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Understand the Chinese Financial Institution System in One Minute#

In the financial industry, it is essential to have a certain understanding of the overall picture of the financial sector; only by knowing oneself and the enemy can one win a hundred battles. However, there are many institutions within the financial industry, and beginners often find themselves confused. Which ones are legal and which are illegal? Which carry high risks and which carry low risks? What do various institutions like the central bank, the Ministry of Finance, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission do? What are the differences between banks, securities, funds, trusts, and asset management? Who controls the Chinese financial system, who are the participants, and how do they interact with each other? This article uses a diagram as a pivot to present the entire financial industry to practitioners, as well as the logical relationships between them.

To enter the financial industry, it is essential to have a certain understanding of the overall picture of the financial sector; only by knowing oneself and the enemy can one win a hundred battles. However, there are many institutions within the financial industry, and beginners often find themselves confused. Which ones are legal and which are illegal? Which carry high risks and which carry low risks? What do various institutions like the central bank, the Ministry of Finance, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission do? What are the differences between banks, securities, funds, trusts, and asset management? Who controls the Chinese financial system, who are the participants, and how do they interact with each other? This article uses a diagram as a pivot to present the entire financial industry to practitioners, as well as the logical relationships between them.

I. Top Level – Central Committee of the Communist Party of China (State Council)

The central government and the State Council formulate top-level financial policies, and the economic work conference held in November or December each year determines the main tone of monetary and fiscal policies for the following year. The central bank, Ministry of Finance, and others then formulate specific operational methods and implementation paths based on this tone.

II. Regulatory/Execution Level (Central Bank, China Securities Regulatory Commission, China Banking and Insurance Regulatory Commission, Ministry of Finance)

1. Central Bank: The central bank is the main proponent of monetary policy, establishing a macro-prudential management framework, drafting major laws and regulations related to the financial industry; formulating and implementing monetary and credit policies, improving the monetary policy regulation system, and being responsible for macro-prudential management. Its functions may overlap with those of the China Banking and Insurance Regulatory Commission, which can lead to duplicate regulation or regulatory blind spots, a point criticized by some scholars regarding the separation of regulatory functions between the two commissions.

Unique Skill of the Central Bank: Currency Issuance

2. China Banking and Insurance Regulatory Commission: Established in 2018 through the reform of central institutions, it merged the former China Banking Regulatory Commission and China Insurance Regulatory Commission. Its main responsibilities include supervising and managing the banking and insurance industries according to laws and regulations, maintaining the legal and stable operation of these industries, preventing and resolving financial risks, protecting the legitimate rights and interests of financial consumers, and maintaining financial stability. It has significant authority over personnel appointments in state-owned financial institutions, and its regulatory functions partially overlap with those of the central bank.

3. China Securities Regulatory Commission: The CSRC is primarily responsible for regulating the securities industry and formulating corresponding laws and regulations. The initial purpose of establishing the Chinese securities industry was to rescue state-owned enterprises, which led to various systems and rules that favored the financing function of the securities industry. This has resulted in current issues such as low investment functionality and difficulty in protecting the interests of small shareholders, leading to the CSRC chairman being humorously referred to as the most difficult chairman in China.

4. Ministry of Finance: The main proponent of fiscal policy, responsible for national fiscal revenue and expenditure management. The Ministry of Finance also holds controlling stakes in most state-owned banks, state-owned insurance companies, state-owned securities companies, and state-owned trust companies, leading to the saying that the financial industry has a "central mother and financial father," as the Ministry of Finance indeed controls a significant portion of the financial industry.

Unique Skill of the Ministry of Finance: Issuance of National Debt

III. Industry Associations

Composed of 13 mainstream industry associations, including the Securities Association, assisting the regulatory level in standardizing the operations of their respective industries, and possessing functions such as registration, approval, filing, and management of practitioners.

IV. Trading Places and Clearing Institutions

Exchanges: There are only 8 nationwide formal, safe, and reliable exchanges.

Shanghai Stock Exchange, Shenzhen Stock Exchange: Currently the places where stock investors trade, providing trading for the main board (A/B shares), small and medium-sized board, ChiNext, and the Science and Technology Innovation Board (to be launched);

Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange: Provide trading for over thirty types of bulk commodities such as rebar, crude oil, soybeans, and plastics;

Shanghai Gold Exchange: Provides trading for precious metals such as gold and silver;

China Financial Futures Exchange: Provides trading for stock index futures;

New Third Board: The National SME Share Transfer System, currently has over 10,000 listed companies, divided into market maker trading and negotiated trading, with ordinary investors currently unable to participate in New Third Board stock trading.

V. Market Participants

1. There are over 4,000 commercial banks in China. In terms of equity, the Ministry of Finance represents the state and holds about 45% of the equity of all commercial banks either directly or indirectly, local governments hold about 40%, and the remaining 15% belongs to social capital and foreign investment.

Unique Skill: Depository

Commercial banks include 5 state-owned banks (Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, and China Communications Bank);

12 joint-stock banks (Shanghai Pudong Development Bank, China Merchants Bank, CITIC Bank, etc.);

134 city commercial banks (Nanjing Bank, Ningbo Bank, Beijing Bank, etc.);

1,311 rural commercial banks (such as Changsha Rural Commercial Bank);

938 rural credit cooperatives (such as Hengnan County Rural Credit Cooperative);

1 postal savings bank (Postal Savings Bank);

17 private banks (WeBank, MyBank, etc.);

1,594 village and town banks (such as Beijing Yanqing, Xiangxi Changxing, etc.);

41 foreign banks (such as DBS Bank, etc.);

2. Policy Banks are specialized financial institutions that implement certain specific economic policies and conduct financial business in specific fields without profit motives. There are currently 3, namely the China Development Bank, Export-Import Bank of China, and the Agricultural Development Bank of China, characterized by long loan terms and low interest rates, but with high difficulty in obtaining loans.

3. Insurance Industry: The development of the Chinese insurance industry has been relatively slow, currently dominated by state-owned insurance companies such as Life Insurance, People's Insurance, Ping An, Taikang, etc.; it has also gradually opened up to private capital, such as Anbang, Qianhai Life, etc. The insurance industry has a generally poor reputation domestically, with complex claims processes (auto insurance is relatively better), various insurance contracts with hidden traps, and exaggerated promotions that cannot be fulfilled being the main reasons.

4. Securities Companies: Since the Shanghai Stock Exchange opened in 1990, the industry has developed rapidly over nearly thirty years, with over 130 securities companies currently, and the total market capitalization of the A-share market is about 40 trillion RMB (excluding the New Third Board and Fourth Board).

5. Trust Companies: There are currently 68 trust companies nationwide, managing trust assets of over 20 trillion. Trust business is similar to bank asset management, securities firm asset management, and private equity funds, but can also engage in loan business, a capability that asset management and private equity do not possess. However, in recent years, the trend has been that the asset management industry and private equity funds are impacting the trust industry's position as the second dominant player in the financial sector due to their flexibility.

6. Fund Companies: Funds are divided into public funds (with low minimum investment amounts and low trading thresholds) and private funds (with a minimum investment of 1 million, targeting qualified investors. In terms of investment targets, they are divided into fixed-income funds (mainly investing in government bonds, currency, corporate bonds, etc.) and equity funds (equity of listed and non-listed companies).

7. Futures Companies: Margin trading methods can amplify leverage and increase investment returns, but the risks are significant, and non-professionals should be cautious.

8. Asset Management Companies include two categories: one is [financial asset management companies], and the other is non-financial asset management companies.

(1) Financial Asset Management Companies – Currently, there are only four in China: Dongfang, Xinda, [Huarong], and Changcheng, holding licenses issued by the China Banking and Insurance Regulatory Commission. They were initially established after the Asian Financial Crisis in 1999 to separate the non-performing assets of the four major state-owned banks, led by the State Council, to acquire, manage, and dispose of the corresponding non-performing assets of Bank of China, China Construction Bank, Industrial and Commercial Bank of China, and Agricultural Bank of China. Originally intended to exist for ten years, they have long since exceeded that period, and the four major asset management companies have been diversifying their operations in recent years, no longer limited to the non-performing asset business of state-owned banks, extending their reach into trusts, securities, futures, and other industries.

(2) Non-Financial Asset Management Companies – Banks, securities companies, and insurance companies have all established independent asset management departments, and there are also asset management companies established by social capital. Their main function is to manage finances on behalf of others, but to avoid competition with the banking industry, prevent deposit-taking, and control financial risks, regulatory authorities have clear regulations on the identification of qualified investors and the prevention of fund pool operations.

9. Others: Including the recently emerging P2P and other internet finance, small loan companies, and other [non-bank financial institutions](. also including various securities consulting institutions. The characteristic is that they are mainly composed of private capital, and regulatory reach is difficult to achieve or regulatory power is insufficient, leading to a mixed environment with good and bad, making it a high-incidence area for various financial scams.

How does money flow?
When it comes to the Chinese financial market, a prominent feature is the excessively low proportion of direct financing. What does this mean? The following diagram provides a vivid illustration.

Specific Financial Needs of Individuals and Enterprises#

Multi-layered Capital Market System
The financial market can be classified in different ways, with the most common being based on the trading objects (also known as financial assets). The basic types of financial assets are debt, equity, and derivatives, leading to corresponding bond markets, stock markets, futures markets, and foreign exchange markets.

Another classification is based on the maturity of the rights being traded. The short-term bond market (less than 1 year) is referred to as the money market; the long-term debt market and equity securities market are referred to as the capital market.

What do financial intermediaries do?
Different countries have different classifications, and even the same organization may have different names in different countries. For example, securities firms are generally referred to as investment banks abroad. From the perspective of functionality (reference material 1), this is a very good angle; taking asset management as an example, many types of institutions can perform this function.

What about securities firms?
In "Basic Knowledge of Financial Markets," there is a detailed classification listing 10 main businesses.

However, this is more based on "function" (i.e., the so-called licenses); it can also be classified by customer, which is often mentioned in the digital transformation of securities firms as "customer-centric."

We can also look at the operational models of securities firms and how they make money.