1 Introduction

An important function of a financial system is to channel funds from savers to investors. How the financial system is structured is thus key to economic growth and prosperity. This lecture casts an overview of China’s financial system through the lens of her flow of funds accounts (资金流量表)[1], giving us a bird’s-eye-view of how savings are generated and allocated to the different sectors of the economy. A country’s financial system is shaped not just be economic factors but also by history and politics. China is no exception as we shall explain. Deconstructing China’s financial system paves the way to a better understanding of the problem of global imbalances.

2
Flow of Funds Accounts and Financial Intermediation


At the dawn of the reform era, the financial system was simple and unsophisticated. The state-owned enterprises (SOEs) were largely financed by budgetary appropriations. The People’s Bank of China (PBOC) was then the monopolistic supplier of credits. The last three decades have witnessed monumental transformation. Replacing the monobank system of the planning era are the burgeoning of
a wide variety of financial institutions since the mid 1980s as detailed in Table 1.


Through the flow of funds accounts, we review below the relative importance of the different financial sectors in channelling savings to investments.
Flow-of-funds accounting traces flows of funds between sectors within as well as into and out of a country. There are two tables, one recording physical while the other financial transactions. National income statistics such as total savings may be derived from the physical flow of funds account, while borrowing and lending of different sectors are captured by the financial account.
Each of these accounts are made up of five sectors: Nonfinancial (feijinrong), financial (jinrong), government (zhengfu), household (zhuhu) and foreign (guowai). For each sector, there are two sets of figures describing the sources of funds and their utilization.
The latest flow-of-funds accounts can be found in the Chinese Statistical Yearbook (中国统计年鉴).

2.1. Flow of Funds Account (Real) and China’s High Savings Rate


A natural starting point in our discussion of China’s financial system is China’s high domestic savings rate, which has been in the international limelight not least because a thrifty China is often cited as a key reason behind the problem of global imbalances, fuelling the ongoing frictions between the US and China.[1]

To find out how thrifty China is, the first step is to find her total savings.
Let’s recall the national income identity:

(1
)
Y = C + I + G + NX+ NFI = C + I + G + CA,

where Y = gross national product, C = nongovernment consumption expenditure, I = gross investment, G = government consumption expenditure, NX = net export, and NFI = net factor income from abroad. The current account balance, CA, is then equal to the sum of NX and NFI. Let YD be non-government (households + enterprises) disposable income such that YD = Y – T, i.e., after-tax incomes of households and enterprises.
Then, eq. (1) may be rewritten as follows:

(2)
I = Y – C – G - CA = (YD – C) + (T – G) – CA = SP + SG + SF,

where T is tax revenue (T may be thought of as the government’s disposable income); SP, SG and SF are then gross savings of households and enterprises, government savings and foreign savings respectively. It is to be noted that SG is essentially budgetary surplus of the government; if SG < 0, then the government is running a deficit. SF (-CA) is equal to current account deficit.

[1] For a recent discussion on the issue of global imbalances, see, e.g., O. Blanchard and F. Giavazzi (2005), “Rebalancing growth in China: a three-handed approach.”
SSRN.



[1]

A word of caution is in order. National income accounting data have in recent years been challenged for their accuracy. The flow-of-funds data are no exception. Actually, they have in recent years been subject to big revisions.