Chinese economic growth

China's economic development began several millennia ago. Several aspects of the political, economic, social, and financial systems date back far more, but this study focuses on the major growth of the financial system since the mid-fourteenth century. The Ming and Qing dynasties made important contributions to the development of China's economic and monetary systems. Yet, throughout the Song dynasty, economic and societal progress began (960-1279). At this time, key developments included the formation of structures and institutions known as pre-modern or traditional China by historians. The emperor established a political control of the tax system and assessment of privately owned land, expansion of markets and facilities the use of money as the medium of exchange in trade.

Chinese Finance and Credit History

The Ming and Qing dynasties improved on agricultural production to feed the ever-growing Chinese population. The Emperor improved household, regional specialization, labor, transport system that led to deepening markets for the commodities. The Ming and Qing market networks and commercial activities drew the support of informal and formalized finance. The formal financial system was organized around native or traditional banks known as (Qian Huang). The banks operated locally but continued to create links beyond their regional boundaries. Later, the system grew into a national financial system called the Shanxi banks originating from the Shanxi province. The nationwide financial system specialized in the management of official funds and transfer of funds to long distances (Allen, Qian & Qian, 2007). The financial institutions accepted deposits and gave out loans where the borrowers faced unlimited liability. The institution also offered oversee and interregional loans. Subsequently, the bank led to the development of banks notes. The bank system financial networks commanded respect from overseeing where the Chinese financed the trade between Europe and China during the 19th century. The Chinese merchants' dominance in the trade activities and is attributed to the superior financial networks (Hamashita, Selden & Grove, 2013).

The local ‘money shops’ considerably helped in currency exchange. The hard currency exchanged hands with bank notes, between trade-specific bookkeeping and local currencies. The pawnshops offered small loans to merchants and other individuals against various collaterals. There were an estimated 25,000 pawnshops in the rural areas by the end of 18th century. However, other than the formal financial institutions, the tradesmen, individuals, and shopkeepers offered personal loans. The informal financial arrangements involved friends and family providing funds on the casual basis. Ostensibly, the transactions involved the exchange of labor and land (Perdue, 2010). Income from farming was irregular thus prompted farmers to go for the tapestry credit options to monetize the land use rights associated with both ownership and tenancy. The farmers secured against downward mobility due to crop failure, death or illness. Subsequently, the financial arrangement enhanced stability in the society.

The financial mechanism enabled financial exchange, higher rates of interest and increased costs of the transaction. The new financial system had limited potential benefits. The Chinese legal framework and restrictions did not shield borrowers from the high cost of loans. The monthly interest went as high as 3 percent in mid-19th-century percent by the early 20th century. In northern China, household used land as the collateral to obtain a loan. The lender acquired the rights to use land and returned such rights after the loan was fully repaid. The lending rates were different from one region to another indicating the local market volatility. The interest went as high as 20-30 percent per annum in the coastal regions of Zhejiang, Fujian, and Guangdong. The less developed provinces such as Jillian, Suiyuan, Henan, and Ningxia experienced higher annual interest costs of 50 percent (Perdue, 2010). The Chinese financial market experienced higher interests rates and limited development compared to Europe during the same period.

Before the formation of the People’s Republic of China in 1949, there was a developed financial system. Shanghai was one of the financial centers in Asia throughout the 19th and 2oth centuries (Ji, 2003). The finance and commerce system developed even without a formal legal system in place. China nationalized the pre-capitalist intuitions and companies in 1950. The Chinese financial system consisted of one bank known as People’s Bank of China (PBOC) between 1950 and 1978. The central government controlled both the commercial bank and central bank under the Ministry of Finance. The main role of the government was to fund the physical production plans to control cash flow (cash and credit-plan) in the consumer markets and between branch transactions. Banking changes took place between 1978 and 1984 where the government separated the PBOC from the ministry. The government established state-owned banks including The Bank of China, Agricultural Bank of China, the Industrial and Commercial bank of China. Each entity took different commercial transactions in the financial system and Chinese economy.

The Ingredients or Characteristics of a Well-functioning Financial System

Chinese financial system plays a significant role in supporting sustainable economic growth and meets financial needs in the People’s Republic of China. The financial system avail funds facilitate price discovery as well as liquidity. The system essentially provides efficient risk management and monitoring services. The financial system achieves major milestone through resilience, efficiency, fairness and adhering the roles and responsibilities. Subsequently, there is great trust and confidence from the population.

Efficiency

The efficiency of the Chinese financial system supports growth and productivity. According to Allen, Qian, and Qian (2007), the system is able to allocate scarce financial resources to improve the economy. It also promotes the sustainable rate of productivity in the economy. Operational efficiency allows delivery of products and services at a minimal cost thus maximize on value. The Chinese financial system helps firms in improving quality and reducing product cost of services and products. It also improves policies that offer regulatory stability in the financial environment. The financial system allocates financial resource to the valuable and productive areas. Efficiency in allocation is an important ingredient as it helps the process to adjust freely. Price helps in market analysis of risks and returns expected from financial products.

Resilience

The Chinese financial system has the capacity to adjust to severe and normal economic or business cycles. Resilience does not in any way suggest price stability or preclude failure. Rather, the resilience in the financial system means the ability to adjust to changes and situations while providing fundamental economic function. The financial instability is as result of high leverage levels, volatility, liability, and assets mismatch and risk underpricing. Instability will continue to take place but the financial system must be ready to resolve distress to policy holders, taxpayers, and depositors in such circumstances.

Fairness

The financial systems allow fairness by all participants. Fair treatment implies non-discrimination, honesty, integrity and transparency in the market. These characteristics improve efficiency and confidence in business transactions. The banks, insurers, lenders, brokers, financial advisers should act in the interest of legal customers (Weild, Kim & Newport, 2013). It is important to earn trust and confidence from the customers. The investors and consumers must be ready to accept financial decisions outcomes. The financial firms treat the customers in a fair manner through the provision of information on risk, quality advice, and good financial dispute resolution mechanisms. The consumers, investors, regulators, financial firms and the government must play their respective roles and responsibilities. Each party in the financial system must work for the interest of economic stability and confidence building.

Financial Markets can close the Gap of Asymmetric Information

In the financial market, one party may have superior information compared to the other party in a transaction. The seller most of the time understands more about the product and service compared to the buyer. The unbalanced information between parties is known as information asymmetry. The asymmetric information is inherent in a wide variety of industries and markets and leads to adverse selection. In the financial markets, the asymmetric information between lenders and borrower is a key characteristic in the credit market that results to moral hazards and adverse selection on behalf of the receiver (Miller, 2003).

There are several methods that markets can use to respond to address the problem of adverse selection. The producers can offer the receiver with refunds, guarantees, and warranties especially in the car markets. However, availing information will provide data to the consumers. Companies in the financial markets should share information with consumers to allow them to make informed decisions. The company can utilize the click stream, telematics, social media and other advanced technology to solve this information problem. The firms will be able to elevate the quality of the products, improve competitive pricing and improve market efficiency.

Availing and sharing information have a positive influence on the behavior of both lenders and receivers countering the moral hazards and adverse selection risk. The customers and competitors can always monitor themselves and be a close observer of each other (Wehinger, 2012). The public can engage each other in online reviews, notaries, underwriters’ laboratories and consumer reports. These services will help people exchange information about financial securities, therefore, bridge the gap in information.

Traditional and Contemporary Role of the Government in the Development and Maintenance of Healthy Financial Markets in China

The government can have the direct or indirect influence on loan procedures. The government of China’s responsibility is to set policies enabling the financial system to move towards sustainable economic growth. The system must meet people’s needs and minimize the risk of funds to the taxpayers. The obligation of the government in the traditional system to date was to act in the long-term interest of the Chinese national instead of short-term political mileage. Under the government policies, there are departments responsible for bank regulation and rule enforcement. The bank and financial system regulators mandate are to establish standards in the field. Regulators act independently and use accountability while discharging judgment in the civil service. The department has access to necessary regulatory resources and tools to punish intuitions and individuals involved in money laundry and other economic sabotage (Wehinger, 2012). The government and regulators efforts ensure healthy financial system thus sustainable economic growth.

References

Allen, F., Qian, J., & Qian, M. (2007). China's financial system: Past, present and future. Philadelphia, Pa: Financial Institutions Center, Wharton School, Univ. of Pennsylvania.

Hamashita, T., Selden, M., & Grove, L. (2013). China, East Asia, and the Global Economy: Regional and Historical Perspectives. Hoboken: Taylor and Francis.

Ji, Z. (2003). A history of modern Shanghai banking: The rise and decline of China's finance capitalism. Armonk, N.Y: M.E. Sharpe.

Miller, M. J. (2003). Credit reporting systems and the international economy. Cambridge, Mass: MIT Press.

Perdue, P. C. (2010). China marches west: The Qing conquest of Central Eurasia. Cambridge, Mass: The Belknap Press of Harvard University Press.

Wehinger, G. (2012), Bank deleveraging, the move from bank to market-based financing, and SME financing, OECD Journal: Financial Market Trends, Vol. 2012/1. Retrieved on July 18, 2017, from http://10.1787/fmt-2012- 5k91hbvfh9g3

Weild, D., E. Kim and L. Newport (2013), Making Stock Markets Work to Support Economic Growth: Implications for Governments, Regulators, Stock Exchanges, Corporate Issuers and their Investors, OECD Corporate Governance Working Papers, No. 10, OECD Publishing. Retrieved on July 18, 2017, from http://dx.doi.org/10.1787/5k43m4p6ccs3-en