The Peoples Bank of China (PBC) was the main bank that was working before the reform process began. Approximately 93% of Chinese's financial assets and vast majority of financial transactions were handled by this bank only. In the pre-reform era, the degree to which a bank could function as an intermediary in the allocation of resources was very limited. Majority of investment was in the form of budget appropriations by the government, rather than being implemented through the banking system. Bank deposits were the only form of financial assets, with no non-bank Financial Institutions (FIs) and no financial markets.

Since then, substantial progress has been made in reforming the banking sector in the People's Republic of China (PRC). There has been an overall improvement in the autonomy of the banking sector like independence of the central bank in implementing a monetary policy has increased, the autonomy of State-Owned Banks (SOBs) in credit management has been enhanced, bank supervision has been improved. But still, the banking sector is facing many challenges. The major problem with which the PRC is suffering is the legacy of the origin of the banks as fiscal agents for domestic resource allocation. In spite of many years of directed lending under the credit plan and administered interest rates, the State-Owned Commercial Banks (SOCBs) have accumulated large Non-Performing Loans (NPLs) and are considered insolvent. The HR-related issues, like internal organization structures, reporting channels, and information flows, which were created for the convenience of government agencies and the measures for implementing a central plan, are now very inadequate for managing risks, enhancing efficiency and maximizing profits. The Chinese banking sector is still under heavy pressure because of the intervention of the government in the allocation of credit to priority sectors, extensive control of interest rates, and heavy taxation. In spite of several efforts to strengthen banking supervision, development has been limited. Many new regulations and plans have been announced, but it is not clear how effectively and efficiently they will be implemented. In part, this is due to the significant gap between the actual bank situation and the stipulated prudential norms. Until and unless the banking sector is rehabilitated and SOBs are restructured, strengthening the prudential regulations will remain only on the paper. The authorities abandoned the credit plan in 1998, but effective instruments for indirect monetary control have not yet been put in place. The banking system in China has undergone significant changes in the last two decades. The industry is still under the government's regulation, albeit the banks have gained a significant degree of autonomy.

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