Description

China's Economic Miracle: Public Banks and the Quantity Theory of Credit

This paper examines China's rapid economic growth since the post-Mao reforms, arguing that it resulted from a unique integration of Currency and Banking School policies. The authors contend that the decentralized system of public banks, coupled with government credit guidance ("window guidance"), effectively channeled credit towards productive investments in the real economy. This approach, they suggest, offers valuable policy insights for other developing economies seeking similar growth. The paper contrasts this model with the Washington Consensus approach, highlighting the limitations of solely relying on market-based, privately-run economies. Finally, the authors propose policy recommendations based on their analysis of the Chinese experience. https://professorwerner.org/wp-content/uploads/2023/05/2023-Kun-D-P-Ivanov-R-Werner-ROPE-Chinese-Econ-Miracle-Rapid-Development.pdf

Timeline of Main Events:

1950s: China operates under a near-monobank system with the People's Bank of China (PBOC) responsible for both commercial and policy functions.

Late 1978: Deng Xiaoping initiates comprehensive market reforms, emphasizing the crucial role of finance and banking in driving economic growth.

1980s:

• Decentralization of the banking system begins with the new legal status of the PBOC in 1983.
• Four state-owned policy banks (PBs) are founded: Agricultural Bank of China (ABC), China Construction Bank (CCB), Bank of China (BOC), and Industrial & Commercial Bank of China (ICBC), each specializing in a specific credit market.

1990s:

• Three more PBs are established: China Development Bank (CDB), Import and Export Bank of China (CEXIM), and Agricultural Development Bank of China (ADBC).
• ABC, BOC, CCB, and ICBC are transformed from specialist lenders with high non-performing loans (NPLs) into competitive state-owned commercial banks (SOCBs).
• Four asset management companies are established to buy toxic assets from the PBs, restoring their financial health.
• Thousands of city and rural banks are founded to enhance regional competitiveness.
• The 1995 People’s Bank of China Act establishes the PBOC's role in maintaining currency stability and supporting economic growth through credit guidance.

1996: The original four PBs (ABC, BOC, CCB, and ICBC) are restructured into competitive banks.

1998 onwards: SOCBs are officially allowed to conduct lending based on their own management policies while subject to the PBOC’s window guidance.

2000s:

• The Chinese banking system evolves into a four-pillar system: SOCBs, joint-stock commercial banks (JSCBs), city commercial banks (CCBs), and rural commercial banks (RCBs).
• The state retains significant ownership in most banks, appointing senior management in key institutions.

2010s - present:

• China experiences rapid economic growth, lifting a vast population out of poverty.
• Challenges emerge, including income inequality and a potential reduction in trade surplus.
• The PBOC may engage in further quantitative public bank easing to support productive business investment and address new economic challenges.

Deng Xiaoping (1904-1997): Architect of modern China, initiating market liberalization policies and emphasizing the critical role of finance and banking in driving economic growth. He understood the importance of credit for economic development and advocated for public bank easing supporting the real economy.

Yi Gang (1958-present): Governor of the People’s Bank of China (PBOC). He advocates for a balanced approach to monetary policy, utilizing both quantity and price controls, and emphasizes the PBOC's role in supporting lending to small and micro businesses and private enterprises.