Change in China’s Banking Sector as An Institutional Evolution Guy Williams Darwin College University of Cambridge This dissertation is submitted for the degree of Doctor of Philosophy Summary Thesis Title: Change in China’s Banking Sector as An Institutional Evolution Name: Guy Williams This thesis explains how China’s banking system has evolved since the establishment of the socialist market economy in 1993, when the state began to develop a more standardised and robust system of banking regulation and commercialise China’s state-owned banks. China’s large state-owned banks, which were technically insolvent in the 1990s, are now some of the biggest commercial banks in the world. There has been a remarkable transformation of systems of governance and risk management across all types of banking institutions. China has developed a system of financial regulation characterised by close supervision and strong regulation of financial institutions to mitigate risk and ensure the banking system serves the real economy. This thesis has relied on qualitative research to understand this change. Interviews of a number of past and present stakeholders in China’s banking system were undertaken, including officials from the China Banking Regulatory Commission, the agency responsible for the regulation and supervision of China’s banking system since 2003. The thesis also makes use of Chinese language texts which provide the views of Chinese political leaders and banking officials with respect to reform of the banking sector. The principal conclusion of the thesis is that the development of China’s banking system can best be understood as an evolution of institutions which reflect historical patterns of political and economic organisation in China. This finding is in contrast with the main body of academic literature which evaluates the development of China’s banking system according to its degree of conformance with a neoliberal economic system. The thesis argues that policy for China’s banking sector was conceived and implemented by officials through a politically united, centrally controlled bureaucracy reflective of China’s bureaucratic tradition. China’s leaders applied the concept of ‘Chinese studies at the base, Western studies for practical use’ (中體西用 zhongti xiyong), when adapting Western ideas and technology within China’s traditional political and economic system to modernise the banking sector. The deep concern of officials for financial stability caused them to gradually and pragmatically adopt international standards of financial regulation and resist policies of financial liberalisation and deregulation which were advocated by self-interested Western-educated bankers and government officials. 2 Acknowledgements Completing my PhD at the Centre of Development Studies has been a difficult but extremely rewarding task. I could not have achieved this without the considerable support from a number of people along the way. First, I would like to thank my supervisor Professor Peter Nolan. Peter is incredibly professional and efficient and always made time to read my work and provide me with extremely thorough feedback. I thank him for his patience, encouragement and for his honest and constructive criticism. I also want to thank him for sharing his passion for Chinese civilisation and deep understanding of China’s banking sector. I very much enjoyed Peter’s company during the course of the PhD. I found the environment at the Centre of Development Studies to be extremely friendly, positive and stimulating. I would like to thank all the administrative staff, including Doreen and Nathalie, for all their help and for putting up with all my stupid questions! I would also like to thank Dr Kun-Chin Lin for giving me the opportunity to supervise his course on China in the International Order and give a lecture. It was a privilege to have the chance to engage with undergraduate students on this topic. I was also honoured to be part of the group which established the China Graduate Discussion Group, which brought together academics and graduate students with an interest in China’s political economy. I would like to thank Kun-Chin and Vasiliki, along with the other group members, for their hard work and commitment to the group, which remains active today. I was also grateful for the friendship and support of my fellow students at the Centre of Development Studies. I wish to thank Joao and Fu Zhenyu in particular. I would like to thank all the people who generously offered their time to me for interviews and advice during the course of the PhD. I offer special thanks to Zhu Yuanqian and the staff at CBRC headquarters. I am also especially indebted to Leon Walker at ANZ, Professor Wang Dashu at Peking University and David Chin of UBS for going out of their way to help me and taking a real interest in my work. I also want to thank all the people outside of my academic life which have supported me. To Zach, Niall, Mike, Renad, Katia M., Sazana, Barney, Stephanie, Eun-Joo, Gunce, Merve, James, Tom, Katia B., Maria, Darren and Blandine, thanks for sticking by me through the PhD and making it a fun time! You made all the difference. To my parents Anne and Lyn and my brothers Alex (Jerry) and Rupert, thank you for always believing in me and providing constant support from so far away! Thanks to all my other friends including the ‘habibis’ group, members of Darwin football and table tennis teams, and the climbing group. Thank you to Dongmei, Eric and Zha for hosting me in Beijing during my fieldwork. I am grateful also to Tom Chan and his family for so generously providing a ‘home away from home’ in the U.K. and treating me like family. Thank you to the staff of Darwin College for looking after me while I was here and giving me a place to stay. 3 Contents Summary ..................................................................................................................................................... 2 Acknowledgements .................................................................................................................................... 3 Tables and Figures ...................................................................................................................................... 5 Abbreviations .............................................................................................................................................. 6 Introduction ................................................................................................................................................ 9 Part I: The Orthodox View of Reform: ................................................................................................... 11 Part II: Reform as an Evolution of Institutions: ..................................................................................... 17 Part III Fieldwork: .................................................................................................................................. 30 Chapter 2: The Search for a Modern Banking System (800-1990) ............................................................ 33 Chapter 3: Building a Banking Regulatory System for the Socialist Market Economy (1990-96) .............. 59 Chapter 4: Reducing Systemic Risk in the Socialist Market Economy (1997-2002) ................................... 79 Chapter 5: The Development of a Sound and Sustainable Banking Model (2003-07) ............................. 105 Chapter 6: Reacting to the Global Financial Crisis (2008-17) .................................................................. 137 Conclusion .............................................................................................................................................. 163 Part I: Summary .................................................................................................................................. 163 Part II: Research Contribution ............................................................................................................. 172 Part III The Future of China’s Banking Sector: ..................................................................................... 176 References: ............................................................................................................................................. 179 4 Tables and Figures Table 1: China’s Top 25 Banks by Tier One Capital ................................................................................... 10 Table 2: Supervisory and Internal Auditing Tasks Carried Out by PBoC’s Organisational Units ................ 48 Table 3: Declining Capital Adequacy Ratios of the Four Specialised Banks, 1990-1996 ............................ 74 Figure 1: Photo of CBRC Headquarters in Beijing with ‘Shield’ Symbol................................................... 107 Table 4: Minority Investments in China’s Large State-Owned Banks ...................................................... 119 Figure 2: History of Interest Rate Liberalisation in China ........................................................................ 132 Figure 3: Wall Street Crumbles ............................................................................................................... 138 Figure 4: Monthly Average Loan Growth of Banking Institutions and Annualised GDP Growth ............. 141 Figure 5: China Total Debt (% of GDP) .................................................................................................... 144 Figure 6: Land Sales Revenue as a