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The Contradiction in China’s Gradualist Banking Reforms

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  • Wendy Dobson

    (Rotman School of Management, University of Toronto)

  • Anil K Kashyap

    ()
    (University of Chicago Graduate School of Business, National Bureau of Economic Research and Federal Reserve Bank of Chicago)

Abstract

China’s state-owned banks historically have funded money losing enterprises to maintain employment and social stability. We survey the banking industry in China, focusing on the largest banks which are being reformed to increase their competitiveness following China’s 2001 WTO commitment to open the domestic banking market by 2007. We assemble macroeconomic, microeconomic and anecdotal evidence suggesting that government influence, while less explicit than in the past, is continuing despite the reforms. Indeed, the reforms thus far do not resolve the tensions between government influence and the obligation of widely-held commercial banks to make credit decisions based on objective appraisal of borrowers’ ability to repay. We conclude that when growth slows the contradiction will become fully apparent and the government will resolve it by again bailing out the banks. We describe a pair of alternative bank reform proposals that would help to reconcile the government’s conflicting objectives.

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Bibliographic Info

Paper provided by Rotman Institute for International Business, Joseph L. Rotman School of Management, University of Toronto in its series Working Papers Series with number 08.

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Length: 51 Pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:ttp:iibwps:08

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  1. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September.
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  7. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China," NBER Working Papers 13103, National Bureau of Economic Research, Inc.
  8. Eichengreen, B. & Masson, P. & Savastano, M. & Sharma, S., 1999. "Transition Strategies and Nominal Anchors on the Road to Greater Exchange-Rate Flexibility," Princeton Essays in International Economics 213, International Economics Section, Departement of Economics Princeton University,.
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