China's central banking system, 1949-1990 : a historical analysis with comparisons with Indian central banking

A comparison of China's central banking with India's is unique and valuable. The approach of this study is institutional, policy-oriented, and historical. The following are findings of this study: [1] The People's Bank has derived its authority from the state council and operated within an administrative framework, while the Reserve Bank derives its power from India's three pieces of banking legislation and interacts with the financial system in the context of a market. (2) The legitimate boundary between the central and commercial (specialized) banks credit funds is still hard to define, and the over-centralization of credit funds can be costly and destabilizing. [3] In the inter- regional fund markets, China's traditional fiscal-oriented finance pattern has been proven deflationary and ineffective for the well-balanced development strategy. Without promoting the monetary-oriented finance and transferring the onus of adjustment from the Ministry of Finance to the People's Bank, the poor regions will continue to enjoy their creditor position by amassing monetary resources while running budget deficits and accepting the central grants. (4) China has made little progress in establishing financial legality. If there are no a mutually consistent set of economic laws, and the Chinese people do not believe in the stability and enforcement of these laws, China's leadership will not be able to implement credible commitment to any effective market incentive mechanism and to develop an all-round market. [5] China's financial reforms have lacked a long-term vision of developing a market "culture," aggressive expansion of capital markets, and improving the information system available to all lenders and investors. 16) With few monetary Instruments and limited market mechanism, China over-relies on administrative measures and other direct restrictions to regulate aggregate demand, and the policy-oriented financing tends to disturb the financial condition and economic development rather than stabilizing them as these initiatives intended. (7) China's economy has been caught in a sort of trade-off between inflation and economic slowdown within a vicious cycle due to the marriage between the rigidity of the inefficient state industries and a policy-oriented state's banking. And (8) without economic legality, the personal financial responsibility and the corporate bankruptcy law can never be enforced. The soft budget constraints on the state industries never stop the state banks from financing their deficits. Without a strong and reform-oriented leadership, a positive role of central banking in coordinating an efficient financial circulation with market-oriented industrial circulation cannot be achieved.