The banking sector is one of the most critical aspects of a country’s economy, despite their preferred economic systems. Banks play a vital role in an economy by facilitating the allocation of funds from savers to borrowers. Banks accept deposits from their customers which they then use to provide financial support to consumers and business organizations.
Therefore, the financial sector is the most crucial determinant of economic growth and development, as banks provide the necessary capital. Some researchers have even argued that the status of a banking system is a good indicator of the country’s economic situation. This argument is also applicable to the Chinese and American economies, which depend heavily on their banking sector (Ding, Fung, & Jia, 2017).
However, financial institutions like banks develop unique structures and operations based on the preferred economic system of the country. For example, the banking system in a managed economy like China is fundamentally different from the banking system in capitalist systems like the United States. This article analyzes how the banking system in a managed economy like China is fundamentally different from the banking system in capitalist countries like the United States.
One of the most fundamental differences between the banking system in a managed economy and the banking system in a capitalist system concerns the ownership of financial institutions. Managed economies like China are characterized by strong government involvement in the planning and management of the economy. The state-owned People’s Bank of China was the only financial entity mandated to operate in the Chinese economy.
However, the country underwent reforms in the 1980s, allowing five other specialized public banks to operate in the country. The banks included ABC (Agricultural Bank of China), BoCom (Bank of Communications), BoC (Bank of China), CCB (Construction Bank of China) and ICBC (Industrial and Commercial Bank of China).
Other reforms included the offering to specialized banks of initial public offerings (IPOs), although the state still retains a controlling stake in the banks. Moreover, the little private property in the banking sector is mainly reserved for Chinese nationals with limited foreign investment in the authorized banking system. The Chinese government is reluctant to allow foreign investment in the financial sector because the banking system is closely tied to the state’s micro and macroeconomic policies. This ownership structure is fundamentally different from that adopted in capitalist societies like the United States.
Capitalist systems like the United States tend to look to private property in the banking sector to promote free market ideals promised under capitalism, although the state plays a critical role in regulating the sector through of the Federal Reserve system. The privatization of the banking sector in the United States has resulted in the largest number of financial institutions with more than five thousand financial entities in the country.
In addition, privatization has also resulted in the creation of many small banks, especially those regulated by state supervisory committees. The five largest financial organizations are private because the capitalist system adopts a free market system that encourages private ownership of these institutions. In addition, the US banking system allows significant foreign direct investment in financial institutions under free market capitalist principles. As a result, managed economies like China turn to state ownership while capitalist systems like the United States encourage private ownership throughout the banking system.
The regulatory environment for the banking system in managed economies like China is also fundamentally different from that of capitalist countries like the United States. Elliot states that the United States and China have taken very different directions when it comes to financial regulation (Elliot, 2017). The Chinese government plays a vital role in regulating the financial environment, especially banking activities, as does its role in ownership.
The government is essential in regulating the banking system since it regulates it internally through its ownership positions while maintaining an external regulatory role through state bodies. Ownership positions in the country’s major banks allow the government to direct the actions and operations of the banking system as the major public financial institutions dictate the functioning of the financial sector in the country.
The government’s external regulatory role also allows the Chinese government to control and manage the banking sector through the People’s Bank of China, acting as a central bank, and three other regulators: China Securities Exchange Commission , CIRC (China Insurance Regulatory Commission), and CBRC (China Banking Regulatory Commission) (He, 2012). However, the Chinese government has implemented reforms to regulate the financial sector, especially the banking system, and established the Committee for Financial Stability and Development (FSDC) in November 2017. The committee was entrusted with the task of role of super financial regulator and was created under the aegis of the Council of State. headed by a Deputy Prime Minister with more powers than the other regulatory commissions. Therefore, as Cousin excellently states, the state is the essence of the regulator of the Chinese banking system.
In comparison, the United States adopts a two-tier system that implies that financial institutions can be licensed by state governments or by the federal government (Labonte, 2017). However, regulators are independent from government interference and are free to pursue their policies as they see fit. For example, the Federal Reserve Bank, which serves as the central bank of the United States, is independent from government policies and actions, although it coordinates with government officials to ensure a unified monetary strategy.
However, the government has no power over the bank. Some of the main types of financial regulators at the federal level include consumer protection regulators, regulators of government-sponsored companies, securities market regulators, and custodian regulators (Labonte, 2017). Therefore, the state tends to play an important role in regulating the banking system in managed economies like China, while regulators are more independent in capitalist countries like the United States.
Finally, the banking system in managed economies like China is geared towards supporting government policies while that of capitalist countries is sensitive to free markets. Cousin states that “financial flows were organized around planning exercises for the whole economy and flows were directed to specific industries and regions based on policy decisions” regarding the Chinese banking sector (Cousin, 2012).
This statement implies that the main function of the banking system is to serve the macro and microeconomic policies of the Chinese government, which can sometimes be based on political considerations. For example, the banking system directs financial resources to priority sectors of the current political regime. In contrast, the banking system in capitalist societies like the United States is established to serve the market and responds to market changes appropriately. For example, US banks grant loans at their discretion without any direct government interference.
In conclusion, this article analyzes the fundamental differences between the banking system of a managed economy like China and the banking system applied in capitalist countries like the United States. One of the most fundamental differences between the banking system in a managed economy and the banking system in a capitalist system concerns the ownership of financial institutions. The regulatory environment for the banking system in managed economies like China is also fundamentally different from that of capitalist countries like the United States. Finally, the banking system in managed economies like China is geared towards supporting government policies while that of capitalist countries is sensitive to free markets.
Cousin, V. (2011). The specificities of Chinese banking regulations.
Ding, N., Fung, HG and Jia, J. (2017). Comparison of bank profitability in China and the United States. China and the global economy, 25(1), 90-108.t
Elliot, DJ (2017). Living in two worlds: Chinese and American financial regulation. Center for Strategic and International Studies |. https://www.csis.org/living-two-worlds-chinese-and-us-financial-regulation
Him, WP (2012). Banking regulation in China: what, why and how? Journal of Financial Regulation and Compliance.
Labonté, M. (2017). Who regulates whom? An overview of the US financial regulatory framework.
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