The history of the Chinese banking system has been somewhat checkered.

Nationalization
and consolidation of the country's banks received the highest priority in the earliest years
of the People's Republic, and banking was the first sector to be completely socialized. In
the period of recovery after the Chinese civil war (1949-52), the People's Bank of China
moved very effectively to halt raging inflation and bring the nation's finances under central
control. Over the course of time, the banking organization was modified repeatedly to suit
changing conditions and new policies.
The banking system was centralized early on under the Ministry of Finance, which
exercised firm control over all financial services, credit, and the money supply. During
the 1980s the banking system was expanded and diversified to meet the needs of the
reform program, and the scale of banking activity rose sharply. New budgetary procedures
required state enterprises to remit to the state only a tax on income and to seek investment
funds in the form of bank loans. Between 1979 and 1985, the volume of deposits nearly
tripled and the value of bank loans rose by 260 percent. By 1987 the banking system
included the People's Bank of China, Agricultural Bank, Bank of China (which handled
foreign exchange matters), China Investment Bank, China Industrial and Commercial
Bank, People's Construction Bank, Communications Bank, People's Insurance Company of
China, rural credit cooperatives, and urban credit cooperatives.
The People's Bank of China was the central bank and the foundation of the banking
system. Although the bank overlapped in function with the Ministry of Finance and lost
many of its responsibilities during the Cultural Revolution, in the 1970s it was restored to
its leading position. As the central bank, the People's Bank of China had sole responsibility
for issuing currency and controlling the money supply. It also served as the government
treasury, the main source of credit for economic units, the clearing center for financial
transactions, the holder of enterprise deposits, the national savings bank, and a ubiquitous
monitor of economic activities.
Another financial institution, the Bank of China, handled all dealings in foreign exchange.
It was responsible for allocating the country's foreign exchange reserves, arranging foreign
loans, setting exchange rates for China's currency, issuing letters of credit, and generally
carrying out all financial transactions with foreign firms and individuals. The Bank of
China had offices in Beijing and other cities engaged in foreign trade and maintained
overseas offices in major international financial centers, including Hong Kong, London,
New York, Singapore, and Luxembourg.
The Agricultural Bank was created in the 1950s to facilitate financial operations in the
rural areas. The Agricultural Bank provided financial support to agricultural units. It issued
loans, handled state appropriations for agriculture, directed the operations of the rural
credit cooperatives, and carried out overall supervision of rural financial affairs. The
Agricultural Bank was headquartered in Beijing and had a network of branches throughout
the country. It flourished in the late 1950s and mid-1960s but languished thereafter until
the late 1970s, when the functions and autonomy of the Agricultural Bank were increased
substantially to help promote higher agricultural production. In the 1980s it was
restructured again and given greater authority in order to support the growth and
diversification of agriculture under the responsibility system.
The People's Construction Bank managed state appropriations and loans for capital
construction. It checked the activities of loan recipients to ensure that the funds were used
for their designated construction purpose. Money was disbursed in stages as a project
progressed. The reform policy shifted the main source of investment funding from the
government budget to bank loans and increased the responsibility and activities of the
People's Construction Bank.
Rural credit cooperatives were small, collectively owned savings and lending organizations
that were the main source of small-scale financial services at the local level in the
countryside. They handled deposits and short-term loans for individual farm families,
villages, and cooperative organizations. Subject to the direction of the Agricultural Bank,
they followed uniform state banking policies but acted as independent units for accounting
purposes. In 1985 rural credit cooperatives held total deposits of -Y72.5 billion.
Urban credit cooperatives were a relatively new addition to the banking system in the mid-
1980s, when they first began widespread operations. As commercial opportunities grew in
the reform period, the thousands of individual and collective enterprises that sprang up in
urban areas created a need for small-scale financial services that the formal banks were not
prepared to meet. Bank officials therefore encouraged the expansion of urban credit
cooperatives as a valuable addition to the banking system. In 1986 there were more than
1,100 urban credit cooperatives, which held a total of -Y3.7 billion in deposits and made
loans worth -Y1.9 billion.
In the mid-1980s the banking system still lacked some of the services and characteristics
that were considered basic in most countries. Interbank relations were very limited, and
interbank borrowing and lending was virtually unknown. Checking accounts were used by
very few individuals, and bank credit cards did not exist. In 1986 initial steps were taken in
some of these areas. Interbank borrowing and lending networks were created among
twenty-seven cities along the Chang Jiang and among fourteen cities in north China.
Interregional financial networks were created to link banks in eleven leading cities all over
China, including Shenyang, Guangzhou, Wuhan, Chongqing, and Xi'an and also to link the
branches of the Agricultural Bank. The first Chinese credit card, the Great Wall Card, was
introduced in June 1986 to be used for foreign exchange transactions. Another financial
innovation in 1986 was the opening of China's first stock exchanges since 1949. Small
stock exchanges began operations somewhat tentatively in Shenyang, Liaoning Province,
in August 1986 and in Shanghai in September 1986.
Throughout the history of the People's Republic, the banking system has exerted close
control over financial transactions and the money supply. All government departments,
publicly and collectively owned economic units, and social, political, military, and
educational organizations were required to hold their financial balances as bank deposits.
They were also instructed to keep on hand only enough cash to meet daily expenses; all
major financial transactions were to be conducted through banks. Payment for goods and
services exchanged by economic units was accomplished by debiting the account of the
purchasing unit and crediting that of the selling unit by the appropriate amount. This
practice effectively helped to minimize the need for currency.
Since 1949 China's leaders have urged the Chinese people to build up personal savings
accounts to reduce the demand for consumer goods and increase the amount of capital
available for investment. Small branch offices of savings banks were conveniently
located throughout the urban areas. In the countryside savings were deposited with the
rural credit cooperatives, which could be found in most towns and villages. In 1986
savings deposits for the entire country totaled over -Y223.7 billion.