Southern Perspective Shenzhen

I know that banking can be a dry subject, but it is important for people that do business and live in China to have a basic understanding of the way in which the Chinese banking system is setup.

I will do a series of posts that are designed to provide specific information about the structure of Chinese banking regulation, how it is changing and the direction it is heading.

For all of China’s history the way that power is held is economic stability.

No matter how bad things get for people, as long as they can put food on the table, they are generally satisfied.

The People’s Bank of China has inherited the modern “Mandate of Heaven”, the main responsibility is to keep a stable economy. The people of China don’t really care how they do it, the end result is all that matters.

The PBOC (People’s Bank of China) has many tools that it can use to control and maintain stability, the method of choice is the required reserve ratio.

Basically, the PBOC directs the big four on the minimum amount of customer deposits that they must hold.

The point of this is to stop a Chinese version of “It’s a Wonderful Life”, Jimmy Stewart isn’t going to make sure that there are no runs on Chinese banks.

Besides stopping runs on the banks, this method of control also influences how much business a bank can do. Banks make money by making loans, they would probably loan out every single RMB note we deposited if they could.

By forcing them to hold more money, banks can’t do as much business, by letting them loan out more of our money, they can do more business.

China changes the reserve amount a lot, 9 times in 1997, in order to control inflation. I thought my aiyi was on the take when I was eating ribs for breakfast.

Numbers and stats on inflation don’t usually spark unrest, but when people see their grocery bill start to climb they get anxious.

By increasing the reserve requirement, the PBOC forces the banks to tighten their belts and make less risky loans, because there is less money pouring out, inflation goes down and I can have pork chops for breakfast again.

By forcing the banks to think twice about their business, the PBOC can control the amount of money loaned and maintain the strength of the currency actually used by people to make purchases.