“Finance is the lifeblood of the modern economy” has become something of a stock phrase for Chinese policymakers over recent years, uttered most recently by Xi Jinping as part of his speech to the Belt and Road Forum in Beijing in mid May. Although this sounds like a capitalist mantra, what precisely might be meant by this phrase requires more in-depth understanding of China’s economy and its financial system. At the heart of that system still lie China’s banks, in spite of the rapid emergence of other financial institutions and instruments over the last decade.

While much of the international coverage of banks in China suggests that the system is fundamentally unsound and prone to crisis, due to hidden non-performing loans and inefficiencies, Jim Stent’s in-depth account of China’s Banking Transformation sets out a rather different story.
Stent is uniquely well-qualified to write on this topic. A career banker who has spent many years in Asia, Stent sat as an independent director on the boards of two Chinese banks, China Minsheng Bank and China Everbright Bank, during the period from 2003 to 2016. What he witnessed was the transformation of China’s banks from “damaged relics of the planned economy into modern commercial banks”.
This is a story of a deliberate reform process strategically envisaged and carefully sequenced. It can be traced to the early 1990s, when key officials—in particular Zhu Rongji—realized that China’s banking system lagged behind its transforming economy, and that something needed to be done to rescue banks from bad loans, poor management, and inefficient operation.
In doing so, Zhu and others—the experts which the Party-state called on—sought to learn what they could from experience of banks elsewhere. Progress was slow but steady, moving from one issue to another. Stent recounts one example from his time at Everbright :
From … 2006, I repeatedly pointed out the dire need for upgrading retail bank service standard, which … was deplorable … Finally, in 2009, the CEO told me that the time had come to deal with this issue – management announced to the board that that was to be the year for launching the all-out ‘Sunshine Service Campaign.’ I protested that a campaign was not what was needed, but rather than we needed a carefully worked out long term program to re-engineer service standards. My protests were silenced with the explanation that mass mobilization of retail staff over the continuous period of a full year, with slogans, training, drives, rewards, model workers, etc., would be the way this would be handled. It worked, Chinese style. After the first year of the campaign was finished, standards of retail service in most of the branches were up to international standards – and stayed that way.
By 2010, most of the work in transforming the operations of the major banks had been done. However, Stent does note that the state of second and third tier banks still varies substantially and there is more to do in other parts of the financial system, such as equity markets, which Stent sees as falling well short of the maturity of the banking section.
Foreign banks also had played a role as strategic investors. But the view in China of Western, in particular American, banks changed dramatically as a result of the global financial crisis in 2008. While Chinese officials looked to learn from Western experience, their approach was pragmatic not ideological, looking to use what was helpful for the Chinese economy.
Stent shows that Chinese policy makers never intended simply to try and implement some sort of “Western” economic model in China, and that the banking transformation also demonstrates particular features of the Chinese economy. At the heart of the government’s strategy for the banks is the idea that they should “serve the real economy”. Moreover, the state is likely to continue to play a role in the banking system, including through “hybrid” governance involving the bank’s board and the regulator in a way which is “more intrusive and controlling than in the West”. Stent explains too why he thinks it unlikely (and inappropriate) that China will go down the route of wholesale privatization of the banking sector.
Of course, not all will agree that is the best way forward, and some may still have more criticisms of the banks themselves to offer. But understanding the wider political and economic context and modus operandi of China’s banks should be the first step for engaging with the sector in China. Stent delivers this through his detailed, thorough and comprehensive account of China’s banking transformation.
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