhuang were taking big risks in making loans. A customer’s bankruptcy often led to a qianzhuang’s bankruptcy, sometimes even generating a domino effect that led to a more general financial crisis.

Aware of that weakness in the traditional financial system, new banks made great efforts to avoid loans based on personal credit and to encourage loans based on material security. Instead of focusing on personal credit loans, as the native Chinese financial institutions usually did, major banks based most of their loans on the security of materials. Merchants received loans by providing collateral, and manufacturing companies got loans for their working capital by depositing their raw m
aterials or finished goods in bank warehouses. Longer-term financing of industry was provided against the security of the mortgages on factory sites, buildings, and machinery. These loans were much safer than loans based on personal credit. Most income of these banks came from the interest on these loans.

Reforms in Management and Structure

Recognizing the significance of human resources in a business operation, these bankers insisted on recruiting and promoting staff according to their working abilities, instead of relying on personal connections. Various methods were designed to enhance the quality of their staff, including a series of material incentive and welfare systems, which greatly improved the working conditions of their employees.

Unlike most Chinese business firms, which functioned as groups at essentially the local or regional level, these major banks operated their business nationwide, even internationally, by establishing regional branch offices and correspondent agencies in various places. They also expanded their activities across financial fields, making more industrial loans and investing capital in numerous diverse modern ventures. By the middle of 1930s, these banks were beginning to transform into an altogether new type of institution: modern enterprises. All of these major banks were organized as limited liability companies. Their corporate structure gave professional managers great leeway in running their businesses. They took long-term growth, rather than distribution of immediate dividends, as their business goal. They adopted many ways to build a sound financial foundation for their banks. For them, the long-term development of the bank was more important than short-term dividends because the incomes, careers, and fame of these managers relied on the expansion of their banks. It was also eventually a better way to secure the interests of stockholders.

From today’s point of view, particularly in Western countries, these approaches and business practices were commonplace. But they represented dramatic changes in the contemporary Chinese business world. Reforms in banking practices and management brought these banks substantial advantages in competing with other financial institutions, but they led the for other business leaders in adopting new corporate structures and practicing new techniques.

Maintaining China’s Indigenous Business Traditions

Although China’s new banks adopted many Western business methods, they also wisely retained many of the beneficial elements of Chinese tradition.

Each of the chief executives of all nine of China’s major banks in the early decades of the twentieth century were born, or had family roots, in Jiangsu and Zhejiang provinces. The dominance of these “Jiang-Zhe” natives (as they were called) in the Chinese financial field was not an accidental development, but one with long historical roots.

Jiang-Zhe merchants appeared in Shanghai as early as the Ming dynasty (1368–1644). Chinese traders in an alien setting tended to cluster into two kinds of groups or cliques, called bang ?—one on the basis of native-place (common place of birth or ancestral home), and the other on the basis of common occupation. Of the ten great merchant bang that appeared during the Ming and Qing dynasties, those formed by merchants from Zhejiang and Jiangsu became the most powerful after Shanghai was opened to foreign trade in 1842. Commercial acumen was an acknowledged gift of these merchants. Though Jiang-Zhe merchants were engaged in diversified business interests in Shanghai, the greatest concentration of their resources was in banking. Shanghai finance lay primarily in their hands. Western scholars have long recognized the importance that Chinese people place on the notion of native-place ties. For Chinese people, sharing the same birthplace or the same ancestral county can reduce the psychological barriers that usually exist among business-people and can foster cooperation. Among merchants, those from Jiangsu and Zhejiang were famous for their fierce loyalty to their native place.

In competing with the established financial institutions, these bankers consciously used this age-old Chinese tradition of emphasizing personal guanxi (connections) to strengthen their power as a group. It was common for bankers to assume positions such as director or supervisor of the board in one another’s banks, and often these major banks helped one another to pass through difficult times. They signed contracts among themselves to open accounts in one another’s banks, and the bills and checks issued by banks that had a relationship with another could be cleared without passing regular clearinghouses. When it was necessary to send cash, the accruing fees would be waived; when one bank had an emergency, others had a responsibility to help it by advancing a predetermined amount of cash. Native-place ties were the most significant factor in establishing this kind of cooperation and special consideration.

In the absence of an effective governmental administrative apparatus for urban centers in China in the 1920s and 1930s, Chinese bankers derived considerable support from their native-place ties. They helped each other deal with expected or unexpected crises, which occurred frequently in those years. Particularly, they stood together in resisting the government’s pressure to use more financial sources for unproductive purposes.

Identification of the Individual with the Group

In China, identifying individual interest with that of the group has always been the norm; the Chinese do not value rugged individualism. China’s new bankers took full advantage of this tradition and promoted the notion that an individual worker’s interest should be identified with the bank’s interest. It was in the employees’ own best interest to work hard for the bank, the bankers pointed out, because the workers would benefit only if the bank could survive and prosper. The Shanghai Bank asked its staff to bear in mind that “the bank is me, and I am the bank.” To encourage the sentiment expressed by this slogan, the Shanghai Bank persuaded and helped staff members to purchase bank stock. Indoctrinating their employees with the Confucian value of group consciousness was at the core of the business culture of all these banks and a vital element in their success.


Since bank staff dealt with cash every day, personal honesty was extremely important. Because the banks were such large organizations, the general managers could not directly supervise and motivate each branch manager, much less each employee. Sincerely believing in the usefulness of traditional Chinese ethics, these bankers indoctrinated their employees with Confucian principles. While strictly enforcing discipline, therefore, all major banks also asked their staff to follow certain guidelines in order to promote morality, a good work ethic, and good personal habits.

The office of the general manager of Shanghai Bank, for example, instructed its workers to adhere to the four virtues of loyalty, sincerity, honesty, and modesty and to overcome the four vices of selfishness, cheating, greed, and aggressiveness; other banks followed suit.

Also as part of such self-cultivation programs, bank employees were encouraged to improve themselves in a manner that would benefit the bank, such as learning foreign languages, becoming familiar with various foreign and domestic markets, mastering the abacus, calculating statistics, and acquainting themselves with modern legal practices. The banks encouraged their staff to learn new skills and advance their education by setting up libraries or reading rooms in the banks, inviting noted scholars to give lectures, sending staff abroad to study, and publishing relevant informati
on in bank journals.

Self-improvement was reflected in good personal habits as well. Almost all major banks set up regulations concerning personal habits and hygiene of their staff and persuaded them to avoid bad habits. The general manager of the Jincheng Bank issued an order prohibiting his staff from participating in gambling and warned that those who violated this rule might lose their jobs. Most prominent bankers tried to set examples for their staff to view their personal integrity over material gains.

Social Responsibility

From the middle of the nineteenth century onward, Chinese intellectuals believed that increasing China’s economic strength was the way to save China from miserable poverty, foreign oppression, and domestic disintegration. Bankers believed it was their responsibility to serve society and saw a possible means of national salvation in their successes. Shanghai Bank made its motto “Serving society” and invited famous scholars to lecture on and analyze how employees could help the bank facilitate it goals.

The Bank of China’s Zhang Jiaao set up three goals (which were later called “the spirit of the Bank of China”) for the staff. First, it was not enough for the Bank of China staff to provide a safe repository for the bank’s stockholders, depositors, and lenders; the bank must also seek well-being for all of society and increase the wealth and strength of the country. Second, every staff member, no matter how high or low their positions, had to be honest, selfless, and devoted to his or her work. Third, it was expected that while staff members would make no mistakes in routine transactions, they would devote serious efforts to improve their performance in furthering the bank’s reputation.

Chinese nationalism, stimulated by the establishment of the Republic of China in 1911 and the May Fourth intellectual movement, also made a strong impression on these bankers. Shanghai Bank’s Chen Guangfu told his colleagues that the bank had a special mission, which was to save China and to resist foreign economic oppression.

Unlike many radical Chinese nationalists, these bankers did not oppose foreign economic presence in China. Through contact with foreigners in China and through study abroad, these bankers acquired a nationalist vision based on economic development. They admitted the superiority of Western business methods and technology and inevitably had constant contact with foreign firms, but such contact did not lessen the Chinese bankers’ sense of their national mission. In his autobiography, Zhang Jiaao stated that even if the patriotic role played by Chinese bankers was not as celebrated as that of the May Fourth student movement, their contributions to a new society in China were nevertheless important. His view was shared by the economist Ma Yinchu, who recognized in 1933 that, “The monopoly of the foreign banks in China has declined considerably in contrast to their previous position. This is not the result from the prohibiting of their activities, from the abolition of the unequal treaties, or from the end of the extraterritoriality. It is the result of the efforts of China’s new entrepreneurs who run their banking business determinedly and have overcome all sorts of hardships and deprivations. Their activity has substantially recovered China’s rights and profits [from the foreign banks] and significantly improved the unequal relationship between foreigners and Chinese” (quoted in Cheng 2007, 235).

Decline of Modern Banking in China

Unfortunately, the development of modern Chinese banking was cut off by the Japanese invasion of China. In confronting the increasing Japanese military threat, the Nationalist government carried out a series of reforms to strengthen China in the middle of the 1930s. Backed by political power, the government restored its control of the Chinese financial market through various financial reforms. More state-owned banks, such as Central Bank of China, Postal Remittances & Savings Bank, and Farmers Bank of China, were established one after another or expanded. In dealing with China’s financial crisis in 1935, the government launched an overall financial reform that changed China’s domestic monetary base and established a managed currency system by issuing fabi as China’s legal tender note. In the meantime, the government took over Bank of China, Bank of Communications, and several private banks and turned them into government-controlled banks, from which many famous bankers left or were forced to leave. Before the full-scale outbreak of the Second Sino-Japanese War in 1937 (in China, called the War of Resistance against Japan), the government had controlled over 70 percent of the assets of modern Chinese banks and established a relatively strong government-controlled central banking system.

During the wartime emergency, the Nationalist government further consolidated its financial power by establishing the General Administration of the Four Consolidated Banks (including the Central Bank of China, Bank of China, Bank of Communications, and Farmers Bank) to deal with all financial issues.

Modern Banking during China’s Civil War Period

The wartime financial policy was continued after the war was over in 1945 and the Nationalist government executed state monopoly over 90 percent of China’s banking assets. The government’s control of modern banking did accomplish its immediate goal of controlling the Chinese banking industry for the imminent war against Japan. But one consequence of excessive government control was the decay of the private entrepreneurial initiative. By 1945, the total assets of all Chinese private banks were less than those of one of the larger private banks in the prewar period.

The government’s total control of banking system also provided a base for government’s inflation policy during China’s civil war period. To meet the massive budgetary deficit caused by military expenditures, the Nationalist government circulated more and more paper money, resulting to the worst hyperinflation in Chinese history. The official exchange rate of fabi depreciated from 77,636 yuan to 1 U.S. dollar in the beginning of 1948 to 7 million yuan to 1 U.S. dollar in the middle of August (Ji 2003, 228). Attempting to control galloping inflation and to find new financial resources for the civil war, the government launched an ill-designed new currency reform and replaced fabi with jinyuanquan (or “gold yuan”) on 19 August 1948. With the rapid escalation of the civil war, jinyuanquan depreciated even faster. The supply of jinyuanquan jumped 124,900 times from August 1948 to May 1949. The wholesale price index in Shanghai was more than 1.28 million times higher in the same period (Ji 2003, 234). China’s financial system was totally collapsed. Certainly one important cause leading to the Nationalist government’s rapid collapse after the Second World War was its ill-designed financial policy.

Modern Banking under the Communist Regime

After 1949, the Communist government went further still. It confiscated all state-owned banking institutions left by the Nationalist government and established the People’s Bank of China to manage all financial institutions and financial activities. By 1956, the socialization of all China’s private banks and other private financial institutions was accomplished. The People’s Bank of China became the sole government bank for issuing currency, making monetary policy, and granting short-term credit and loans to both public and private commercial enterprises. Over the next three decades, China’s financial institutions were no more than money collection centers and accounting houses for the large state-controlled economy. Only by middle of t
he 1980s had banking reform appeared on the agenda of the Chinese government.

Further Reading

Bergère, M.-C. (1988). The golden age of the Chinese bourgeoisie, 1911–1937 (J. Lloyd, Trans.). Cambridge, MA: Harvard University Press.

Cheng, Linsun. (2007). Banking in modern China: Entrepreneurs, professional managers, and the development of Chinese banks, 1897–1937. Cambridge, U.K.: Cambridge University Press.

Feuerwerker, A. (1958). China’s early industrialization. Cambridge, MA: Harvard University Press.

Ji, Zhaojin (2003). A history of modern Shanghai banking—the rise and decline of China’s finance capitalism. Armonk, NY, and London: M. E. Sharpe.

Mann, S. L. (1987). Local merchants and the Chinese bureaucracy, 1750–1950. Stanford, CA: Stanford University Press.

McElderry, A. (1986, July). Confucian capitalism? Corporate values in Republican banking. Modern China, 12(3), 401–416.

Tamagna, F. M. (1942). Banking and finance in China. New York: Institute of Pacific relations publications office.

Vogel, E. F. (1991). The four little dragons: The spread of industrialization in east Asia. Cambridge, MA: Harvard University Press.

Wang Jingyu. (1983). Shijiu shiji xifang ziben zhuyi dui Zhongguo de jingji qinlue [Western capitalists’ economic invasion of China during the nineteenth century]. Beijing: Renmin chubanshe.

Zhang Jiaao. (unpublished). Autobiography. New York: Rare Book and Manuscript Library, Columbia University.

A good fortune may forebode a bad luck, which may in turn disguise a good fortune.


Huò xī fú suǒ yǐ, fú xī huò suǒ fú

Source: Cheng, Linsun. (2009). Banking—History. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 143–151. Great Barrington, MA: Berkshire Publishing.

The Hong Kong and Shanghai Banking Corporation, the Bund, Shanghai, China, c. 1931. Stereographic print.

Banking—History (Yínháng lìshǐ 银行历史)|Yínháng lìshǐ 银行历史 (Banking—History)

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