During the pre-reform era there was only one bank in China, the People’s Bank of China, which functioned as both the central and commercial bank. In 1983, it was made the central bank of China while the commercial opera- tions responsibilities were given to four specialised banks: Agricultural Bank of China (rural sector responsibilities), Industrial and Commercial Bank of China (industrial sector responsibilities), Peoples Construction Bank of China (long-term investments responsibilities), and Bank of China (foreign exchange business).
The Financial market was developed. China’s financial market saw an increase in the number of financial institutions and financial tools like finan- cial bond market, stock market etc. Investment in fixed assets financed by government budget increased.
At the 14th National Congress of the CPC, the concept of socialist market economy was formally recognised and to give impetus to this the government started large scale experimentation with the financial market. The targets of the financial system reform were:
To establish an independent macroeconomic control mechanism by the Peoples Bank of China independent of local governments but under the direction of the State Council.
To establish policy banks and to transform state-owned specialised banks to commercial banks.
To establish open, unied, well-ordered, competitive, and well managed financial markets.
To reform foreign exchange control and to issue appropriate guidance for the development of non-bank financial institutions.
To develop a financial service infrastructure and to establish a modern financial management system.
To implement these, the government set up three policy banks in 1994 to distinguish between policy lending and commercial lending – China Develop- ment Bank, Export and Import Bank of China, Agricultural Development Bank of China. In order to operate foreign exchange transactions smoothly using a computer system, in April 1994 the PBC established the China For- eign Exchange Trading System (CFETS). To introduce order into the in- terbank money market, the PBC established local financing centres in 1995 and closed brokerage institutions run by commercial banks. The Pillars of China’s Banking Reforms were:
Bank restructuring through the cleaning up of NPLs and recapitaliza- tion.
The reduction of government interference in the system, through quan- tity and price liberalization as well as opening up to the foreign com- petition.
• Improved regulation and supervision.
As a result of the reform in banking sector, Investment in fixed assets financed by bank loans have rise from around 12.5 percent of total fixed investment funds in 1981 to 26.5percent of total fixed asset investment in 1992 and then it falls to around 19 percent in 1998.(Refer figure in section 5.1.5).
Trimming inflation was key to stabilize and foster the economic develop- ment and it was to be achieved trough building an effective central bank. This central piece of reform and its implications on the macroeconomics of China shall not go unaccounted for. Looking at Chinas rate of inflation there was growing inflation from the on set of reform until the mid 1990s. Then a period of steep reduction in inflation rates followed until the year 2000. Since then, inflation accelerated again. (Refer figure in section 5.1.6).