TNAG-1623-FCO40-2237-Relations-between-Hong-Kong-and-China-1987 — Page 199

CONFIDENTIAL # 3

Financial Developments in China and their Implications for the Hong Kong Economy

The pre-1979 situation

China's post-1949 banking system was developed

using the Soviet model, with few significant changes prior

to 1979. Before 1979, the fiscal and monetary functions, which would be undertaken elsewhere independently by the central bank, the commercial banks and the State Treasury in the capitalist economies, were all placed under the

domain of one "bank" in China, namely the People's Bank of

China (PBOC). Enterprises and institutions were obliged to deposit all their cash above a stipulated amount with

the PBOC, which in turn made loans, at low interest rates,

in accordance with the overall state credit plan. Foreign

exchange and international banking functions were, and

still mainly are, the domain of the Bank of China (BOC),

which dealt with the foreign currency reserves of the

country under the supervision of the PBOC. The other

"bank", namely the People's Construction Bank of China

(PCBOC), was, before 1979, not a bank in the true sense of

the word. Operating under the administration of the

Ministry of Finance and Capital Construction Commission, it acted merely as a conduit for state-appropriated funds earmarked for capital construction projects.

2.

Prior to 1979, the banking system in China was

thus no more than an extension of the Government's fiscal

and capital investment operations. The primary function of China's banking system as a whole was to act as the government's agent in disbursing state funds and

overseeing their use. There was little difference in

practice between bank lending and government spending or between bank deposits and government revenue.

Control of

CONFIDENTIAL #B