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Running head: DIFFERENCE BETWEEN U.S AND CHINESE BANKING

Difference between U.S. and Chinese Banking
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Table of Contents
Introduction and Statement of Problem ........................................................................................................ 3
Justifications for the Study............................................................................................................................ 4
Literature review ........................................................................................................................................... 5
Differences between US and Chinese Banking ............................................................................................ 5
Quantity gap .................................................................................................................................................. 5
Layout gap .................................................................................................................................................... 6
Financial product gap .................................................................................................................................... 8
Guarantee System Gap ................................................................................................................................ 10
Operating Cost Difference .......................................................................................................................... 12
Comparison of Financial System in Developed and Developing Countries ............................................... 14
The Independence of the Central Bank and the Macro-Control Means Are Different ............................... 14
The History of the Development of the Financial Industry is very different .............................................. 17
The Completeness of the Market System is Different ................................................................................ 18
There is a Huge Difference in Financial Awareness and Ideas .................................................................. 20
Financial Laws and Regulations of the Different Levels of Sound ............................................................ 22
The Problems of China and the US Banking Industry ................................................................................ 23
The Market Value Shrank ........................................................................................................................... 23
Asset Business Shrinking ............................................................................................................................ 23
Operating Profit Fell Sharply ...................................................................................................................... 24
The Credit Market is shrinking ................................................................................................................... 24
Chinese and U.S. Solution .......................................................................................................................... 25
Strengthen the Supervision of Banks .......................................................................................................... 26
Banks Should Focus on Their Own Risk Management .............................................................................. 27
Summation of the Literature ....................................................................................................................... 28
Recommendations ....................................................................................................................................... 28
Implementation of Recommendations ........................................................................................................ 29
Conclusion .................................................................................................................................................. 31

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Abstract
Today, both China and America's banks face a serious problem: the overall economic
downturn. This paper examines the differences between banks and how to solve them. My
purpose is to find the problem and solve it. The primary purpose of this paper is to analyze the
difference between China and the United States banking industry to analyze how China's
banking industry will develop in a healthy way. And how to help other developing countries
create a healthy financial environment. This thesis has five parts. The first part is the comparison
between China and the United States, developed countries and developing countries. The second
part is to find the problems faced by these banks. The third part is how they solve the problem,
and my discussion. The fourth part is about how to help other countries. In this part, I have cited
an example of China The fifth part is a summary of the full text.
Introduction and Statement of Problem
The banking system refers to the structure of a banking system determined by the
administrative and legal forms of a country or region and their relations with each other. It is
established according to the requirements of a country's economic development and evolves with
the development of economy. Different countries, due to the level of economic development,
social and cultural background, the national economic management system, people's customs and
ideas and so on, lead to great differences in the financial system. There is a significant difference
between the developed countries and the developing countries over the big differences in these
factors.

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Justifications for the Study
A. Developing nations need a financial system from developed nation by study the banking
system of developed nations.
B. Identify which characteristics of the banking system work best for the developing nations.
C. U.S and China should build a better relationships (eg.trade, economy, financial, banking),
and study how increase their chance.
D. Through cooperation between countries, help people get a better life and improving people's
quality of life.

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Literature review

Differences between US and Chinese Banking

Quantity gap
According to Financial Stability Board (FSB), shadow banking system occurs where
credit transactions involve financial entities outside the requirements of the banking sector.
There are three major classifications of shadow banking in China. First, the banks act as
intermediaries in the process of making financial transactions although they don’t benefit from
the actual process. Notably, credit intermediation is conducted by special bodies such as trustees,
insurance companies and brokers. The third aspect of shadow banking is where firms transact
credit businesses without involving any intermediary such as banks or brokers (Weerts, 2013).
The Chinese government has a huge role in general regulation of the business of credit
transactions; to avoid chances of economic shortfalls. In China, banks are discouraged from
lending to some specified industries and are required by the law to offer low interest rates on
money being deposited; in order to fill the quantity gap in the banking industry.
In China, non-banks give out loans by use of the invested money hence rotating lines of
credit. This culture of banking has posed financial risks; justified by the fact that some investors
withdraw money at once for their own economic reasons. However, there are some notable
advantages that are associated with this form of lending system (Weerts, 2013). Individuals and
businesses within certain form of industrial ventures end up getting money with minimal
turbulences as opposed to strict restrictions from the commercial banks. By using investors’
money to lend individuals and other types of businesses, banks are relieved off the burdens

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which happen to have constructive economic impacts. With this kind of financial gap, banks are
required to implement proper structures in the banking industry; in order to deal with disorderly
flows currently witnessed.
The quantity gap is also evident in the United States of America. In January 2016,
Federal Housing Finance Agency made monetary proposals for all non-banks to have a
minimum net worth of $2.5 million (Weerts, 2013). This initiative was meant to guard the
government from being adversely affected by some notorious and nauseating capital lenders. The
Federal Bank has been consistently pumping money into its economy with minimal price
inflations being recorded. The banking system of USA is purely based on capitalistic system of
production as opposed to the culture of encouraging printing of huge currency in the Chinese
banking system. This is justified by the fact that indeed huge bank notes without clear economic
policies result to extraordinary fall of currency value; just like what happened in Zimbabwe
where people were carrying huge amounts of cash to make simple businesses transactions.

Layout gap
Evidently, there is huge layout gap in the US and Chinese banking industry. As at the
year 2016, the GDP gap stood at 30.1%. This is contributed by the ratio of the outstanding credit
being given to non-financial institutions and individual business operators. At the year 2009,
Chinese credit-to-GDP gap stood up to 10% without any form of disorderly flows; a positive
outcome caused by government intervention in the financial systems of the banking industry.
Contrary to this, the uncontrolled lending culture has resulted to the industry being one of the
most risky to invest (Weerts, 2013).

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There are some notable positive manifestations in the banking industry of China. As at
March 2017, China’s domestic product was higher than that of the European Union (Weerts,
2013). This has been as a result of effective layout procedures; being influenced by its reliance
on debt and international finance. This is also caused by financial deepening culture of the
banking industry, aggressive monetary policies by the government and effective fiscal policies to
deal with the global economic crisis. It is of cardinal impact to appreciate the fact that indeed
fiscal stimulus is being directed to wasteful investment avenues, increased levels of debt and
deficiency in industrial capacity to handle the banking industry in an effective manner (Weerts,
2013). Local Chinese governments rely on loans from banks to fund developments of the
country’s transport and communication systems. The culture of depending on bank loans is
caused by tight regulations on stock and bond issuance regulation mechanisms of the
government and the banking industry itself. This has aroused huge criticisms from the capitalists
who suggest that indeed a diversified capital markets can help China to widen its financial
systems as opposed to current dependence on bank loans for implementation of the projects.
Layout gap in the banking industry of US has manifested itself in some of the notable
financial disorderly flows that have been reported. Bank stocks declined by over twenty percent,
as at the year 2012. This has been caused by foreign debt crisis and fears of dip recession periods
occurring. Basel III international banking regulations of capital have had a significant impact in
the layout gap within the financial systems of the US. Additionally, Dodd-Frank Act and the
unwinding of consumer debt have contributed immensely in the l...