On the morning of August 18, the branches of the People's Bank of China (PBoC) at the provincial and city level officially came into operation. This reform is in line with the deployment outlined in the institutional reform plan released in March this year. According to the plan, the PBoC would abolish its regional branches, branch operation management departments, headquarters' directly affiliated operation management departments, and central branches in provincial capitals. In their place, provincial-level branches were established across the 31 provinces (including autonomous regions and municipalities), with separate branches set up in Shenzhen, Dalian, Ningbo, Qingdao, and Xiamen.
This reform marks a return to the provincial branch system. Simultaneously, it signifies the end of the 25-year era of the PBoC's regional branch system. In the 1998 organizational reform, the Chinese central bank established nine regional branches and five central branches in provincial capitals: 1. Shanghai Branch (covering Shanghai, Zhejiang, Fujian); 2. Tianjin Branch (covering Tianjin, Hebei, Shanxi, Inner Mongolia); 3. Shenyang Branch (covering Liaoning, Jilin, Heilongjiang); 4. Nanjing Branch (covering Jiangsu, Anhui); 5. Jinan Branch (covering Shandong, Henan); 6. Wuhan Branch (covering Jiangxi, Hubei, Hunan); 7. Guangzhou Branch (covering Guangdong, Guangxi, Hainan); 8. Chengdu Branch (covering Sichuan, Guizhou, Yunnan, Tibet); 9. Xi'an Branch (covering Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang). The five central branches in provincial capitals were at Zhengzhou, Shijiazhuang, Hangzhou, Fuzhou, and Shenzhen.
Following the 2023 reform, most of the provincial branches have regained their status as bureau-level institutions. According to a report by the Chinese news portal Caixin, apart from the four provincial-level branches in Hainan, Qinghai, Tibet, and Ningxia, which are vice bureau-level, 27 provincial-level branches are now at the bureau level. The original five planned independent city branches (Shenzhen, Dalian, Ningbo, Qingdao, Xiamen) have transitioned into city branches, with Shenzhen retaining its status as a bureau-level institution. Slightly deviating from the earlier reform plan, the recent development has retained the original Beijing and Chongqing operation management departments, with the addition of operation management departments to 27 provincial-level branches. Additionally, according to the plan, PBoC county (city) branches will no longer be maintained, with their relevant functions integrated into the central branches in respective cities. The original plan aimed to retain 190 county-level dispatch offices, but ultimately, about half were eliminated, leaving around 95. As per the People's Bank of China Annual Report 2021, there were a total of 1,761 county-level branches of the bank. This implies that over 1,600 county-level branches will fall under the jurisdiction of the China Banking and Insurance Regulatory Commission, serving as dispatch offices of the National Administration of Financial Regulation (NAFR). The staff from PBOC county branches, numbering around 50,000 to 60,000, will be consolidated into dispatch offices of the NAFR.
Publicly available information indicates that in the early 1990s, the Chinese central government became increasingly concerned about the growing intervention by local governments in the monetary policy formulation and banking supervision of the local branches of the central bank. This catalyzed reforms in the local management structure of it. After a prolonged period of research, and with reference to the model of the 13 Federal Reserve Districts in the United States, the central government ultimately decided to establish nine regional branches, taking into account factors such as geographical relevance, the total economic and financial volume, and the regulatory needs. Given the significant regional disparities in China, this decision was made with the aim of enhancing the authority of the central bank in executing monetary policy, increasing the independence of financial supervision, ensuring uniformity and effectiveness in financial regulation, facilitating the coordinated deployment of regulatory resources across provinces, avoiding various forms of intervention, and improving the efficiency of financial regulation.
However, soon after its implementation, new issues began to arise. The establishment of regional branches across administrative regions was initially intended to address problems such as local protectionism and interference from local governments in central bank management. Yet, after the establishment of regional branches, difficulties emerged in coordinating with local governments, managing their own extensive scope of responsibilities, and effectively carrying out their functions. In later stages, although the regional branch system was retained, it mainly dealt with the work of the central bank in the respective provinces. For instance, the Guangzhou Branch only handles responsibilities within Guangdong Province, with limited jurisdiction over Guangxi and Hainan. Similarly, the Shenzhen Central Branch does not fall under the jurisdiction of the Guangzhou Branch, resulting in the Guangzhou Branch largely failing to fulfill the role of a regional branch.
The coordination challenges between the regional branches of the central bank and local governments in execution reflect another reality, that a strong administrative system and its powerful inertia. With its huge government, even as China has progressed toward a market economy, the administrative system maintains significant inertia in sectors related to government management. This inertia reflects a foundational institutional force that is not easily swayed by individual will.
On the other hand, the financial sector in China exhibits a lower level of marketization. When the PBoC introduced the regional branch reform, it drew inspiration from the Federal Reserve's branch system in the U.S. However, there are three fundamental differences between the Fed's system and China’s own: First, the U.S. practices federalism, where power is decentralized between central and local levels; second, the financial sector in the U.S. is highly market-oriented; third, the Fed enjoys strong independence. Given these disparities, the regional branch system of the PBoC struggles to surpass the larger administrative system and fulfill the intended role set out at the beginning of the reform. Additionally, in China, the fundamental role of the financial industry remains that of serving the economy, especially the real economy, rather than being pursued solely as an entirely independent industry for extensive development.
Due to these factors, the rollout of the PBoC's regional branch system swiftly became engulfed by the primarily administrative structure, spanning from the national and regional tiers down to the provincial levels. Conversations between ANBOUND and former officials of the central bank revealed that the regional branch system had lost its practical significance and effectiveness as far back as a decade ago, if not even earlier. As a result, the current shift back to the provincial branch reform represents more of a surface-level adjustment with minimal substantial or inherent changes.
While local governments once intervened in financial matters during China's economic upswing to secure additional financial resources for local development, the current scenario is rather different. The present financial sector is rife with risks and complexities, and local governments may still seek funding for their developmental needs. However, they may not necessarily wish to navigate the intricate financial sector or assume the risks associated with influencing financial policies. Considering the financial crises experienced by various provinces in recent years, each province had to draw upon both its internal resources, as well as national-level financial policies and resources to address financial risks. As it stands, resolving financial risk matters in this manner is likely to grow increasingly intricate.
Final analysis conclusion:
The implementation of the structural reform by the People's Bank of China, transitioning from the regional branch system back to the provincial branch system, is a management framework reversion that aligns with the realities of China's current situation. Behind this reversion lies the issue of central bank independence, the degree of financial marketization, and the positioning of the financial sector.
