The Chinese banking system is in the midst of a generational program of reform as it transitions to be more open to and supportive of the emergence of China into the global economic system after decades of communism and state ownership. This program was started in the early 1980s and continues to the present day. (For related reading, also take a look at Investing in China.)
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Chinese Banking Structure
The banking system in China used to be monolithic, with the People's Bank of China (PBC), which is the central bank, as the main entity authorized to conduct operations in that country. In the early 1980s, the government started opening up the banking system and allowed four state owned specialized banks to accept deposits and conduct banking business. These four specialized banks are the Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC).
In 1994, the Chinese government established three more banks, each of which is dedicated to a specific lending purpose. These policymaking banks include the Agricultural Development Bank of China (ADBC), the China Development Bank (CDB) and the Export-Import Bank of China. The four specialized banks have all conducted initial public offerings and have varying degrees of ownership by the public. Despite these IPOs, the banks are all still majority owned by the Chinese government.
China has also allowed a dozen joint stock commercial banking institutions and more than a hundred city commercial banks to operate in the country. There are also banks in China dedicated to rural areas of the country. Foreign banks were also allowed to establish branches in China, and to make strategic minority investments in many of the state owned commercial banks.
U.S. Banking Structure
The banking structure in the United States is generally a mix of both privately owned and publicly-traded institutions, varying in size from one branch banks in small towns, all the way up to international behemoths that control trillions of dollars in assets.
During the 2007/08 financial crisisu and recession, the U.S. Treasury provided hundreds of billions of dollars in capital to the financial system in the United States. The government also took significant ownership stakes in many large financial institutions during this time, including Citigroup (NSYE:C) and American International Group (NYSE:AIG). These actions, though necessary, somewhat blurred the line between state and private ownership. Despite these efforts to support the system, the U.S. government moved quickly to return ownership of the banking system back to the private sector once the financial sector was stabilized.
By the Numbers
The total assets of the Chinese banking system were 94.3 trillion RMB, or $14.4 trillion in USD, at the end of 2010. The four specialized banks controlled 45.9 trillion RMB, or approximately 48% of these assets.
The U.S. banking system had total assets of $13.3 trillion at the end of 2010. These assets were even more concentrated than China, with the four largest U.S. banks controlling $7.6 trillion or 56% of these assets:
Bank of America (NYSE:BAC) - $2.3 trillion
JP Morgan (NYSE:JPM) – $2.1 trillion
Citigroup (NYSE:C) - $1.9 trillion
Wells Fargo (NYSE:WFC) - $1.3 trillion
Chinese Banking Regulation
The main national regulatory body that oversees the Chinese banking system is the China Banking Regulatory Commission (CBRC), which is charged with writing the rules and regulations governing banks in China. The CBRC conducts examinations and oversight of banks, collects and publishes statistics on the banking system, approves the establishment or expansion of banks and resolves potential liquidity, solvency or other problems that might emerge at individual banks.
The People's Bank of China also has considerable authority over the Chinese banking system. Aside from the typical central bank responsibility for monetary policy and representing the country in an international forum, the PBC's role is to reduce overall risk and promote stability of the financial system. The PBC also regulates lending and foreign exchange between banks, and supervises the payment and settlement system of the country.
U.S. Banking Regulation
The United States has several different agencies at the national level that regulate the banking system. Each state also has an agency that regulates banks that are chartered or that conduct in that state. The regulatory authority of these agencies and departments overlap in many instances.
The Office of Thrift Supervision (OTS) supervises savings institutions and the holding companies that own them. The OTS is part of the U.S. Treasury Department. The U.S. Treasury Department also has the Office of the Comptroller of the Currency (OCC), which has the authority to regulate national banks and the federal branches of non-U.S. banks.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency that examines and supervises banking institutions in the United States. The FDIC also manages the Deposit Insurance Fund to protect against the loss of deposits when banks are taken over by the government. (For more, check out Who Backs Up The FDIC?)
The Federal Reserve is the central bank of the United States and provides supervision and regulation of the banking system. The Federal Reserve also provides credit to banks when needed, and protects against systemic risk.
The National Credit Union Administration (NCUA) regulates federal credit unions in the United States. This is a financial institution chartered by the U.S. government, organized in a cooperative business model and owned by its members.
Chinese Deposit Insurance
Deposit insurance is provided to protect depositors from the loss of their funds and eliminate the possibility of a "run on the bank" if rumors spread about a particular bank. As of 2011, one hundred and seven countries currently provide some form of deposit insurance, according to the International Association of Deposit Insurers (IADI). China does not insure its deposits, but according to the IADI, that country and 23 others have systems pending or are planning to create deposit insurance. Hong Kong, which is a special administrative region under the sovereignty of China, does have deposit insurance for its banks.
U.S. Deposit Insurance
In the United States, bank deposits are insured by the FDIC, which runs the Deposit Insurance Fund. Deposits held at credit unions are insured by the NCUA through the National Credit Union Share Insurance Fund. Although the conventional wisdom is that the U.S. government and thus the taxpayer is responsible for funding and paying claims out of these two funds, both are funded with assessments on the banks and credit unions that are members. However, both funds do have a credit line with the U.S. Treasury a as backstop if needed.
The Chinese banking system is undergoing a program of reform needed to help transition that system from state to private ownership, and support the economy's move to capitalism. This reform started a generation ago and will continue for many years.
For additional reading, have a look at Top 6 Factors That Drive Investment In China.