Building a banking sector from scratch
In the 1980s, during the liberalization period of the Chinese economy, the banking sector was severely underdeveloped and access to financial services was limited. In order to aid the development of the banking sector, the Chinese government established “policy banks” to serve the function of financing economic development and state projects. In the initial opening-up phase, the five policy banks: the Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications, and China Construction Bank, were tasked with accepting deposits and providing other banking services.From there on, the Chinese banking sector developed into one of the largest in the world. Out of the ten largest banks in the world, five are Chinese. Besides the large state-owned banks, over 100 commercial banks operate on a regional level and foreign banks were given permission to open branches in the country.
Systematic weaknesses
Even after the large state-owned banks had officially redeveloped into ordinary commercial banks, fulfilling their initial purpose of carrying out government mandated policy objectives, their policy bank legacy remained. For instance, these banks preferred lending to state-owned companies, because these enterprises tend to be safer investments and the objectives of the banks and the government remained closely aligned. Consequently, small businesses which had a high demand for credit, lacked access. This is partly the reason why China developed a large shadow banking sector. The downside was that the shadow banking sector also attracted bad actors, especially in the P2P-lending industry.The shadow banking sector, bad actors and suspect lending practices have certainly raised concerns for government regulators. However, according to official numbers, the ratio of non-performing loans in China was comparable to healthy economies in Europe. Nonetheless, state regulators were aware of the issue and introduced a debt-equity swap program in 2016, where government-financed asset management companies bought up bad loans from banks. Despite all these, Chinese banks had proven to be resilient against crises in the past two decades, such as the global financial crisis in 2008 and Chinese stock market turbulence in 2015.