Banking system: economies directed against capitalist states

The banking sector is one of the most critical aspects of a country’s economy, despite their preferred economic systems. Banks play a vital role in an economy by facilitating the allocation of funds from savers to borrowers. Banks accept deposits from their customers which they then use to provide financial support to consumers and businesses.

Therefore, the financial sector is the most crucial determinant of economic growth and development, as banks provide the necessary capital requirements. Some scholars have even argued that the state of a banking system is a good indicator of a country’s economic condition. This argument also applies to the Chinese and American economies, which are highly dependent on their banking sector (Ding, Fung, & Jia, 2017).

However, financial institutions such as banks develop unique structures and operations based on the country’s preferred economic system. For example, the banking system in a managed economy like China is fundamentally different from the banking system in capitalist systems like the United States. This article analyzes how the banking system in a command economy like China is fundamentally different from the banking system applied in capitalist countries like the United States.

One of the most fundamental differences between the banking system in a command economy and the banking system in a capitalist system concerns the ownership of financial institutions. Managed economies like China are characterized by strong government involvement in the planning and management of the economy. The state-owned People’s Bank of China was the only financial entity mandated to conduct operations in the Chinese economy.

However, the country underwent reforms in the 1980s, allowing five more specialized public banks to operate in the country. Banks included ABC (Agricultural Bank of China), BoCom (Bank of Communications), BoC (Bank of China), CCB (Construction Bank of China) and ICBC (Industrial and Commercial Bank of China).

Other reforms have included offering specialist banks initial public offerings (IPOs), although the state still retains a majority stake in the banks. In addition, small private ownership in the banking sector is mainly reserved for Chinese nationals and limited foreign investment in the banking system is permitted. The Chinese government is hesitant to allow foreign investment in the financial sector because the banking system is closely tied to the micro and macroeconomic policies of the state. This ownership structure is fundamentally different from that adopted in capitalist societies like the United States.

Capitalist systems like the United States tend to lean towards private ownership in the banking sector to promote the free market ideals promised under capitalism, although the state plays a vital role in regulating the sector through the federal reserve system. The privatization of the banking sector in the United States has resulted in the largest number of financial institutions with over five thousand financial entities in the country.

In addition, privatization has also led to the creation of many small banks, especially those regulated by state oversight committees. The five largest financial organizations are private because the capitalist system adopts a free market system that encourages private ownership of these institutions. In addition, the United States banking system allows significant foreign direct investment in financial institutions under free market capitalist principles. Therefore, managed economies like China lean towards state ownership while capitalist systems like the United States encourage private ownership throughout the banking system.

The regulatory environment of the banking system in managed economies like China is also fundamentally different from that of capitalist countries like the United States. Elliot argues that the United States and China have taken very different directions when it comes to financial regulation (Elliot, 2017). The Chinese government plays a vital role in regulating the financial environment, especially banking activities, as does its role in ownership.

The government is essential in regulating the banking system since it regulates them internally through its ownership positions while maintaining an external regulatory role through public bodies. Ownership positions in the country’s major banks allow the government to direct the actions and operations of the banking system since the major public financial institutions dictate the functioning of the financial sector in the country.

The government’s external regulatory role also allows the Chinese government to control and manage the banking sector through the People’s Bank of China, acting as the central bank, and three other regulatory bodies: China Securities Exchange Commission, CIRC (China Insurance Regulatory Commission), and CBRC (China Banking Regulatory Commission) (He, 2012). However, the Chinese government has introduced reforms to regulate the financial sector, particularly the banking system, and established the Financial Stability and Development Committee (FSDC) in November 2017. The committee was given the role super financial regulator and was created under the aegis of the Council of State. with a Deputy Prime Minister with more powers than the other regulatory commissions at the head. Therefore, as Cousin puts it very well, the state is the essence of the regulatory authority of the Chinese banking system.

In comparison, the United States adopts a two-tier system which implies that financial institutions can be licensed either by state governments or by the federal government (Labonte, 2017). However, regulators are independent from government interference and are free to pursue their policies as they see fit. For example, the Federal Reserve Bank, which serves as the central bank of the United States, is independent of government policies and actions, although it coordinates with government officials to ensure a unified monetary strategy.

However, the government has no power over the bank. Some of the major types of financial regulators at the federal level include consumer protection regulators, government-sponsored business regulators, securities regulators, and securities regulators. deposits (Labonte, 2017). Therefore, the state tends to play a strong role in regulating the banking system in managed economies like China, while regulators are more independent in capitalist countries like the United States.

Finally, the banking system in managed economies like China is geared towards supporting government policies while that of capitalist countries is sensitive to free markets. According to Cousin, “financial flows were organized around planning exercises for the whole economy and flows were directed to specific industries and regions based on policy decisions” regarding the Chinese banking sector (Cousin , 2012).

This statement implies that the primary function of the banking system is to serve the macro and micro-economic policies of the Chinese government, which can sometimes be politically based. For example, the banking system directs financial resources to industries prioritized by the current political regime. In contrast, the banking system in capitalist societies like the United States is set up to serve the market and reacts appropriately to changes in the market. For example, US banks make loans at their discretion without any direct government interference.

In conclusion, this article analyzes the fundamental differences between the banking system of a command economy like China and the banking system applied in capitalist countries like the United States. One of the most fundamental differences between the banking system in a managed economy and the banking system in a capitalist system concerns the ownership of financial institutions. The regulatory environment of the banking system in command economies like China is also fundamentally different from that of capitalist countries like the United States. Finally, the banking system in managed economies like China is geared towards supporting government policies while that of capitalist countries is sensitive to free markets.

References

Cousin, V. (2011). The specificities of Chinese banking regulations.
Ding, N., Fung, HG and Jia, J. (2017). Comparison of bank profitability in China and the United States. China and the global economy, 25(1), 90-108.t
Elliot, DJ (2017). Living in two worlds: Chinese and American financial regulation. Center for Strategic and International Studies |. https://www.csis.org/living-two-worlds-chinese-and-us-financial-regulation
Him, WP (2012). Banking regulation in China: what, why and how? Journal of Financial Regulation and Compliance.
Labonte, M. (2017). Who regulates whom? An overview of the United States financial regulatory framework.

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