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Banking reform in China: Driven by international standards and Chinese specifics

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  • Kudrna, Zdenek
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    Abstract

    This paper reviews the progress of banking reforms in China over the last five years. The stated goal of reform is to “transform major banks into internationally competitive joint‐stock commercial banks with appropriate corporate governance structures, adequate capital, stringent internal controls, safe and sound business operations, quality services as well as desirable profitability.” The reform strategy relies on three pillars – extensive publicly financed bailouts, implementation of the international best practices in bank governance and regulation and listing of major banks at the Hong Kong stock exchange. This strategy has been successful in stabilizing the three major banks. However, our review of academic and commercial research indicates that there is no evidence that the stabilization is sustainable. Prudential indicators of the largest banks are comparable to international averages, but this is an outcome of large bail outs and ongoing credit boom rather than fundamental change in banker’s incentives. Reforms of bank governance and regulatory framework need more time to proliferate throughout the banking and regulatory hierarchies. However, time alone would not solve the problem as the reform design retains important departures from international standards. These standards are implemented in a selective manner; those aspects that help to concentrate key powers in the center are implemented rather vigorously, whereas principles that require independence of banks’ boards and regulators are ignored. Thus the largest Chinese banks remain under the firm state control and can be used as development policy tools for the better or the worse.

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    File URL: http://mpra.ub.uni-muenchen.de/7320/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7320.

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    Date of creation: Oct 2007
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    Handle: RePEc:pra:mprapa:7320

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    Keywords: China; banks; reform; international standards;

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    1. Richard Podpiera, 2006. "Progress in China'S Banking Sector Reform," IMF Working Papers 06/71, International Monetary Fund.
    2. Erik Berglof & Patrick Bolton, 2001. "The Great Divide and Beyond: Financial Architecture in Transition," William Davidson Institute Working Papers Series 414, William Davidson Institute at the University of Michigan.
    3. Guonan Ma, 2006. "Who Pays China’s Bank Restructuring Bill?," Working Papers 2006-04, CEPII research center.
    4. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
    5. Katharina Pistor & Yoram Keinan & Jan Kleinheisterkamp & Mark D. West, 2003. "Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries," World Bank Research Observer, World Bank Group, vol. 18(1), pages 89-112.
    6. Tang, Helena & Zoli, Edda & Klytchnikova, Irina, 2000. "Banking crises in transition economies : fiscal costs and related issues," Policy Research Working Paper Series 2484, The World Bank.
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