The Chinese banking system, characterized by a large proportion of state-ownership and low capitalization, has started a reform process based on three main pillars: (i) bank restructuring, with the cleaning- up of non-performing loans and public capital injections, particularly in the four largest state-owned banks; (ii) financial liberalization, with the gradual flexibilizaton of price and quantity controls and the opening-up to foreign competition; and (iii) strengthened financial regulation and supervision, as well as better risk management, corporate governance, disclosure, and the introduction of international standards. Although it is still early to judge on the success of the reform, the available evidence does not offer a very optimistic outlook. The solvency of Chinese banks is still very weak, with a stubbornly high level of non-performing loans, and profitability is poor. Given the commitment of the Chinese authorities to fully open up its banking system to foreign competition by 2006, it seems crucial that financial reform accelerates so that the Chinese banking system can compete at the international level. This is particularly the case for the reduction of NPLs and bank recapitalization as well as for a furthered improvement of bank regulation and supervision.
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Paper provided by EconWPA in its series Macroeconomics with number
0408001.
Find related papers by JEL classification: E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions G2 - Financial Economics - - Financial Institutions and Services G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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