Table Of ContentSTUDIES ON THE CHINESE ECONOMY
General Editors: Peter Nolan, Lecturer in Economics and Politics, University of
Cambridge, and Fellow and Director of Studies in Economics, Jesus College,
Cambridge, England; and Dong Fureng, Professor, Chinese Academy of Social
Sciences, Beijing, China
This series analyses issues in China's current economic development, and sheds
light upon that process by examining China's economic history. It contains a
wide range of books on the Chinese economy past and present, and includes not
only studies written by leading Western authorities, but also translations of the
most important works on the Chinese economy produced within China. It
intends to make a major contribution towards understanding this immensely
important part of the world economy.
Published titles include:
Derong Chen
CHINESE FIRMS BETWEEN HIERACHY AND MARKET
Dong Fureng
INDUSTRIALIZATION AND CHINA'S RURAL MODERNIZATION
Du Runsheng (edited by Thomas R. Gouschang)
REFORM AND DEVELOPMENT IN RURAL CHINA
Qimiao Fan and Peter Nolan (editors)
CHINA'S ECONOMIC REFORMS
Christopher Findlay, Andrew Watson and Harry X. Wu (editors)
RURAL ENTERPRISES IN CHINA
Hong Wang
CHINA'S EXPORTS SINCE 1979
Michael Korzec
LABOUR AND THE FAILURE OF REFORM IN CHINA
Nicholas K. Menzies
FOREST AND LAND MANAGEMENT IN IMPERIAL CHINA
Ryoshin Minami
THE ECONOMIC DEVELOPMENT OF CHINA
Yuming Sheng
INTERSECTORAL RESOURCE FLOWS AND CHINA'S ECONOMIC
DEVELOPMENT
Wang Xiaoqiang and Bai Nanfeng (translated by Angela Knox)
THE POVERTY OF PLENTY
Malcolm Warner
THE MANAGEMENT OF HUMAN RESOURCES IN CHINA
Tim Wright (editor)
THE CHINESE ECONOMY IN THE EARLY TWENTIETH CENTURY
Shujie Yao
AGRICULTURAL REFORMS AND GRAIN PRODUCTION IN CHINA
Xun-Hai Zhang
ENTERPRISE REFORMS IN A CENTRALLY PLANNED ECONOMY
Zhu Ling
RURAL REFORM AND PEASANT INCOME IN CHINA
Banking and Financial
Control in Reforming
Planned Economies
Haiqun Yang
First published in Great Britain 1996 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 6XS
and London
Companies and representatives
throughout the world
A catalogue record for this book is available
from the British Library.
ISBN 978-1-349-24472-0 ISBN 978-1-349-24470-6 (eBook)
DOI 10.1007/978-1-349-24470-6
First published in the United States of America 1996 by
ST. MARTIN'S PRESS, INC •.
Scholarly and Reference Division,
175 Fifth Avenue,
New York, N.Y. 10010
ISBN 978-0-312-12724-4
Library of Congress Cataloging-in-Publication Data
Yang, Haiqun, 1949-
Banking and financial control in refom1ing planned econmnies I
Haiqun Yang.
p. em.
Includes bibliographical references and index.
ISBN 978-0-312-12724-4
I. Banks and banking-China. 2. Banks and banking-Government
ownership-China. 3. Finance, Public-China. 4. Economic
stabilization-China. 5. Monetary policy-China. 6. Monetary
policy-Europe, Eastern.
HGJJ34. Y35 1996
332.1'0951---<lc20 95-14399
CIP
© Haiqun Yang 1996
Softcover reprint of the hardcover 1st edition 1996 978-0-333-64557-4
A II rights reserved. No reproduction, wpy or transmission of
this publication may be made without written permission.
No paragraph of this publication may be reproduced, copied or
transmitted save with written permission or in accordance with
lhc provisions of the Copyright, Designs and Patents Act 1988,
or under the terms of any licence pcnniuing limited copying
issued by the Copyright Licensing Agency, 90 Tollcnham Court
Road, London WI P 9HE.
Any person who docs any unauthorised act in relation to this
publication may be liable to criminal pmsecution and civil
claims for damages.
10 9 8 7 6 5 4 J 2
05 04 OJ 02 01 ()() 99 98 97
Contents
Preface x
Acknowledgements xi
List ofA bbreviations xiii
Introduction l
Background 1
Issues 3
Questions 3
Structure 6
l Socialist Banking Systems and their Reforms 8
Introduction 8
The banking model of CPEs 10
The partially reformed banking model 24
Conclusions 43
2 Problems of Selected RCPEs 46
Introduction 46
The economic problems of Hungary 48
The economic problems of China 55
Banking decentralisation during transition 65
Conclusions 81
Appendices 83
3 Financial Development and Banking Control 85
Introduction 85
How to treat the market: a review of financial development
theories 86
Are financialliberalisation models useful to reforming CPEs? 88
The control of banks and banking control 97
Credit rationing and monetary control 116
Conclusions 127
vii
viii Contents
4 Financial Disorder and Banking Control 131
Introduction 131
The changing pattern of finance: Jiangsu Province 132
Four national financial disorders in China 134
lnterenterprise debt in China 136
The third national financial disorder: Hengshuei 148
The battle against the fourth national financial disorder 152
Centralisation and the control function of the banking system 166
Successful banking systems are controlled and help to control 170
Conclusions 174
5 Monetary Equilibrium and Disequilibrium 177
Introduction 177
Monetary equilibrium in the RCPEs 178
Liberalisation or control? Peebles and the 'Shortage School' 195
Conclusions 223
Appendix: the cost functions 223
6 Modelling Money Demand and Supply in China:
Dealing with a Small Sample Size 225
Introduction 225
The theory 227
The model 231
Estimation 237
Conclusions and policy recommendations 257
Future research 263
Appendices 264
7 Conclusions and Suggestions 278
Introduction 278
Analysis of the problems of CPE reforms 279
The findings 283
Advice for foreign investors in the reforming economies 288
Some ideas for a new banking model 291
Some final thoughts 293
Contents ix
Notes and References 296
Bibliography 306
Index 325
Preface
This study of banking system reforms analyses the advantages and disad-
vantages, with particular reference to costs, of decentralising the banking
systems in centrally planned economies (CPEs) that are themselves under-
going decentralisation. The work discusses the functions of the banking
system during transition, the direction of reforms, how far decentralisation
of banks can actually go, whether a market competitive banking system
can be easily copied and whether it is possible to stabilise an economy
through the banking system.
The study starts with socialist banking developments and shows that in
a CPE the banking system fulfils a control function for the economy.
Chapter 2 analyses the economic and financial problems faced by banks
after the economic reforms. Chapter 3 comprises a theoretical and critical
exposition of models of banking, monitoring and corporate control in rela-
tion to the main issues of the work. In Chapter 4 the financial disorders
experienced by China following its radical reforms are examined and used
to illustrate the necessity of control of and by banks in the present transi-
tion. Chapter 5 puts forward full arguments against some established theo-
ries on socialist economy and banking. With a new approach, Chapter 6
estimates systematically the demand for and supply of money in China in
order to show that control is not only necessary, but possible. Finally, in
Chapter 7 some policy conclusions are formulated, together with advice to
foreign investors in emerging markets.
The main conclusion of the study is that liberalisation of the banking
system should not be attempted as long as the industrial system is not
subject to proper financial discipline. Given that the production system of a
reforming CPE is decentralised, the banking system should be correspond-
ingly controlled in terms of central bank regulation, credit planning and
control, and bank supervision over the production system. Without proper
control and a well-designed corporate governance structure, the economic
and social costs of reform, such as inflation and/or financial disorders, will
be increased. Reformers and (foreign) investors should cooperate closely in
narrowing the 'control vacuum' and minimising 'disorder costs'. Even if the
industrial system is well disciplined, monetary control is still necessary and
important, and long-term financing by banks remains essential.
Vice President and Chief Economist China HAIQUN YANG
ABN AMRO Bank
Address: 3308 Jing Guang Center, Hu Jia Lou, Beijing 100020, PRC
Telephone: (8610) 501205515019697. Fax: (8610) 5015110.
X
Acknowledgements
This book is based on my two degree theses. The central hypothesis of the
research originated from my MPhil thesis, China's Banking System and Its
Reforms, which was completed under the supervision of Mr M. G.
Kuczynski at the University of Cambridge, where I was sent to study by
the State Planning Commission of the PRC in 1987. Mr Kuczynski at
Pembroke College and Dr P. Nolan at Jesus College recommended that I
go on to take a PhD degree. Mr D. Wall of Sussex 'University responded
to my application and helped me to obtain an Overseas Research Student
Award to start the course in the autumn of 1988 in Sussex, England. Shell
Hong Kong Ltd kindly sponsored me to the extent of providing my living
expenses and part of the tuition fees for four academic years. I transferred
to the University of London in April1989.
R. Portes, a professor at Birkbeck College and director of the Centre for
Economic Policy Research, supervised my Ph D thesis, Costs and Benefits
of Decentralising a Banking System in Transition, from beginning to end,
giving much support to my general ideas and arguments, especially those
in Chapter 5. Professor C. A. E. Goodhart of the London School of
Economics and Politics (LSE) offered me external supervision on the
research proposal and the first two chapters. Discussions with Professor D.
M. Nuti at his home in Florence in the summer of 1989 and with Professor
P. Wiles of the LSE in the same year gave me great encouragement for the
research. Professor R. I. McKinnon of Stanford University and Dr J.
Corbett of Oxford University kindly sent me their papers in support of my
research. Professor C. Mayer of the City Business School also provided
constructive comments on my work and discussed the banking system
reforms in 1992. Professor L. Harris and Professor M. Fry helped to
restructure the thesis and made many extremely valuable comments and
suggestions for its improvement. Professor R. Smith made a great contri-
bution to the econometric approach in Chapter 6. From him and Professor
Harris I have learnt what the word 'gentleman' means. Useful feedback
for the drafts also came from Dr D. Blake, Dr J. Coakley, DrS. Kapur, Dr
A. Timmermann, Dr H. Davis, Professor V. Grilli and Dr Bian Jiang. I
also thank the many Chinese overseas students and visiting scholars with
whom I had some illuminating discussions.
My research has also benefited from field studies in Eastern and
Western Europe and North Africa, including Hungary (1989 and 1990),
China (1990}, the GDR (1989), the FRG (1989}, the USSR (1989 and
1990), Poland (1989), Yugoslavia (1989), Romania (1989 and 1990),
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