Bank of China branch in the old Peking (Beijing) Hotel, 1980. Foreigners exchange their money for Chinese currency, in that year called Foreign Exchange Certificates. PHOTO BY JOAN LEBOLD COHEN.

China’s modern banking system emerged from an era in which foreign banks were dominant, developed with little government control to become state-run, and underwent reform and further foreign involvement with China’s opening and eventual accession to the World Trade Organization. As 2009 begins, China’s banks face an uncertain future, but they’ll no doubt have an impact on how the global financial crisis is resolved.

The modern banking system in China resembles banking systems in other developed countries. Both domestic and foreign-funded banks operate within the country, although foreign banks have a more difficult time getting established. Modern banking began only in the nineteenth century and has developed unevenly since then. The success of modern banking in China’s comes from a combination of tradition, innovation, socialism, and capitalism. The future, however, is less than certain.

Development of Modern Banking

Throughout the Qing dynasty (1644–1912) and until the end of the nineteenth century, the financial industry in China was dominated by foreign banks. China’s first domestic modern bank, the Imperial Bank of China, opened in Shanghai in 1897. A new type of bank was needed to meet China’s new financial demands. Since the 1860s, modern industrial practices, many borrowed from the West, had become more common in China. But modern industry needed large amounts of capital for long periods of time, which the Qing government was unable to provide and foreign banks were reluctant to lend.

The establishment of modern Chinese banks was seen as an important way to protect the country from economic exploitation and invasion by foreign powers. Foreign banks were more interested in making quick profits by financing China’s international trade and providing loans to the government than by investing in the development of industry. In addition, complicated and unfamiliar business practices made investing in industry even riskier for foreign banks.

Rising nationalism sparked by the 1911 Revolution and the May Fourth Movement of 1919 stimulated modern banking and the opening of banks. Private and privatized state banks dominated the banking systems as government-owned banks declined because of mismanagement and government corruption. The leaders were the Bank of China, the Bank of Communications, the Three Southern Banks (Shanghai Commercial and Savings Bank, Zhejiang Industrial Bank, and National Commercial Bank), and the Four Northern Banks (Jincheng Banking Corporation, Continental Bank, Yanye Commercial Bank, and China & South Sea Bank). By the mid-1930s, about 75 percent of the total capital and more than 80 percent of the total assets of modern Chinese banks were held by a handful of principal banks.

During this time the government played a limited role in the development of the banking system. The success of modern banks is attributed to a group of prominent bankers who ran the banks for most of this period. These bankers shared regional ties. They all had a solid Chinese classical education, and many had studied in the West or in Japan before starting their banking careers. They combined modern banking business techniques with China’s traditional business practices to reform the banking system. They introduced new management procedures, new types of personal and business accounts, and new bank products in the form of loans.

The development of modern Chinese banking was curtailed by the Civil War (1927–1950) and the Second Sino-Japanese War (known in China as the War of Resistance against Japan, 1937–1945). During this tumultuous time, the Nationalist government seized control of more than 90 percent of China’s banking assets to aid the war effort, which marked the beginning of the end of the private entrepreneurial initiative in China.

Banking in the PRC

Following the creation of the People’s Republic of China in 1949, all capitalist institutions and private enterprises were nationalized. By 1956 all of China’s private banks and other private financial institutions were controlled by the state. Mao Zedong instituted one central bank, the People’s Bank of China (PBC), akin to the U.S. Federal Reserve or the Bank of England. However, unlike those central banks, the PBC also took deposits, made loans, and served as a commercial bank for China. This move froze out foreign banks, which closed their Chinese operations and largely moved out of China. Over the next thirty years, China’s financial institutions acted merely as money collection centers and accounting houses for the large state-controlled economy.

When China began to open up during the 1970s and 1980s, China’s one central bank split into four specialized branches: the Bank of China (BOC), the People’s Construction Bank of China (now the China Construction Bank, or CCB), the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC). Each of these banks specialized in one area of China’s economy.

In 2005 and 2006, as part of the overall shift from nationalized banking, the BOC, the ICBC, and the CCB put forward initial public offerings that are now traded on the Shanghai and Hong Kong exchanges. But the divided banks also faced some challenges as foreign financial institutions took advantage of China’s new liberalization to establish representative offices on the mainland in the hopes that China would be a future market.

Foreign Banks

At first Beijing limited foreign banks to certain services, creating regulatory protection for the four state banks and smaller local banks by blocking foreign firms from getting into the domestic currency business, but that barrier was eventually removed as part of the 2001 World Trade Organization (WTO) accession deal.

Foreign banks that want to operate in China may choose from joint ventures, alliance operations, or wholly foreign-owned operations. The terms of WTO accession has meant that any qualified foreign financial institution may operate any of these types of banks in China, but application requirements and banking regulations have made it hard for many foreign banks to meet the requirements, particularly for wholly foreign-owned operations.

Since November 2006, Beijing has allowed foreign entities to operate in any region of China, under certain conditions. An applicant must go through an approval process that can take up to a year. Then the applicant has to apply for local business licenses. Foreign or joint-venture banks must be based in a regulatory jurisdiction approved by China Banking Regulatory Commission (CBRC). The bank must incorporate in China and have a minimum of registered capital of 1 billion yuan ($129.2 million) and must allocate 100 million yuan ($14.6 million) to each branch it opens. The parent enterprise of a foreign-funded or joint-venture bank must have total assets of at least $10 billion, and a foreign bank that wants to open a branch must have assets of at least $20 billion. A foreign branch bank can take time deposits only above 1 million yuan ($146,000) from Chinese citizens. Registration requirements contain loopholes that allow the CBRC to turn down any application.

Joint ventures also pose some additional challenges. While the WTO requires China to allow foreign ba
nks to hold majority stakes in these joint operations, as of 2005, foreign partners in these ventures were limited to 25 percent shares. Joint-venture banks are subject to all the regulations governing joint ventures and foreign-owned financial institutions.

Bank of America

Bank of America’s wholly owned subsidiary Bank of America (Asia) was active in the Hong Kong market for ninety years. Originally founded in 1912 as the Bank of Canton (the first Chinese-owned bank in Hong Kong), it was bought by the Security Pacific National Bank in 1988 and renamed the Security Pacific Asian Bank. In 1993 Bank of America (Asia) was established after a merger between Security Pacific National Bank and Bank of America.

In 1949, when banks were nationalized in China, Bank of America closed its branch operations, but it was quick to reopen a representative office in Beijing in 1981 when China’s doors reopened to foreign banks. Bank of America (Asia) continued to grow, opening its first full consumer and commercial banking operation in Shanghai in 2004. And in January 2006, Bank of America (Asia) opened its first official Guangzhou representative office.

In 2005 Bank of America acquired a 9 percent stake in China Construction Bank, China’s second-largest bank, for $3 billion. This purchase represented the company’s largest push into China’s growing banking sector. Then in August 2006, CCB acquired Bank of America (Asia) for HK$9.7 billion (US$1.2 billion). On 12 January 2007, the official name became China Construction Bank (Asia) Corporation Limited. CCB (Asia), now a full-service commercial bank, has thirty branches in Hong Kong as well as corporate banking offices in Beijing, Shanghai, and Guangzhou.

Hong Kong Shanghai Banking Corporation

Founded in 1865 by Thomas Sutherland, a Scottish employee of the Peninsular and Oriental Steam Navigation Company, Hong Kong Shanghai Banking Corporation (HSBC) was created to help make trade between Europe, India, and China easier. HSBC is one of the few foreign-owned banks that has had a continuous presence in China, with the exception of periods of Japanese occupation. HSBC is well known internationally, with branches and holdings around the world, including the United States. While much of its twentieth-century business before the 1970s focused on inward remittances and export bills, Deng Xiaoping’s open-door policies allowed HSBC once again to pursue a wider range of banking activities.

In 1980 HSBC became the first foreign bank to open a representative office in Beijing since the founding of the People’s Republic. In 1997 it achieved another first, becoming the first foreign-owned bank to obtain a license to engage in domestic currency business. It launched yuan services in its Shanghai and Shenzhen branches in 1997 and 1998. In 2001, with China’s entry into the WTO, HSBC became the first foreign commercial bank to buy a minority stake in a local bank, acquiring 8 percent of the Bank of Shanghai in December of that year. Also in 2001 HSBC expanded its operations to Qingdao, Tianjin, and Guangzhou. In 2004 it opened operations in Suzhou, and in 2005 it expanded its operations in Chengdu and Chongqing to full branch offices.

HSBC continued to expand throughout 2007 and 2008. During those years HSBC opened branches in Shenyang, in Changsha (the first foreign bank in Hunan Province), and in Zhengzhou (the first foreign bank in Henan Province). It also launched private banking services in Beijing, Shanghai, and Guangzhou. In addition, HSBC established a locally incorporated entity on the Mainland wholly owned by the parent company. HSBC Bank (China) Company Limited started operations with a registered capital of 8 billion yuan ($1.1 billion). The bank was accepted as an overseas member of the Shanghai Gold Exchange. And HSBC joined the Credit Reporting System of the People’s Bank of China, the first foreign bank to join the system.

Facing the Crisis

How China’s banking system will deal with the global financial crisis that began in 2008 is difficult to gauge because of a lack of transparency in the system. Some economists believe that China’s banks are not as susceptible to worldwide pressures as banks in other countries are. Others believe that China’s banks have been just as adversely affected by bad loans and weak bottom lines as banks in other countries have been. Two things seem certain, however. The CBRC is sure to increase requirements and regulations that will affect both domestic and foreign banks. And China will work to shore up its own economy. The People’s Bank of China has already cut benchmark lending rates, and the government is investing in infrastructure improvements. Once China saves its own economy, it may become a major player in resolving the worldwide crisis.

Further Reading

Bankers gambling for very high stakes. (2006, January 19). South China Morning Post.

China: Foreign banks will jump high. (2007, February 28). International Herald Tribune. Retrieved January 28, 2009 from

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

Jaffe, D. A. (2008). Bank of China makes history with its core banking project. Framingham, MA: IDC.

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.

Lee Wei. (2003). China and the WTO: Moving toward liberalization in China’s banking sector. DePaul Business & Commercial Law Journal, 1, 481.

Source: Eldridge, Scott II, & Anderson, Wendell. (2009). Banking—Modern. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 152–155. Great Barrington, MA: Berkshire Publishing.

Banking—Modern (D?ngdài Zh?ngguó yínhángyè ???????)|D?ngdài Zh?ngguó yínhángyè ??????? (Banking—Modern)

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